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?