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An array of Kraft and Heinz Products, such as Kraft Macaroni & Cheese and Heinz Tomato Ketchup.

The Heinz-Kraft merger will form the fifth biggest food and beverage company worldwide. Source: AdWeek

The Heinz-Kraft merger announced Wednesday will form the fifth biggest food and beverage company worldwide, and the third biggest in North America, with $28 billion in annual revenue. The merger, which was orchestrated by 3G and Warren Buffett’s Berkshire Hathaway, contradicts consumer trends favoring fresh foods over prepackaged, big-name brands.

However, executives are confident that the merger will be nothing but positive: Kraft shares surged 33% on the day the merger was announced. Executives expect $1.5 billion in annual cost savings by the end of 2017. The merger will also increase opportunities for both domestic and international growth, although the firm is expected to increase its share of marketing dollars internationally versus domestically.

Advertising Age writes that marketing for these companies has “long been on autopilot,” but that is about to change when the merged company adopts zero-based budgeting, in which every dollar spent must be justified by its return. It’s a fact-based, results-oriented approach.

Bernardo Hees (CEO of Heinz, who will take over as CEO for Heinz-Kraft) reports that the company actually plans to increase its marketing spend in support of its combined brands, which include Jell-O, Velveeta, Oscar Meyer, Lunchables, Ore-Ida, Maxwell House coffee, Philadelphia Cream Cheese, and of course Heinz Ketchup.

3G reworked Heinz’s marketing structure when it bought the company in 2013. It is already searching for savings from non-working media, which is money spent on creating output. In other words, this money is spent before anything reaches the consumer. Examples include TV commercial production costs, content creation and development costs, agency fees, and research. Working-media is consumer-facing, such as paid media spend, sponsorships, or in-store activation.

On the other hand, according the AdWeek, Kraft “has never been a flat or lean organization.” In fact, Kraft announced in February that its CMO, Deanie Eisner, will be leaving the company following flat earnings and market share growth in 2014. No replacement has been named.

Together, the companies primarily work with five outside agency firms: CP+B, McGarryBowen, Leo Burnett and Taxi (Kraft) and Cramer-Krasselt (Heinz).

In 2014, Kraft spent much more on advertising than Heinz did, at $540.5 million and $42.4 million, respectively. Heinz will look to Kraft to boost awareness of its products via cross-promotions or increased distribution. Kraft’s brand awareness is currently 80 percent in 14 markets. However, cross-promotion will be limited due to the little overlap in the products that Heinz and Kraft each sell.

The merger has been agreed by the boards of both companies, but awaits regulatory approval and the support of Kraft shareholders. The companies expect the deal to close in the second half of 2015, at which point Heinz shareholders will own 51% of the combined firm while Kraft shareholders will get a 49% stake.

From a marketing management perspective, here are some questions to consider:

  • What marketing synergies may be achieved through this merger?
  • Would you recommend a centralized or decentralized marketing strategy for Heinz-Kraft and why?
  • What risks do each of the companies face as a result of this merger?