Will the Kraft-Heinz merger lead to local job cuts?

It’s an iconic brand that’s left an indelible mark on American popular culture, all the way from “B-O-L-O-G-N-A” to the whimsical Wienermobile. But beyond that, Oscar Mayer remains a top employer in the Greater Madison area and an important cog in the local economy.

With the March 25 announcement that global food giant Kraft, Oscar Mayer’s parent company, plans to merge with H.J. Heinz Co. to form the fifth-largest food and beverage company in the world, the industry has tilted a bit on its axis, and most of Oscar Mayer’s 1,250 local employees likely felt the tremors.

On the morning of the announcement, Oscar Mayer’s Madison office directed local media to a conference call Kraft and Heinz organized to provide details on the merger. During the press conference, Heinz CEO Bernardo Hees, who will be CEO of the newly formed Kraft Heinz Co., was noncommittal when it came to potential job cuts, preferring to focus on the opportunities for growth related to the merger. But for those reading the tea leaves, one number likely stands out: $1.5 billion.

That’s the amount the newly merged company is hoping to find in annual cost savings by the end of 2017.

In his opening statement of the press conference, Kraft’s chairman and CEO, John Cahill, referred to the significant challenges the food and beverage industry has faced, noting that his company has responded by accelerating the pace of change in the fast-evolving food and beverage landscape. He also said that over the long term, the industry will converge, leading to more “lean, nimble, and global champions.”

Meanwhile, the track record of the deal’s chief brokers, 3G Capital Partners (which owns Heinz) and Warren Buffett’s Berkshire Hathaway Inc., may offer some clues about the future of Kraft’s Madison-area workforce.

According to a report in the Wall Street Journal, 3G is “an acquisitive Brazilian firm known for buying consumer companies it considers bloated and aggressively slashing costs.” In fact, after taking over Heinz in 2013, 3G cut 7,000 jobs in 20 months.

Whether 3G’s aggressiveness translates to local job losses remains to be seen, but there’s likely more in the works than just cost-cutting.

“I think it’s reasonable to think that in general, at the combined organization, there will be cuts in jobs,” said Hart Posen, associate professor of management and human resources at UW-Madison. “That said, I think that will be one of a variety of sources of cost savings typically expected in these kind of mergers. There may be cost savings associated with scale economies and logistics and distribution and other sources that may or may not require or lead to substantial job cuts.

“I think anything we say now is purely speculative, and anything we say with regard to, for instance, Oscar Mayer here in Madison is really speculative.”

That said, any cost savings resulting from the merger would appear to be long overdue. Kraft recently reported a $398 million net loss for the fourth quarter of 2014, which compared to $931 million in profits reported in the fourth quarter of 2013. That report coincided with leadership changes in the company, including the departure of Executive Vice President and CFO Teri List-Stoll.

The company’s dismal fourth-quarter numbers continued a trend in which Kraft and other U.S. food companies have reported disappointing sales due to changing customer tastes, including greater demand for healthier, fresher foods. Meanwhile, higher commodity costs have further eroded their profits.

“I want to emphasize that this is a transformative transaction for our industry, one that jump-starts the change we’ve been discussing,” stated Cahill during the conference call. “This transaction enables us to move and grow faster than we could on our own, allowing us to fulfill our potential as an industry leader, navigate a fast-changing marketplace, and emerge as a global powerhouse.”

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Part of Kraft’s transformation may involve establishing a more global presence. While its brands, including Oscar Mayer, have been pressured by a trend toward healthier fare, there may be untapped potential abroad, noted Posen.

“I think one thing that has gone a little bit unnoticed or less discussed is the fact that Heinz is quite a global company and Kraft is in some sense much more American-dominated, and I think there is an opportunity to do a better job of leveraging some of the Kraft brands outside of the U.S.,” he said.

For Zach Brandon, president of the Greater Madison Chamber of Commerce, news of the merger was not necessarily unwelcome, considering that Kraft, despite its disappointing fourth-quarter results, is still operating from a position of strength.

“I was able to have a conversation with some of the company leadership, and I’ve communicated with their new CEO and have had a great relationship with both of the past two CEOs, and so I know that Oscar Mayer and Madison are in a good position,” said Brandon. “It doesn’t guarantee success, it doesn’t guarantee anything in the future, but when I first read the announcement and heard about it, I had no negative connotation; it all seemed positive to me. … To me, it strengthens the company, it doesn’t weaken it, and strong companies make rational business decisions.”

But while Brandon believes that Oscar Mayer’s relationship with Madison will remain strong given the company’s history in the community and the fact that Kraft has decided time and time again that the city is the ideal location for Oscar Mayer’s headquarters, he says that the merger should serve to remind policymakers of the key factors that enter into businesses’ siting decisions: including business costs and access to talent, customers, supply chains, and infrastructure.

“It is a good reminder to Madison and to Dane County that we are operating in a global environment, that we are competing not just against neighboring states but against countries, and that we have to make sure that we understand how and why businesses make decisions and then make sure that we don’t do things that get in the way of our own success,” said Brandon.

Fast facts about the planned merger of H.J. Heinz Co. and Kraft Foods Group:

• The merged firm, The Kraft Heinz Co., will be the third-largest food and beverage company in North America and the fifth-largest in the world.
• The company will have revenues of approximately $28 billion.
• It will boast eight $1 billion-plus brands and five brands with revenues of between $500 million and $1 billion.
• It will be co-headquartered in Chicago and Pittsburgh.
• Berkshire Hathaway and 3G Capital plan to invest an additional $10 billion in The Kraft Heinz Co., and existing Heinz shareholders will own 51% of the company.
• The deal will bring some of the world’s most popular food brands under one corporate umbrella. Kraft’s brands include Oscar Mayer meats, Jell-O, Kool-Aid, Cool Whip, Miracle Whip, Planters, Kraft cheeses, and Velveeta, while Heinz owns Heinz condiments, Ore-Ida, Bagel Bites, Wyler’s, and TGI Fridays snacks.

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