The sustainability challenge of the Kraft-Heinz merger

The sustainability challenge of the Kraft-Heinz merger

Kraft Sustainability
FlickrMike Mozart
After a deeper look into Kraft's past sustainability performance, where will sustainability be prioritized after the merger?

Two weeks ago, Kraft Foods Group and H.J. Heinz Company agreed to merge to create a food and beverage monolith valued by some analysts at $49 billion. While the megamerger may cause some investors to rejoice at potential future earnings, it also might put corporate sustainability advocates on watch.

The newly formed food conglomerate will be named The Kraft Heinz Company — the third largest food and beverage company in North America and the fifth biggest in the world. The merger is backed by Warren Buffet’s Berkshire Hathaway, as well as the Brazilian private equity firm 3G Capital.

3G Capital made headlines in recent years for its acquisition of Anheuser-Busch in 2008, as well as acquiring a 70 percent stake in Burger King in 2010. The private equity firm is also known for its authoritarian approach to cost cutting by employing an accounting metric known as zero-based budgeting.

Zero-based budgeting requires employees to justify and analyze each expense they plan to make. The goal is to boost a company’s bottom line by reducing unnecessary waste. It previously was used by 3G Capital when it acquired Anheuser-Busch, relegating employee perks such as tickets to St. Louis Cardinals games and flying first class.

While this accounting technique may result in better margins, it's worth wondering what will the shift might mean for corporate social responsibility executives expected to justify long-term sustainability initiatives that might not immediately add to the company’s bottom line.

Compounding the challenge for those tasked with selling sustainability to leadership is that Kraft ranks near the bottom of the list in an industry that has a profound global footprint. According to a report by Climate Smart Business (PDF), “emissions from food distribution, processing, retail, and food services sectors combined are projected at nearly 1 million tons of CO2.”

The disclosure

For anyone born in the U.S. or Canada, Kraft’s ubiquitous consumer product lines — which include Cheez Whiz, Jell-O, Kraft Singles and Kool-Aid — are likely quite familiar. Behind the scenes for these well-known brands, however, the company's structure and business model have been dramatically transformed in recent years.

In 2012, what was then Kraft Foods Inc. spun off its snack foods components and renamed it Mondelez International. The company's grocery product line became the Kraft Foods Group entity now merging with Heinz.

Kraft salad dressing
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Salad dressing, one of Kraft's ubiquitous grocery store offerings.

Kraft Foods Group focused on the North American markets, while Mondelez concentrated on international markets. (Prior to the Kraft Heinz merger, Kraft Foods Group had 98 percent of its sales in North America.)

Since then, Kraft Foods Group, publicly traded on the NASDAQ and based in Northfield, Ill., has appeared to make strides in its sustainability efforts.

According to a corporate website, some of these efforts have included cutting energy per ton of product produced in its manufacturing processes by more than 20 percent since 2005, reducing waste to landfill by 35 percent since 2005 and saving 109 million pounds of packaging in 2010.

Yet these new practices would go unnoticed to the readers of the company’s annual filing to the Securities and Exchange Commission, known to the wry investor as a 10-K — underscoring an enduring challenge for the field of sustainability, as not every company opts to explicitly tie corporate social responsibility to key financials.

In the company’s 10-K for 2014 (PDF), the term “sustainability” was not mentioned a single time. Also neglected was the term “climate change,” mentioned only twice. Within the entire 170-page report (PDF), two sections and a collective five paragraphs discussed the environment, with one section pertaining to environmental regulation and another to environmental laws.

Why Kraft has decided to abstain from listing climate change or environmental problem risk factors is unclear, especially considering two of Kraft’s notable competitors, Campbell’s Soup Company and ConAgra Foods, explicitly have done so.

According to the SEC’s website, a risk factor “includes information about the most significant risks that apply to the company or to its securities. Companies generally list the risk factors in order of their importance.”

In Campbell’s filing, it stated, “Adverse changes in the global climate or extreme weather conditions could adversely affect the company's business or operations.”

Whereas ConAgra, listed as a direct competitor to Kraft by Yahoo Finance, stated, “In the event that such climate change has a negative effect on agricultural productivity, we may be subject to decreased availability or less favorable pricing for certain commodities that are necessary for our products, such as corn, wheat and potatoes.”

Kraft did not make an executive available for an interview on the topic, but spokesperson Basil Maglaris noted in an email, "We report our environmental sustainability progress and accomplishments on our Web site. We have not included that information in our 10-K filing since spin-off (in 2012)."  

Some of Kraft’s shareholders also seem concerned about the lack of disclosure. One shareholder in particular, the Province of St. Joseph of the Capuchin Order, went so far as to file a shareholder resolution requesting that the company issue “a comprehensive sustainability report describing its environmental, social and governance (ESG) performance and goals, including greenhouse gas (GHG) reduction goals.”

In the resolution, the shareholder asks Kraft to disclose the relevant information by October.

“Kraft peers such as Mars, Nestle and Unilever issue comprehensive sustainability reporting," according to the shareholder resolution. "By implementing this resolution, Kraft can demonstrate its values, and drive its practices and performance.”

Although sustainability reporting is not required in the U.S., according to a survey conducted by KPMG in 2013 (PDF) of 4,100 global companies, over 71 percent published ESG reports.

Back of the pack

For Kraft Foods, it is not only the dearth of information in its annual filings nor a request by an obscure individual shareholder that cements its status as a laggard in sustainable food; that standing is also reinforced by an industry benchmark of 52 sources.

