Three Secrets from the World of Kraft Heinz

By Anastasiya Pocheptsova and Daryl James

SMITH BRAIN TRUST -- Shareholders will vote Wednesday on the formation of Kraft Heinz, which would emerge as the world’s fifth-largest food and beverage company pending legal hurdles. The merger would bring popular brands such as Oscar Mayer, Planters, Kool-Aid, Ore-Ida, Bagel Bites and Classico under the same roof. While most consumers won’t notice any difference at the supermarket, the blockbuster deal led by Brazilian investment firm 3G Capital and Berkshire Hathaway will stir interest in an industry that many people misunderstand. Here are three secrets that shoppers won’t find in the fine print on a jar of mayonnaise.

1. They Didn’t Build That

Most consumer products companies don’t grow or extract their own raw materials. Most don’t print their own labels or manufacture their own packages and lids. Some don’t actually build, store or transport anything. All of this can be outsourced, which brings brand-related challenges. One prime example came in 2007 when a Chinese supplier got caught using lead-based paint on Fisher-Price toys for Mattel.

So what do consumer products companies actually do? The big ones often keep at least some of their manufacturing in house. Kraft Foods Group, for example, processes most of its own products at 36 North American facilities. But the same company relies on third-party suppliers for raw ingredients, packaging, warehousing and distribution.

H.J. Heinz has been a private company since 2013, so its operations are less transparent. But regardless of who does what, the right amount of outsourcing is strictly a business decision for Kraft, Heinz and similar firms. That’s because consumer products companies, at their core, are not manufacturers.

They are firms that know how to pick winning products and support them in terms of supply chain management, brand management and relationship management with retailers. The new Heinz Kraft Company can do anything else it wants, but if it falls short in any of these three areas, shareholders will feel the pain.

2. Your Money Is Theirs

Consumers might think they have thousands of choices when they walk into a supermarket, but only a few dozen companies control most of the popular brands. Procter & Gamble sells Tide and Gain laundry detergents. Unilever sells Klondike Bars and Popsicle frozen treats. And Mondelēz International, a Kraft Foods spinoff, sells Wheat Thins and Triscuits snack crackers. Just these three companies own hundreds of brands, which are geared toward different target markets and often priced differently. (Take a Smith Brain Trust quiz to see how well you know your brands and their parent companies.)

So why not market everything under one master brand? For starters, companies like the financial security that comes with a diversified portfolio. If one brand fails, another can succeed. Each name becomes an asset that can be traded, which happened in 2014 when Unilever sold its Ragu and Bertolli businesses to Japan’s Miskan. Because of the way Unilever had branded its pasta sauces, the value transferred smoothly to new ownership.

Consumer psychology explains the rest of the story. Shoppers generally do not believe that a company can be good at multiple things, and research shows that brand extensions that veer too far from core products often fail. If Kraft Foods sold wieners, peanuts and gelatin under the same brand — instead of using Oscar Mayer, Planters and JELL-O — people would get confused about what the company was really good at.

None of this is logical from an operations perspective. Coca-Cola would face a backlash if it launched a line of bug spray or bleach. But in reality, people good at managing supply chains, brands and relationships can use their same skills to support just about any product.

This is why talented individuals can move easily among different types of consumer products companies. But the companies themselves must consider consumer psychology — along with logistics synergies — to build cohesive brand portfolios.

3. You Don’t Like Surprises

Some people say they like surprises, but market research shows that shoppers will pay a premium to get something familiar. This is the power of consumer products brands such as Kraft or Heinz. More than anything else, including quality, they stand for consistency.

People want to know what’s inside when they buy a package of cheese or a bottle of ketchup, and they don’t have time to study everything on the shelf. So they grab what they recognize, trusting it will be the same as their previous experience or what was promised on television.

These perceptions don’t just happen by chance. They are driven by significant marketing investments. So it doesn’t matter that many companies produce their private labels on the same floors as their higher-priced brands. You judge a product by its package.

Anastasiya Pocheptsova, Ph.D., is an assistant professor of marketing at the University of Maryland’s Robert H. Smith School of Business. Daryl James is director of communications at the same school.

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