3G to use its cost-cutting playbook on Kraft after Heinz merger

Thu Mar 26, 2015 11:29am EDT
 
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By Anjali Athavaley

NEW YORK (Reuters) - When Kraft Foods Group merges with H.J. Heinz Co, they will share a name, a central place in the American kitchen and two headquarters near Chicago and Pittsburgh.

But that dual office structure may soon change, according to some industry watchers. If history is any guide, their new owners will wrest an expected $1.5 billion in annual cost savings by 2017 by removing duplicate operations, slashing perks such as the use of private jets, while scrutinizing even the most mundane expenses.

"There is going to be a lot of headcount reduction," said Bob Goldin, executive vice president of food consultancy Technomic. “You will see some portfolio pruning. They aren't going to have two headquarters for long.”

Heinz's backer, Brazilian private equity firm 3G Capital Partners, has made a name for itself by aggressively trimming the fat from food and beer companies struggling for growth.

3G is considered "the most aggressive in the industry in terms of running businesses on a very lean basis and maximizing margins and cash flow," said Kevin Dreyer, a portfolio manager at Gabelli Funds, which owns roughly a million shares of Kraft. “It’s certainly a good thing for holders.”

3G Managing Partner Alex Behring made clear on Wednesday, when the $46 billion deal was announced [ID: nL2N0WR2GF], that it would implement a strategy of zero-based budgeting at Kraft Heinz Co when it comes to the company’s cost of goods sold and selling, general and administrative expenses. The concept requires management to start each new budget year by justifying all costs from scratch, rather than the traditional method of basing their new budget on the previous year’s figures and then only having to justify any changes.

Some analysts say it is likely that 3G will exceed its savings target. It represents 6 percent of the cost base of Heinz and Kraft combined, according to Dave Novosel, senior analyst who covers both Heinz and Kraft for Gimme Credit, which provides independent research on corporate bonds.

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The Kraft logo is pictured outside its headquarters in Northfield, Illinois, March 25, 2015. REUTERS/Jim Young