Change of menu: Kraft Heinz bets on old brands to win new consumers

An 84-year-old macaroni cheese brand might seem like an unlikely saviour for a company struggling with debt and shrinking sales. 

Yet Kraft Macaroni and Cheese, first sold during the Great Depression, is among the products made by the US food company Kraft Heinz that flew off the shelves during the pandemic, and which the company thinks can help it attract a new generation of consumers. 

Kraft Heinz wants to reinvigorate old brands such as the blue-boxed mac and cheese as part of efforts to push up sales and profits from existing products, a marked shift in strategy from the focus on large-scale acquisitions espoused by its key investor, the Brazilian investment group 3G.

Four years ago, Kraft Heinz shocked the market with an unsuccessful, unsolicited bid for Anglo-Dutch rival Unilever. Now it is focused on revamping its own brands to appeal to healthier, more climate-conscious consumers.

Miguel Patricio, the chief executive selected two years ago by 3G, said: “What we concluded is that we need to grow organically, and that is the most sustainable way of keeping the company growing. They (3G) understood that very well. And they empowered me to make that happen. Because that’s a big change in direction.”

For 3G, however, the stakes are high. The Brazilian group, which built its reputation with the assembly of the world’s largest brewer Anheuser-Busch InBev and of Burger King owner Restaurant Brands International, is known for big acquisitions followed by ruthless cost-cutting to boost margins.

Miguel Patricio, Kraft Heinz chief executive: ‘What we concluded is that we need to grow organically, and that is the most sustainable way of keeping the company growing’ © Kraft Heinz via AP

Peter Brabeck-Letmathe, the former Nestlé chief executive who is now the group’s chair emeritus, admitted after the merger of Kraft and Heinz in 2015 that 3G’s model had had a “revolutionary impact” on the food industry.

David Kass, a finance professor at the University of Maryland’s business school, said: “Everyone is looking at this. This is [3G’s] largest investment, and they have a great reputation for cutting costs, but the question is how successful will they be in growing a company’s top line and bottom line?”

Hard bargains after the big deal

Now 3G is working closely with Kraft Heinz executives — many of which it has handpicked over the past year — on its new strategy.

Patricio, a veteran of AB InBev, took charge in 2019 after Kraft Heinz took a $15.4bn impairment charge, cut its dividend and announced it faced an accounting investigation by the US Securities and Exchange Commission.

Meanwhile, its share price had dropped by more than half since the combined group had been engineered four years previously by 3G and its investment partner, Warren Buffett’s Berkshire Hathaway.

The two groups brought Kraft and Heinz together because they spotted an opportunity where the food industry had not yet gone through the consolidation that had happened in the alcoholic drinks sector, say people familiar with the situation.

Kraft Heinz has underperformed against its global rivals

But by the time Patricio took charge, Kraft Heinz had $31bn of debt, was losing ground — like many rivals — to start-ups and own label products, and staff were demoralised after thousands of job cuts. 

“They were disengaged because they were not achieving targets, because there was a big turnover [of staff], because . . . the strategy that was in place was not working the way that had been expected,” Patricio said.

Product launches before Patricio took over included a ketchup-mayonnaise mix called “Mayochup” and a children’s salad dressing called “salad frosting”, that drew derision for marketing that urged parents to trick children into eating vegetables.

Then an unexpected boon arrived: the pandemic. People stuck at home turned back to familiar products and net sales rose 6 per cent for Kraft Heinz in 2020, compared with a 2.2 per cent drop a year earlier.

Analysts also put the improvement down to 3G’s overhaul of the company’s leadership over the past year, including a new US president, head of US sales and head of global growth.

© Kraft Heinz

The boost from the pandemic, plus sales of the cheese and peanut brands for $6.6bn in total, have given Patricio flexibility to pay off debt. In September he announced a turnround plan that organises Kraft Heinz’s portfolio into six business lines, including snacking and fast fresh food, and will shift investment into fast-growing areas.

The plan also has long-term financial goals of organic net sales growth of 1-2 per cent; growth in adjusted earnings before interest, tax, depreciation and amortisation of 2-3 per cent; and growth in earnings per share of 4-6 per cent.

