Earlier today, Blackstone announced that one of its holdings, Pinnacle, would be acquiring Birds Eye Foods, maker of Duncan Hines, Snyder, Swanson and other brands. The details of the transaction, which the WSJ summarized succinctly, provide specifics on the $1.3 billion deal. But how adept is Pinnacle at cutting costs from a procurement perspective and will the Birds Eye deal enable them to realize significant operating cost synergies tied to Spend Management?
I'd argue that there's both positive and negative baggage that will impact the ultimate direction of the combined entities when it comes to procurement and supply chain. On the negative side, our own analysis suggests that Pinnacle is a laggard organization when it comes to adopting procurement and supply chain processes, technologies and programs that drive savings. This puts them in the roughly 60% of the consumer food products companies we rank with less than stellar cost cutting and working capital reputations amongst their peers for driving significant EPS and balance sheet returns. In contrast, food and products companies such as Kraft, Nestle, PepsiCo, ConAgra, Hershey and Sara Lee perform significantly better in our analysis of overall Spend Management maturity and savings based on our ranking criteria.
On the positive side, however, Blackstone, KKR and other large private equity firms are rumored to be getting much more deeply involved in cost reduction in their portfolio companies, going beyond even hiring consultancies to, in fact, staffing sourcing and operational teams in certain cases for their portfolio organizations to leverage. I suspect we'll see significant benefits overtime from Blackstone's involvement in cutting indirect spending costs between the organizations.
But when it comes to direct spend (i.e., spend that goes into COGs such as food ingredients), what will Birds Eye and Pinnacle need to do to improve profitability like some of their better performing peers have? I'll toss out two ideas here in a list that is anything but exhaustive. First, the merged organizations will need to implement a centralized procurement structure to provide governance, processes (e.g., lean, supplier development, etc.) and technology to what will most likely remain decentralized execution teams. Second, they'll need to invest in talent to drive both basic and advanced strategic sourcing, commodity hedging and supplier collaboration strategies to drive cost take out. At a time when many CPG companies are trimming heads, rising leaders in the procurement space such as Heinz are actually adding strategic headcount while, in some cases, reducing transactional resources through purchasing and A/P automation.