M&A Activity in Food Services Supply Chain Examined: Risk Mitigation

Despite Kraft’s Blue Box recall last month it the food giant went ahead with its announcement that it would be merging with Heinz – thereby making the Kraft Heinz Company the fifth largest food and beverage company in the world, third in the U.S.

But some analysts believe that risk mitigation has yet to be measured.

The companies will begin to operate together during the second half of 2015, which will shake create challenges in the supply chain. Kraft has experienced a few bumps in the road recently, between a break up with its global snacks partner Mondelez Inc. in 2012 (which has limited the company’s operations to Canada and the U.S.); the loss of their CEO in December; and the recent recall.

Analysts suggest that given the track record, Kraft might be forced to take a back seat in sourcing and procurement decisions when the merger takes foot.

Dan Amzallag, CEO at supplier management solutions provider Ivalua, is a 15-year veteran in the supply chain and food service industries arena. Supply Chain Management asked how firms in the midst of M&A activity can mitigate any additional layers of risk brought on? Specifically, can Kraft/Heinz stay more resilient? Below, are his answers:

• Acquisitions break down to having a goal of either 1) breaking up the acquired company and selling off its parts, or 2) leveraging components of the acquisition to make the new entity more than it was before. My understanding of the PE firm and Berkshire Hathaway who are running this M&A is that they want #2.
• Part of executing a merger to improve both companies is a determination of what parts overlap and how to reconcile that (jettison duplicated organizations, analyze the infrastructure and technology that support each side’s operations, expand the better supplier contracts and close the others, etc.). Any M&A activity in the modern age has a fair amount of analysis and planning around this and I’m sure it was a key part of the due diligence.
• The issue with the above is the execution. The planning of what supplier contracts to bolster and which to run away from is typically done from a “buyer” point of view, and cannot take into account the supplier’s point of view. This, then, is the biggest risk. The suppliers may have other ideas when it comes to the re-negotiations.
• My own experience with M&A in execution is that the best-laid plans are the first casualties when it comes to execution. Clients see a chance to re-negotiate with the new merged company, suppliers balk at consolidation of contracts, employees and plants take longer to re-organize—these are the primary risks that must be mitigated.
• Overly rigid or heavily customized architecture can present a big challenge. In the food industry especially, potential mergers are challenged by a bewildering mess of technology, data standards, and infrastructure around supplier information. This has unique implications in this industry, since an issue like food safety puts a high degree of risk on the supplier’s ability to communicate and collaborate effectively.

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