Cost
cutting has often been regarded as a tried and tested method by large
corporations, which want to generate bigger profits. Sometimes, those
measures work, but sometimes they don’t, and in the case of
American food and beverage, it hasn’t. The plunge in revenues and
billions in write-offs for two of its biggest brands has cratered the
stock since Thursday. Following the debacle, experts are now
questioning whether the firm’s aggressive cost-cutting techniques
are to blame for their declining fortunes.
On
Friday, the Kraft Heinz’s stock plunged by as much as 27% amid
widespread panic sell off and the announcement from the company that
they were writing down $15.4 billion from the brand value of two key
brands- Oscar Mayer and Kraft. Additionally, dividends had also been
slashed from 63 cents to 40 cents and needless to say, investors are
far from thrilled.
Kraft
Heinz’s troubles regarding cost-cutting can be traced to the
company’s decision to resort to zero-based budgeting, and many
believe that this particular approach is at the basis of the
company’s troubles. As per the zero-based budgeting approach,
executives sit down and start budgeting with a clean slate, rather
than using the budget from the previous year and while that has been
successful for many companies, it has not been so for Kraft Heinz.
The perils of zero-based budgeting were pointed out consultancy firm
BCG back in 2017. According to the report, “The cuts can be
impressive, and that’s a big win. When it’s applied clumsily, ZBB
can have a demoralizing impact that distracts the organization from
growth and value creation.” It seems the executives at Kraft Heinz
have not been able to apply it well and according to many experts,
cost cutting is something that is tough in the food industry. Any
change in an ingredient can often lead to an alteration in the
product, and it can be rejected by consumers.
That
being said, it is important to point out that many other consumer
giants like Mondelez International and Unilever have used this
strategy. None of them have had such poor results thus far. According
to many analysts, the executives at Kraft Heinz could be the fault
here, and an analyst at Investec said as much. He said, “I think
it’s a black eye for Kraft Heinz management for not implementing it
in as a sophisticated way as might be necessary, or maybe they just
implemented it too hard, too fast. I don’t think ZBB per se is the
problem.”
