Ketchup or Macaroni & Cheese?

When I was in first or second grade at Regent Square Elementary School, we toured the Heinz factory. So did every other child in Pittsburgh’s public schools. In the “Burgh,” ketchup and pickles were synonymous with Heinz products and the Heinz family. At the end of the tour, every child was given a little green Heinz pickle pin. Sadly, mine has disappeared, but I did find a photo of one on Etsy. There are more photos on Pinterest.

My pin would be a collector’s item now because, on July 2, 2015, the H.J. Heinz Company acquired Kraft Foods Group, making Kraft Heinz the third largest food and beverage company in North America and the fifth largest in the world.

20150515_172500 Pinterest Heinz Pickle Pin

Kraft Heinz has co-headquarters in Pittsburgh and Chicago.

That reminded me of the Continental Airlines of Houston and United Airlines of Chicago merger in 2010. Five years later, the company is called United and their headquarters are in Chicago.

Will that happen again? Will Macaroni & Cheese win out over the Pickle?

Let’s look at the history of Kraft Heinz and see if there are any clues.

The Kraft Story. Kraft began with processed cheese. In 1911, Walter Gerber of Thun, Switzerland, is credited with inventing processed cheese.

In August 2011, Kraft Foods Inc announced plans to split into two publicly traded companies — a snack food company and a grocery company. The intention was to create two independent public companies: Mondelez kept the high-growth global snacks business with estimated revenue of approximately $32 billion and Kraft Foods Group took the high-margin North American grocery business with estimated revenue of approximately $16 billion. The company arranged the split of the companies as a tax-free spin-off of the North American grocery business to Kraft Foods Inc shareholders. In October 2012, Kraft Foods Inc changed its name to Mondelēz International. Shortly thereafter it spun off the Kraft Foods Group to its shareholders. It is the Kraft Foods Group that merged with Heinz (3G Capital and Berkshire Hathaway).

The Heinz Story.  Heinz began with horseradish.

Henry John Heinz (1844-1919) hated waste. Leading by example, he inspired each of his employees to avoid even the slightest waste of material, time or opportunity.[1]

H.J. probably would have been glad to see the “leaner, meaner” efficiencies accomplished by the company since June 2013 when Brazilian private equity firm 3G Capital and Warren Buffett’s Berkshire Hathaway Inc. acquired Heinz for $28 billion. Opulent private offices and cubicles have been replaced “with workplace benching and more shared space. Even CEO Bernardo Hees, the 3G partner appointed to lead Kraft Heinz, sits at a work station and shares an office with a number of the company’s senior vice presidents. As it has cut back on work space, 3G also has reduced head count. Hundreds of jobs at Heinz’s headquarters have been eliminated,” leaving about 800 employees in Pittsburgh.[2]

Heinz’s new management team has repeatedly reassured local officials that Kraft Heinz will have dual headquarters in Pittsburgh and Kraft’s 910,000-square-foot suburban Illinois campus known as Kraftown in Northfield, Illinois. Northfield will serve as dual headquarters for the new business, even after it acquires

