NEW YORK (TheStreet) -- Warren Buffett sure does love his unhealthy condiments.
On Wednesday, the billionaire investor and CEO of Berkshire Hathaway (BRK.A - Get Report) announced that he was teaming up with 3G Capital again to provide equity financing for a major packaged food deal. Kraft (KRFT), the maker of dinner favorite Macaroni & Cheese, as well as condiments Cool Whip and Philadelphia cream cheese, will be merged with a prior 3G Capital/Buffett investment in ketchup maker Heinz in a $10 billion transaction.
"This is my kind of transaction, uniting two world-class organizations and delivering shareholder value," Buffett said in a statement.
Investors who may have been bidding up shares of packaged food companies Kellogg (K - Get Report) and Campbell Soup (CPB - Get Report) in the hopes of an overture by Buffett may want to revisit their thesis in light of the Kraft merger. Shares of Campbell Soup and Kellogg have gained 6.5% and 2.2%, respectively, in the past six months, despite major struggles in their largest businesses.
That Buffett continues to back firms such as Kraft and Heinz, which tend to sell items that have to be constantly replenished by households, rather than cereal and soup, speaks to several fundamental shifts in Americans' eating habits. One is that people continue to grab snack bars or ready-to-eat cereal from brands owned by General Mills (GIS) or PepsiCo (PEP) before hurrying off to work, instead of sitting down and eating a bowl of Kellogg cereal.
According to Euromonitor, U.S. breakfast cereal sales are projected to decline by 8% to $10.3 billion by 2018. Kellogg's U.S. morning foods segment posted a 7.7% sales decline in the fourth quarter, and a 5.7% drop for all of 2014. The business represents about 23% of Kellogg's annual sales.
As for Campbell Soup, its once formidable market share in soup has been eroded over the years as it has unsuccessfully tried to make soup a year-round business and make it easier to eat at work with new packaging. Consumer perceptions that soup has large amounts of sodium have dented demand.
Campbell Soup's core business could suffer another hit soon, as General Mills is preparing to roll out a line of organic soups this summer from its Annie's brand, which it acquired last year for close to $900 million.
Euromonitor estimates that U.S. soup sales will fall by 2% by 2018. Campbell's U.S. soup sales fell 6% in the most recent quarter, reflecting 11% declines in sales of condensed soups and a 4% fall in broth.Meanwhile, Buffett's growing packaged food empire may hint at one welcome development down the line for U.S. consumers: lower prices on their condiments and other packaged foods.
To extract minimum value from the merger of Heinz and Kraft, Buffett and 3G Capital are likely to combine vast marketing teams and the people responsible for dealing with major retailers such as Wal-Mart (WMT - Get Report), Target (TGT - Get Report) and Kroger (KR - Get Report). As 3G Capital and Buffett consolidate their operations and reduce costs, they could pass along some of those savings to retailers, who in turn could reduce prices.
Kraft gets about 42% of its revenue from its top five customers, with Wal-Mart alone accounting for 26% of Kraft's sales. Heinz, in its last annual report before going public in 2013, noted it relies on Wal-Mart for 10% of its sales.
Wal-Mart declined to comment on its supplier arrangements. Target did not respond to an email seeking comment.