What Kraft-Heinz Merger Means for C-store Operators

NATIONAL REPORT — Now that the dust has settled on Wednesday's announcement of the planned H.J. Heinz Co. and Kraft Foods Group Inc. merger, the potential upsides and downsides are surely on the minds of convenience store operators throughout the nation.

Since Kraft and Heinz offer so many food products and condiments between them, it's difficult for a c-store retailer not to sell something from either company.

Once the merger is finalized, expected in the second half of 2015, the combined company will be known as The Kraft Heinz Co. and boast $28 billion in annual revenues. Brands under its umbrella will include Ore-Ida, Philadelphia, Oscar Mayer, Velveeta, Planters, Kool-Aid, Lea & Perrins, Lunchables, Maxwell House, Bagel Bites and both companies' eponymous brands.

Joe Hamza, vice president of sales and marketing for Tedeschi Food Shops Inc., told CSNews Online that although packaged foods isn't the chain's largest category in terms of sales, the Rockland, Mass.-based retailer offers a "sizable" amount of products from both Heinz and Kraft, specifically in its frozen foods section.

Whenever any larger merger takes place, Hamza said c-store operators need to examine what affect it will have on them, with the Heinz-Kraft deal being no exception. "You're always concerned current agreements [with that company] may change, which could squeeze margins. With a deal like this, the retailer can lose leverage," he said.

However, Hamza stressed that Tedeschi is not concerned about pinched margins or loss of leverage resulting from the Heinz-Kraft merger. In fact, the combination of these two food giants should be a positive for c-store operators, he believes.

"We think the combined company will bring more innovation to the category," Hamza remarked. "Also, I'm certainly not saying Kraft was a weak company by any means. It is one we had a really strong relationship with, but I think it will be a stronger [combined] company. They have some great synergies."

On the opposite coast, Tim Cote, vice president of marketing for Beaverton, Ore.-based Plaid Pantries Inc., operator of Plaid Pantry convenience stores, believes both good and bad will come out of the Heinz-Kraft merger. He expects The Kraft Heinz Co. to undertake dramatic cost-cutting measures once the deal is completed.

"This typically involves sales team reductions, reductions in financial and category management support of retail and wholesale, increased rigidity in go-to market strategies and, at least in the short term, SKU reductions — all in order to achieve a new level of profitability in the short term," Cote said.

Still, he doesn't expect to see a large impact to the category, except for "SKU churning in order to maximize relationships" going forward.

"Generally, when companies execute this type of strategy, the result is a near- to medium-term decrease in sales. That is the bad news," said Cote. "The good news is that the market space that Kraft occupies is quite crowded, and any sales and support losses retail sees relating to these changes should be made up by retailers that are willing to broaden the scope of suppliers they work with to achieve sales and profitability goals."

MORE SUPPLIER MERGERS TO COME?

While 2014 may have been the year of the convenience store retailer merger, 2015 could very well end up being the year of the supplier merger.

Industry experts believe the Heinz-Kraft merger is just the first of many deals to come. Media reports have shined the spotlight on PepsiCo Inc. and General Mills Inc. as potential acquirers.

"I think we will see a lot more mergers in the packaged foods business," predicted Hamza. "With the cost of doing business today, it's difficult for companies to be on their own. It's difficult for these companies to get shelf space in grocery stores and convenience stores."

As competitors merge, that will put even more pressure on other suppliers to match them, the Tedeschi executive added. "I think these deals will put more pressure on suppliers and manufacturers to grow their businesses and become bigger," he said. "This way, they gain more leverage with mammoth companies like Walmart and Target."

Specifically, Hamza concluded he would not be surprised if Campbell Soup Co. and Post Holdings Inc. were acquisition targets in the near future.