In the news reports about the $46 billion merger of Heinz and Kraft Foods, most analysts immediately noted that the new company would be the 3rd largest U.S. food company (or 5th largest in the world, depending on the source). However, much of the talk also centered on the zero-based budgeting plan that will be implemented at the new Kraft-Heinz, which will have nearly $30 billion in annual sales.
ZBB, as it is known, requires management to justify each year’s budget from scratch, instead of basing it on the prior year’s version and justifying only the changes. It sounds like a relatively simple idea and one that some smaller food companies likely already utilize following the lingering recession that made many look carefully at all of their expenses even if they didn't know the proper name for the technique.
What is interesting is management of the new firm expects implementing this budgeting model will result in cost savings of $1.5 billion at Kraft – 8% of current sales. And analysts at Morgan Stanley call that “potentially conservative" (Note: links to PDF download). Morgan Stanley sees Kraft Heinz pro forma EBIT margin rising from 19.5% in 2016 to 24.9% in 2017. That’s over one-third larger than Kraft’s current margin of 18%.
So with those kinds of returns, will zero-based budgeting become the common budgeting method of the future? Several other large companies have already embraced it.
Does your company plan to do so? And if so, what are the implications?
[Editor's note: OFW Law Principal Attorney Michael J. O'Flaherty provided this blog piece regarding the need for federal oversight regarding the ongoing trend of class action lawsuits filed against food companies regarding product labeling.]read more
Brian became president of The Food Institute in 2002 and has worked for this non-profit, founded in 1928, since 1980. Brian has been interviewed on consumer and food industry trends on a number of television programs, including Fox News, The Today Show, NBC News, the CBS Evening News and the PBS Nightly Business Report, and quoted in publications ranging from The Wall Street Journal and New York Times to Supermarket News, Progressive Grocer and Food Processing magazine. He has also been a frequent guest on various Public radio programs discussing food prices, mergers & acquisitions, and other industry issues.
Brian graduated from Ramapo College in Mahwah, NJ with a B.A. in Political Science and also holds a Masters in Administrative Science from Fairleigh Dickinson University.
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