A new type of consumer

Patricio, who spent much of his career working alongside 3G executives at AB InBev, still adheres to the Brazilian investors’ trademark zero-based budgeting, in which each new business expense must be justified afresh in each accounting period.

But as Kraft Heinz seeks to expands its market share for key brands, it plans to increase spending on marketing and research and development, areas that were previously slashed. Marketing spending will rise 30 per cent this year, it said, while it will work towards $2bn of efficiency savings elsewhere.

Column chart of Organic revenues  ($bn) showing Kraft Heinz’s pandemic boost

Marketing is a speciality for Patricio — he was in charge of it at AB InBev. “He’s a brand guy . . . not like the traditional 3G leaders,” said a person close to the company.

One key challenge is to respond to shifting consumer priorities towards healthier, more “natural” and sustainable products, which have boosted plant protein brands including Beyond Meat and products with reduced sugar and fat such as Halo Top ice cream.

European rivals Nestlé and Unilever “have both been innovating to some extent in the food product area”, said Kass. Unlike them, Kraft Heinz has not moved into plant-based substitute meats, though Patricio points out it does make bean burgers and “protein pots”.

He acknowledges the need to make Kraft Heinz’s products “cleaner and greener”, such as by changing the ingredients of classic brands. It removed several artificial ingredients from Kraft Macaroni and Cheese after the merger, and has sought to hang on to increased sales with initiatives such as a version that turned pink for Valentine’s Day. Oscar Mayer, the meat products brand, is also set for an overhaul.

As Covid-19 recedes, Kraft Heinz faces a fresh challenge: maintaining sales as consumers revert to something closer to their old eating habits © Zbigniew Bzdak/Chicago Tribune/Tribune News Service/Getty

There will be fewer but better innovations, Patricio said, to avoid the “cannibalistic” effect of past launches; a new hazelnut spread is selling fast in Canada, setting an example.

“With our new strategic plan, we’re all intensely focused on putting the consumer at the heart of everything we do,” said João Castro-Neves, a partner at 3G and board member at the food company, where he is closely involved in the turnround. “We believe [this] will drive the most growth and value.

“We don’t rule out transformational deals, but they are the culmination of many different variables converging at once.”

Keeping up to speed as Covid recedes

Kraft Heinz is also echoing European groups in pushing green changes such as recyclable packaging, though it lacks big targets such as Unilever’s pursuit of zero emissions from sourcing to point of sale by 2039.

A large US retailer said Kraft Heinz’s performance had improved, citing new marketing ideas and close collaboration to deal with swings in demand during the pandemic. “The change is ramping up all the time. Every quarter it gets better and stronger,” an executive at the retailer said.

Andrew Lazar, an analyst at Barclays, said high staff turnover had affected Kraft Heinz’s supply chain. “Recent improvement in its supply chain staffing is critical to the company delivering on its targeted $2bn productivity goal by 2024. So too could progress on talent acquisition and retention in its sales organisation prove key in rebuilding trust and credibility with its core retail customers,” he said.

Column chart of Net debt/ebitda ratio (x) showing Kraft Heinz has reduced its debt burden

In another break with the past, 3G founding partner Jorge Paulo Lemann announced this month he would retire from Kraft Heinz’s board. The company said this was part of an effort to cut the 81-year-old’s travel commitments, and that 3G will remain a long-term investor. Patricio took over Lemann’s board seat. 

Kraft Heinz’s share price has doubled over the past 12 months and is up by 14 per cent this year, while Unilever’s is down 10 per cent, close to where it was a year ago. However, Kraft Heinz would still need to almost double to reach the levels of soon after its 2015 merger.

As Covid-19 recedes, the company faces a fresh challenge: maintaining sales as consumers revert to something closer to their old eating habits. This will make Kraft Heinz’s financial goals hard to hit in the next two years, said Brian Weddington, analyst at Moody’s. 

“They will be facing much more intense competition,” he said. “Most major branded food companies intend to hold on to as many of the consumers that they have gained during the pandemic as they can. They intend to do that through more advertising and marketing — and obviously they can’t all win.”

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