IN SUMMARY: According to Forbes “in less than two years after merging Kraft with Heinz, its workforce was cut by 20% and overhead by 40%. Critics have long contended that 3G Capital’s cost-cutting went too far and came at the expense of growth”. Yes, the cost-cutting may have hurt but was cutting marketing a reason for the decline in sales and stock price?
Marketing budgets became a key target for the frugality drive of companies ever since the last recession. Last year, budgets had decreased from 12.1% of average revenues into 11.3% the previous year, according to consulting firm Gartner. The question is why?
It is my experience that way too many brands, and marketers, spend too much money in the wrong places. The increase, for example, in digital spending comes at a time when ad fraud caused an estimated $19 billion in losses to advertisers last year. It’s expected to reach $44 billion annually by 2020.
The real cause of Kraft’s sinking is buried within the Forbes article “brands were harmed further by 3G Capital, a Brazilian multi-billion dollar private equity firm best-known for partnering up with Warren Buffett’s Berkshire Hathaway. 3G Capital was lauded by Wall Street as a model operation. It bought Kraft and merged it with its privately-owned the Heinz company in 2015, taking the combined business public, as Kraft Heinz. The 3G Capital approach to business is ruthless and revolves around cost-cutting. Every employee must justify his existence every single day. Promotions are quick and merit-based, and underperformers get fired with the same alacrity. Budgets are zero-based and evaluated unsparingly every year, or even sometimes with more frequency. Expenses are eliminated if they’re no longer judged worth incurring”.
Your employees are crucial to the success or your brand
How many times are we going to learn the lesson of takeovers by capital-based companies whose only goal is to squeeze every dollar out of their investment that they can so they can hit and run.
An atmosphere where employees are afraid of losing their jobs is toxic. Instead of trying to save the brand they are trying to save their jobs.
Then there is private label
Private-label brands are creating a bigger divide between retailers and their suppliers. While just 5% of online sales come from private-labels, they are growing at 65% year over year.
Within the past year, sales of private-label brands have surpassed those of manufacturers’ brands, according to a Nielsen report cited by Food Navigator. A report by Daymon, global consumer retail and private brand agency, found that 81 percent of consumers buy private label products every time or almost every time they visit the grocery store. The report also highlighted that 85 percent of consumers trust private brands as much as national brands and that private label product sales increased by four percent in 2017, which is eight times higher than national brands.
The Forbes articles says “McKinsey has shown the importance of brand-value. They found that in almost 90% of categories that they measured recently, consumers are not loyal to their chosen brands, and almost 60% will switch when considering a new purchase. This means that the moment of initial consideration can be decisive in a consumer’s engagement journey — and a strong brand is a key to winning the battle for that initial consideration”. This is true but what they forgot to mention is that to many consumers brands can easily be replaced with store brands.
The Kraft Heinz nosedive was not due to cuts in marketing alone but rather to creating an atmosphere of fear and only focusing on bottom line results.
Originally published at www.newmediaandmarketing.com on March 19, 2019.