ONLY IN THE WORLD-HERALD
You don't have to know how zero-based budgeting works to know that when corporate executives start talking about it, layoffs often follow.
It happened at food manufacturer Kraft Heinz, beer maker AB-InBev, and fast-food chain Burger King.
Now the strategy could be putting jobs on the line at ConAgra Foods. The company employs about 3,000 people in the Omaha area.
The Omaha-based food manufacturer switched to the accounting method this summer under new chief executive Sean Connolly, whotold stock analysts Tuesday, "Every single thing in our budgets has now been zero-based."
The budget approach forces managers to justify every expense anew each year. That's different from companies that use the previous year's budget as a baseline for cuts or increases.
Food companies, especially, have adopted the zero-based practice recently as shareholders look for bigger profits in what's been a slow growth industry, said Bruce Cohen, who works in the San Francisco office of management consulting firm Kurt Salmon.
"In order to expand your (profit) margins, you have to be operating in a very efficient way," he said.
At ConAgra, zero-based budgeting is part of what Connolly has called a "relentless" campaign to root out inefficiency in areas including corporate operations, the cost of food ingredients and supplies, labor costs and trade spending, or the cost of placing and promoting grocery items on retail shelves.
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Connolly talked about boosting profits and share value when he took over ConAgra in April. Pressure mounted in June when activist investor Jana Partners announced that it had taken a large stake in the business.
ConAgra declined this week to discuss its budget approach, saying executives were busy preparing for today's annual meeting of shareholders in Omaha.
Zero-based budgeting can cut companies' administrative costs by 10 percent to 25 percent as quickly as in six months, management consultants McKinsey & Co. said in a 2014 report. ConAgra competitor Mondelez International, maker of Oreo cookies, saw savings of $350 million in its first year of zero-based budgeting, and expects $1 billion in savings over three years, its consulting firm Accenture said this year.
Companies going zero have slashed perks like first-class travel, and even limited the number of photocopies employees can make.
McKinsey said that while some savings fall to the bottom line, savings also might be reinvested in business growth, such as new sales staff who spend more time with customers, for example.
In addition to zero-based budgeting, Connolly said three other cost-cutting tactics are in play for shaving operating costs: outsourcing back-office jobs; building a corporate culture with stronger individual accountability; and paring layers of management to reduce hierarchies, which executives call an analysis of the "spans and layers" of management.
Connolly's changes aren't ConAgra's first crack lately at cutting costs, but corporate expenses have been growing in recent years.
What companies call "selling, general and administrative expenses," or SG&A, have at ConAgra totaled $3.5 billion in fiscal 2015, $2.8 billion in fiscal 2014 and $2.1 billion in fiscal 2013. They rose mostly because of huge impairment charges in the company's struggling private brands business, which is for sale. Companies record impairment charges when they write off worthless "goodwill" value in their businesses.
Outside of those charges, ConAgra under previous CEO Gary Rodkin cut expenses in several areas. All told, the company reported more than $375 million in cost savings for the 2015 fiscal year, which ended on May 31.
Said new CEO Connolly: "There is more we must do."
This week, he told analysts that corporate costs are "not as low as Kraft Heinz," the merged multinational food company controlled by Berkshire Hathaway and Brazilian private-equity firm 3G. Kraft Heinz has become the "benchmark" for lean management, Connolly said. In August, Kraft Heinz announced 2,500 layoffs — 5 percent of its workforce.
Cohen, the consultant, who follows retail and consumer products companies including ConAgra, said zero-based budgeting can help executives cut costs deeper, even when some cuts have already been made. Heinz posted "extraordinary" operating profit growth after 3G implemented the method, he said.
That growth comes from thinking about spending differently, he said.
Zero-based budgeting isn't ultimately about just cutting costs or boosting profits, Cohen said.
"At its core, it's redeploying resources to the best use of the company," he said, instead of committing to legacy costs. That might mean freeing up cash to spend on advertising or product development, so ConAgra is marketing products consumers want to buy.
To Omaha, he said, ConAgra's long-term prospects should be more important than its current size.
"You don't just want a big company, you want a vibrant company."
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