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Marketing budgets have become a key target of business frugality since the last recession. Last year, budgets had decreased from 12.1% of average revenue to 11.3% the year before, according to consulting firm Gartner.
As might be expected, the financial health of US companies is deteriorating, with a focus on reducing costs rather than growth. According to a 2017 Fortune 500 analysis, 53% of businesses reported lower after-tax profits, while only 47% saw growth. Marketing, once the driving force behind the American consumer society, has been in decline for more than a decade.
AP Photo / Gene J. Puskar, File)ASSOCIATED PRESS
3G Capital, a Brazilian private equity firm well known for its partnership with Warren Buffett's Berkshire Hathaway, has further harmed brands. 3G Capital has been hailed by Wall Street as a model operation. She bought Kraft and merged it with his private company Heinz in 2015, making the public company merged under the name Kraft Heinz. The 3G Capital business approach is ruthless and relies on cost reduction. Every employee must justify his existence every day. Promotions are fast and based on merit, and the less successful are dismissed with the same eagerness. Budgets are based on zero and evaluated annually, or even more frequently, unceremoniously. Expenses are eliminated if they are no longer considered useful.
Less than two years after the merger of Kraft and Heinz, its workforce was reduced by 20% and its overhead by 40%. Critics have long argued that 3G Capital's cost reduction has gone too far and has been detrimental to growth. They proved to be right. The problem with this philosophy is that you can not reduce your growth costs.
Not surprisingly, sales then declined for six consecutive quarters. The wheels were released Friday morning when Kraft Heinz shares fell by 30% at the opening and the company lost $ 16 billion of its market value. The key problem Kraft Heinz faces is that it has stopped investing in its brands at a time when consumer tastes and behaviors are changing and competition is intensifying.
It is time for companies to refocus on growth by investing in marketing, distribution and continuous innovation, and no longer in a strategy of frugality. Significantly, when the third hedge fund, Third Point Capital, launched a militant challenge at Campbell Soup last year, its main criticism was that the company was not investing enough to update its aging soups.
The failure of Kraft Heinz is the canary in the pit of the mine. It is simply a combination of self-destructive measures by many marketers that has reached a critical point. The same Gartner survey I cited above indicates that investments in external agencies, 22% of total marketing budgets, are the lowest ever, as are investments in the paid media, 23% of average marketing budgets . As investments in external agencies decline, marketers spend more, about 25% of their budget, in internal agencies. The most disturbing, perhaps, is that despite the discussions about the importance of data science and its optimization, the acquisition of "marcom" has been reduced by 15%.
Kraft Heinz's very poor offer of Unilever in early 2017 triggered the wave of cost reductions in large consumer companies, with consumer goods companies becoming the third most targeted market for acquisitions of all. sectors in 2018. – performing margins and therefore remain vulnerable, but activist investors will have more trouble directing them. They will have to come up with new ideas on how to grow the business, not just reduce costs.
Brands are more important than ever because the world is becoming more and more used and there are many new markets and a growing middle class in countries like India, China, Brazil, Russia, South Africa, Nigeria, Indonesia, Turkey and Mexico. These consumers buy brands, not commoditized products. They buy high-end brands. And the brand is essential to differentiate itself in a world of parity and to create a brand preference.
Do not forget that brands perform better in difficult times compared to unbranded products and that they survive longer product cycles.
McKinsey showed the importance of brand value. They found that in nearly 90% of the categories they have recently measured, consumers are not loyal to the brands they have chosen and nearly 60% will change when they consider a new purchase. This means that the timing of the initial consideration can be critical in the consumer engagement journey – and a strong brand is the key to winning the battle of that initial consideration.
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Marketing budgets have become a key target of business frugality since the last recession. Last year, budgets had decreased from 12.1% of average revenue to 11.3% the year before, according to consulting firm Gartner.
As might be expected, the financial health of US companies is deteriorating, with a focus on reducing costs rather than growth. According to a 2017 Fortune 500 analysis, 53% of businesses reported lower after-tax profits, while only 47% saw growth. Marketing, once the driving force behind the American consumer society, has been in decline for more than a decade.
AP Photo / Gene J. Puskar, File)ASSOCIATED PRESS
3G Capital, a Brazilian private equity firm well known for its partnership with Warren Buffett's Berkshire Hathaway, has further harmed brands. 3G Capital has been hailed by Wall Street as a model operation. She bought Kraft and merged it with his private company Heinz in 2015, making the public company merged under the name Kraft Heinz. The 3G Capital business approach is ruthless and relies on cost reduction. Every employee must justify his existence every day. Promotions are fast and based on merit, and the less successful are dismissed with the same eagerness. Budgets are based on zero and evaluated annually, or even more frequently, unceremoniously. Expenses are eliminated if they are no longer considered useful.
Less than two years after the merger of Kraft and Heinz, its workforce was reduced by 20% and its overhead by 40%. Critics have long argued that 3G Capital's cost reduction has gone too far and has been detrimental to growth. They proved to be right. The problem with this philosophy is that you can not reduce your growth costs.
Not surprisingly, sales then declined for six consecutive quarters. The wheels were released Friday morning when Kraft Heinz shares fell by 30% at the opening and the company lost $ 16 billion of its market value. The key problem Kraft Heinz faces is that it has stopped investing in its brands at a time when consumer tastes and behaviors are changing and competition is intensifying.
It is time for companies to refocus on growth by investing in marketing, distribution and continuous innovation, and no longer in a strategy of frugality. Significantly, when the third hedge fund, Third Point Capital, launched a militant challenge at Campbell Soup last year, its main criticism was that the company was not investing enough to update its aging soups.
The failure of Kraft Heinz is the canary in the pit of the mine. It is simply a combination of self-destructive measures by many marketers that has reached a critical point. The same Gartner survey I cited above indicates that investments in external agencies, 22% of total marketing budgets, are the lowest ever, as are investments in the paid media, 23% of average marketing budgets . As investments in external agencies decline, marketers spend more, about 25% of their budget, in internal agencies. The most disturbing, perhaps, is that despite the discussions about the importance of data science and its optimization, the acquisition of "marcom" has been reduced by 15%.
Kraft Heinz's very poor offer of Unilever in early 2017 triggered the wave of cost reductions in large consumer companies, with consumer goods companies becoming the third most targeted market for acquisitions of all. sectors in 2018. – performing margins and therefore remain vulnerable, but activist investors will have more trouble directing them. They will have to come up with new ideas on how to grow the business, not just reduce costs.
Brands are more important than ever because the world is becoming more and more used and there are many new markets and a growing middle class in countries like India, China, Brazil, Russia, South Africa, Nigeria, Indonesia, Turkey and Mexico. These consumers buy brands, not commoditized products. They buy high-end brands. And the brand is essential to differentiate itself in a world of parity and to create a brand preference.
Do not forget that brands perform better in difficult times compared to unbranded products and that they survive longer product cycles.
McKinsey showed the importance of brand value. They found that in nearly 90% of the categories they have recently measured, consumers are not loyal to the brands they have chosen and nearly 60% will change when they consider a new purchase. This means that the timing of the initial consideration can be critical in the consumer engagement journey – and a strong brand is the key to winning the battle of that initial consideration.