According to CSRHub, which aggregates some 64 million data points from 380 market intelligence sources covering over 14,400 companies, Kraft in 2014 ranked near the bottom on overall sustainability when compared to industry peers such as ConAgra, Heinz, Sara Lee, Nestle and Campbell’s Soup Company.

In the subcategories of environment and community, Kraft ranks dead last with an overall rating of 57 and an industry percentile ranking of 55.

Kraft CSR Hub
CSRHub

An overview of how food giants stack up on sustainability, according to rankings aggregator CSRHub.

Kraft’s overall ratings represent where it stands compared to the entire global sustainability index of companies surveyed, whereas the percentile ranks demonstrate where Kraft places amongst its food industry peers.

Moreover, Kraft's rankings actually have declined in recent years, according to its percentile rankings between the end of 2012 and 2014. While Kraft’s rating remained fairly constant during this period, a graph of its percentile rankings show a sharp decline in 2013 in nearly every sustainability category. The most notable decline was in the community and labor subcategory.

However, this does not necessarily mean that Kraft decreased its spending or focus on sustainability projects. Rather, it could mean that industry competitors have beefed up their own programs, particularly as food supply chain transparency issues gain currency among consumers.

"More and more companies are starting to do work in this area. There’s more competition," CSRHub co-founder and Chief Operating Officer Cynthia Figge told GreenBiz. "A company may look worse over time, but other companies may just be doing much better."

It is worth noting that Kraft’s decline in industry sustainability rankings in 2013 also came after the company’s net profits increased from $5.7 billion in 2012 to $6.8 billion in 2013, indicating that declining sales or financial turmoil likely weren't the culprits for the dip in sustainability performance.

A slice of sustainability

While sustainability has not yet been integrated into Kraft's financials, the company does list sustainability progress on its corporate website, along with policies on climate change, animal welfare and environment.

Also listed on the Kraft site is a comprehensive account of its carbon management and sustainability goals included in an investor report for 2014 produced by the Carbon Development Project (CDP).

According to Kraft's website, "Sustainability is about protecting the world’s greatest resources — land, air, water and people. We focus on those areas where we can make the biggest impact while enhancing our business performance."

The website elaborates: "Currently, as part of our short term strategy, we take steps to reduce our energy use, and the associated carbon emissions, from our operations, and set climate-related goals for manufacturing and transportation, among other sustainability goals."

In the CDP report, the company explicitly addressed its risks to climate change, which were omitted from its 10-K. Kraft highlighted the drastic effects that a change in precipitation and extreme drought would have on its supply chain and commodities.

Also mentioned in the report are ways that carbon emissions have been reduced by modifying or eliminating infrastructure such as boilers, turbines and compressors.

Overall, CDP gave Kraft Foods Group a rating of 90 for its 2014 climate change disclosure and a B for its performance score. By comparison, ConAgra received a disclosure score of 94 and Nestle earned a perfect 100.  

Glancing through Kraft’s CDP report, a company sustainability report from 2010 and the former Kraft Foods Inc.’s sustainability website kraftfoodsbetterworld.com, one year constantly appears: 2015.

Specifically, in the company’s CDP report for 2014 (PDF), Kraft laid out its sustainability goals for 2015 using 2010 as a base. These goals included reducing energy use, energy-related CO2e emissions, water use and waste in its manufacturing plants by 15 percent, while also planning to eliminate 75 million pounds of packaging material and reduce 14 million miles from its transportation network by 2015.

On the Kraft Foods Better World website, the company’s sustainability goals for 2015 were even more robust. In addition to what was mentioned in the CDP report, the company stated that for 2015 it planned to increase sustainable sourcing of agricultural commodities by 25 percent.

Those ambitious goals for the current year are nowhere to be seen (let alone marked as accomplishments) on the company’s current sustainability page. Rather, there are more dated references to 2005 baselines, such as a 7 percent reduction in the amount of water used per ton of product produced at manufacturing facilities since then.

While Kraft still has the balance of 2015 to evaluate and release progress on more updated goals, incongruencies in the time frame and dated metrics make it difficult to evaluate the work the company really has done of late.

"On our Web site, our goal is to show progress in our environmental sustainability efforts," said Magaris. "In some instances, we show results reflecting progress since our business started on its sustainability journey in 2005."  

The palm oil dilemma

Food companies are exposed to myriad environmental risks, from the agricultural supply chain to food processing centers to retail packaging and distribution.

Still, one individual commodity has emerged as a flash point in the conversation about sustainable food: palm oil.

Kraft, along with Heinz, has drawn criticism for its sourcing practices. According to the Rainforest Action Network (RAN), nearly half of the packaged food found in grocery stores uses palm oil, with increasing demand for a cheaper version leading to deforestation in endangered areas in places such as Malaysia and Indonesia.

According to Kraft’s website, the company purchased less than 0.01 percent of the worldwide crop output of palm oil. Still, the company notes that it is "concerned about the environmental and social issues associated with the supply chain of this commodity, including deforestation, the loss of biodiversity and the impact on local communities.”

That hasn't stopped advocacy groups such as RAN from voicing their displeasure with the company as recently as the announcement of the merger with Heinz.

"This $40 billion merger focuses on growing profits, but these are too often at the expense of chopped down rainforests and human and labor rights violations, which are driven by the snack food industry’s use of Conflict Palm Oil,” said RAN Agribusiness Campaign Director Gemma Tillack in a press release. “A food company of this scale has a massive global footprint, and needs to be accountable for the social and environmental impacts in its supply chains."

Lauren Hepler contributed to this report.