In what would have been one of the biggest deals in the food and drink industry, Unilever announced it has rejected a $143 billion offer from US food giant Kraft Heinz. Here, David Turner, Global Food Analyst at Mintel, explores the impact a merger of this magnitude would have on the global food market, as well as opportunities moving forward. Why are Kraft Heinz looking for new takeover targets? This deal was ultimately about how best to deliver maximum profits to shareholders, when most developed food and drink markets offer only low growth. Looking at the last big food takeover, Kraft and Heinz, the cost-cutting approach of investor 3G has already delivered an estimated $1.5Bn to the new company’s profits since their 2015 merger. With that merger now sufficiently embedded, 3G/Berkshire Hathaway are ready to tackle new challenges. While many European food companies already operate in a leaner fashion than some in the US, the considerable efficiency savings would drive shareholder value, although possibly at the cost of significant job losses. Any merger would also likely offer the potential for cost savings with suppliers. The consolidated buying group will want to pay less, and have a smaller list of suppliers, which in turn may strengthen their hand when dealing with retailers, thanks to a strong portfolio of brands. Why Unilever? A merger with Unilever zeros in on Warren Buffett’s ideal target: well-run brands with a strong consumer legacy. Indeed, while only one-third of the world’s 8,000 largest companies managed to achieve ROCE (return on capital employed) of greater than 10% in 2015, Unilever’s average annual ROCE has been in the region of 22% over the past 10 years, according to reports. The merger would have filled gaps in each company’s portfolio and would provide mid-term growth opportunities in emerging markets, such as Asia, Latin America and Africa. Unilever has stronger penetration in emerging markets, which could continue to grow by adding some of Kraft Heinz’s iconic brands. Adding Unilever’s non-food portfolio is also interesting, as this would point to further non-food acquisitions, and subsequently more synergies down the line. The challenges A merger could have run into monopoly issues in some markets. For instance, Kraft Heinz and Unilever together account for 77% of US mayo sales by value. However, there is still a wider market argument as the combined company share drops when considering the wider condiments category, or even the food market as a whole. Alternately, selling or otherwise separating a division of the business, such as Unilever spreads, could alleviate monopoly concerns. The merger could also have attracted criticism from consumers about globilisation and “big food”, especially in Europe and North America. This merger (as with Kraft Heinz previously) fails to tackle the fact that, in these markets, consumers are increasingly suspicious of processed foods from global giants. In many mature markets, big food companies are losing share to competitors using trendy buzzwords like clean eating, fresh, artisan and natural. Both Kraft Heinz and Unilever are already starting to tackle these areas in their innovation, with the introductions of Organic Hellman’s Mayo or Simply Heinz ketchup, for instance. However, becoming an even larger conglomerate may make younger consumers even more suspicious of product ranges. If not Unilever, then who? 3G/Berkshire Hathaway have clearly raised a significant amount of capital to explore new opportunities. Given Unilever’s resistance, presumably Kraft Heinz will want to invest this capital elsewhere and will move onto other targets and organisations, such as Campbell’s and General Mills, which have previously been identified as potential targets. Mintel’s Global Food and Drink Analyst, David joined Mintel in 2012. During a 20-year career in the food and drink industry, he has gained commercial experience in CPG and foodservice markets, leading the brand and private label marketing activity for major dairy, foodservice and spirits brands. You might also be interested in: No related posts.