The new Heinz and its corporate overlords, 3G and Berkshire Hathaway, are single-mindedly focused on efficiency and streamlining operations, attributes that are sure to play big roles in the consolidation of the two companies and serve as the foundation of Kraft Heinz’s future. With that in mind, it becomes increasingly plausible sentiment and tradition may take a back seat to cold, hard facts. A Heinz exodus to its expansive new digs likely would have more impact on the city’s psyche than on the local economy, according to one official. . . . Several sources told the Business Times that, although they expect the new company to maintain some presence in Pittsburgh, it isn’t likely to keep two headquarters for long. Once consolidation occurs, there’s no guarantee Pittsburgh will end up as critical to Heinz as it has been for more than 140 years. . . . In a conference call with reporters soon after the merger announcement, . . . the 3G execs also said they will move some as-yet-undetermined functions to one city or the other. Kraft Heinz will “remain committed” to community charities in both cities, but there were no firm promises. . . . 3G has a history of moving headquarters. When it purchased Burger King Worldwide in 2010, it cut 413 jobs at the restaurant chain’s North American and Latin American operations but retained the company’s Miami headquarters. But when Burger King acquired Tim Hortons Inc. for about $11 billion in December 2014, it formed Restaurant Brands International and moved the company’s headquarters to Canada. Burger King now only has its U.S. offices in Miami. When it was originally announced Heinz would be sold in 2013, then-CEO William Johnson said the buyers had agreed to keep Heinz’s headquarters in Pittsburgh. Since then, 3G has cut 7,400 jobs and closed five of its lower-performing manufacturing facilities, producing savings of about $250 million a year. While the majority of middle-market consumer packaged goods companies have failed to turn a profit in recent years, its aggressive cost cutting has made Heinz one of the most profitable, said Virginia Lee, senior U.S. research analyst for Euromonitor International. . . . “Their recipe is to make companies lean and mean,” Lee said. “(Since taking over Heinz), it’s been a relentless emphasis to figure out what is making money and what is not, and cutting, cutting, cutting. … Efficiency is a mandate.” These moves align with the playbook 3G has used since it was formed in 2004 by Jorge Paulo Lemann, Carlos Alberto Sicupira and Marcel Herrmann Telles to buy U.S. companies with cash they earned from more than two decades of takeover deals in Brazil. The strategy has been to focus on three areas: buy and merge solid companies for market expansion to gain a competitive position; focus on cost reduction and efficiency to enhance profit; and implement new culture and leadership, according to James Craft, professor of business administration at the University of Pittsburgh’s Joseph M. Katz Graduate School of Business. . . . “Berkshire shares our vision, and we intend to bring the same proven playbook to the new Kraft Heinz Co. to maximize long-term value for all of its shareholders,” said Alex Behring, 3G co-founder and managing partner, on a conference call the morning the deal was announced. With Kraft Heinz, 3G is projecting annual cost savings to reach $1.5 billion by the end of 2017, which executives said would be accomplished through increased scale, operational efficiencies and cost reductions. . . . A comparative look at Heinz in Pittsburgh and Kraft in Northfield indicates the combined Kraft Heinz may find it much easier to lean toward suburban Chicago over western Pennsylvania. With about 60 percent of Heinz’s revenue generated by sales outside the U.S., the need for better international access could be a strong selling point in Chicago’s favor. . . . Hamstrung by its lack of direct and international flights, Pittsburgh International Airport won’t be able to offer Kraft Heinz executives the flexibility Chicago O’Hare International Airport will. . . . Then there’s the amount of real estate each company has in its respective portfolios. Kraft leases its Kraftown campus in Northfield, which is located 20 miles outside of Chicago and is comparable in size to the Pittsburgh region’s largest corporate base, Westinghouse Electric Co.’s 920,000-square-foot headquarters in Cranberry. Meanwhile, Heinz’s real estate presence in Pittsburgh is much smaller and, by all appearances, getting even more so. . . . David O’Neill, an executive managing director for Hanna Commercial Real Estate in Cleveland who has helped large companies move their headquarters, said the employee numbers and difference in real estate holdings clearly benefit Kraft. “I got to tell you, the numbers tell me right away that Chicago would make more sense,” he said. Still, O’Neill expects 3G will adopt a more nuanced process than a zero-sum game of suburban Chicago vs. Pittsburgh. But along with the vast difference in real estate, the employee totals — 800 in Pittsburgh vs. about 2,800 in Northfield — would make it an easier transition to move operations to Illinois, he said. . . . In the short term, the Kraft Heinz story isn’t going to be one of growth, but rather one of cost cutting, according to Euromonitor’s Lee. Because 3G has spent the past two years trimming the fat at Heinz, it’s likely most of the initial cuts will happen on the Kraft side of the business, she said. . . . [Denis] “Pittsburgh needs to have the attitude that we are going to lose one once in a while and we’re going to gain one once in a while,” she said. “The city needs to recognize the economy is changing and adapting. … Maybe we’re going to have to say ‘OK, Heinz isn’t our future anymore.’”[2]

Kraft Heinz. Kraft shareholders received stock representing a 49 percent stake in Kraft Heinz. Existing Heinz shareholders collectively own 51 percent of the new company. Those Heinz shareholders include six members of the new eleven-member Kraft Heinz board: the new Chairman of the Board, Alexandre Behring da Costa of Brazil, co-founder and managing partner at 3G Capital, chairman of Restaurant Brands International, and a director of Anheuser-Busch InBev; Jorge Paulo Lemann and Marcel Telles, both of 3G Capital; and Gregory Abel, Tracy Britt Cool, and Warren Buffett of Berkshire Hathaway.

Three board members are connected to Kraft: John T. Cahill, former CEO of Kraft Foods, who will serve as Vice Chairman of the Board; Mackey J. McDonald, Senior Advisor of Crestview Partners, L.P., a private equity firm, and a Director of Mondelez International, Inc. from January 1, 2010 to October 1, 2012; John C. Pope, an Independent Director of Kraft Foods Group, Inc. since 2012, Chairman of the Board of PFI Group, LLC since 1999 and R.R. Donnelley & Sons Company since May 22, 2014, a Director of Waste Management Inc. since November 1997, and President and Chief Operating Officer of UAL Corporation and United Airlines Inc. from May 1992 to July 1994.

The remaining two board members are L. Kevin Cox, Chief Human Resources Officer of American Express, and Jeanne P. Jackson, President of Product & Merchandising at Nike, Inc.

Heinz CEO Bernardo Hees is the CEO of the combined company. The Kraft Heinz Co. is trading on the Nasdaq exchange under the ticker symbol KHC.

[1] http://www.heinz.com/our-company/about-heinz/history.aspx, accessed July 9, 2015.

[2] Justine Coyne and Tim Schooley, Pittsburgh Business Times, Apr 10, 2015.

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