The End of a Troubled Union

The dissolution of one of the worst unions in American company history, Kraft Heinz, is a notable event.

A Mega-Merger Gone Wrong

The mega-merger, which resulted in decreasing share prices, has finally come to an end. On Tuesday, the food conglomerate announced that it is planning to split up into two new companies, focusing on faster-growing "sauces" businesses, such as Heinz Ketchup and Philadelphia cream cheese, and another on struggling products like Lunchables, Capri Sun, and Kraft Singles.

A Trend of Breakups

The conscious decoupling of Kraft Heinz is not an isolated incident. Other conglomerates, such as Keurig Dr Pepper, have also ended their mergers. Additionally, Pepsico, one of the largest food and drink companies, is facing pressure to restructure. Kellogg, which split into two companies two years ago, is also being acquired by other companies.

The Circle of Corporate Life

The breakup of Kraft Heinz is part of the natural cycle of corporate life. At some point, companies must either scale or split because they are not doing anything new. In a low-interest world, it may have made sense to use free money to acquire other companies. However, in a high-interest world, separation is en vogue.

The Failure of the Mega-Conglomerate Model

The breakup of Kraft Heinz raises questions about the effectiveness of the mega-conglomerate model. According to Melissa A. Schilling, a professor of management at New York University’s Stern School of Business, the power of Heinz’s merger was poorly designed from the start. The assumption that scale is always better is a misunderstanding of how scale works.

The Limitations of Scaling

While scaling mergers and acquisitions has its advantages, such as increased negotiating power and efficiency in areas like marketing and sales, there are limitations. If a company is already incredibly large, there may be no profits to be gained from further scaling. Suppliers and dealers of these companies have limited negotiating power, and there is little margin to squeeze out.

The Challenges of Managing Diverse Product Categories

When Kraft and Heinz merged in 2015, they created the third-largest food company in North America. However, the company quickly realized that managing 56 different product categories under one roof was a challenge. The legacy of Kraft Heinz was that they would tear out costs, but the bigger question was whether they invested enough money in the business.

The Decline of Processed Foods

The decline of processed foods, such as sodium-laden, highly processed packaged foods, has contributed to Kraft Heinz’s struggles. Consumers are withdrawing expenses due to economic uncertainty, and private labels are gaining ground. Since the merger, Kraft Heinz’s stock has fallen by almost 70%.

A New Strategy

Kraft Heinz’s leadership now believes that splitting into two separate units will be worth more to investors than the current structure. Essentially, they are reversing the field they created 10 years ago. The company’s CEO stated that scale alone is not the answer, but scale combined with focus creates opportunities.

Uncertainty on Wall Street

It is unclear whether Wall Street is on board with this new strategy. Kraft Heinz’s shares fell 7% on Tuesday, and Warren Buffett, who admitted to some misconceptions when the two companies merged, does not believe that the separation will fix the company’s problems.