Kraft Heinz 3Q results mixed as company scrambles for fixes
It’s no picnic at Kraft Heinz Co.
Four years after a merger that promised growth and innovation, the maker of iconic brands like Oscar Meyer, Kool-Aid and Jell-O is struggling to find its place in a rapidly changing market.
Sales are faltering as consumers increasingly seeking fresh, minimally processed foods. In a recent Nielsen survey, 41% of consumers globally said they would pay more for foods with natural or organic ingredients. That’s not good news for a product like Kraft Heinz’s Velveeta cheese, which contains 20 ingredients and has no organic option.
When shoppers do buy processed foods, they’re considering the growing number of store brands that compete with Kraft Heinz. Kroger sells a 20-ounce bottle of Heinz Ketchup for $2.79; on the same shelf, a 24-ounce bottle of Kroger brand ketchup is $1.00.
Kraft Heinz’s new CEO Miguel Patricio, who came to the company in July from Anheuser-Busch InBev, says he’s been taking stock of the company’s strengths and weaknesses and will present a detailed plan for the future early next year.
Patricio said Kraft Heinz needs to get better at predicting trends. Kraft acquired the Boca veggie burger brand 19 years ago, for example, but has fallen behind startups like Beyond Meat in the plant-based burger space.
“We need to transform this company into a much more consumer-driven company, rather than just operating in the present,” Patricio told investors and analysts on a conference call Thursday to discuss the company’s third quarter earnings.
Kraft Heinz also needs to introduce fewer, better and more profitable new products, he said. In recent years, it’s put out too many new things that cannibalize existing products and don’t drive incremental sales. One much-derided recent entry was “salad frosting,” which is just ranch dressing packaged to appeal to kids.
But some analysts aren’t convinced that company’s current leadership can turn things around.
Kraft Heinz was created in 2015 by billionaire Warren Buffett and Brazilian private equity firm 3G Capital, which own nearly half of the combined company’s shares. 3G was also behind the formation of Restaurant Brands International – a merger of Burger King, Tim Hortons and Popeyes – and Anheuser-Busch InBev. It’s known for strict cost controls and so-called zero-based budgeting, which requires all expenses to be justified each quarter.
Some analysts say that kind of belt-tightening has stifled innovation. In 2018, Kraft Heinz spent $108 million on research and development. Nabisco owner Mondelez International – which has similar annual sales to Kraft Heinz – spent $362 million. Kellogg Co., which is about half the size of Kraft – spent $154 million.
“While Kraft Heinz’s lean culture is hard for other U.S. food companies to replicate, some may argue that the company has gone too far with its cost focus,” Bernstein analyst Alexia Howard said in a recent note to investors.
Howard thinks Kraft Heinz should consider selling some businesses like Maxwell House, which is under pressure from premium coffee brands, or Planters nuts, which face intense competition from store brands.
On Thursday, Kraft Heinz beat Wall Street’s profit forecasts thanks to the sale of its Canadian natural cheese business for $1.2 billion.
The company’s net income jumped 45% to $899 million. Adjusted earnings of 69 cents per share beat analysts’ forecasts of 53 cents, according to FactSet.
Kraft Heinz shares jumped 13.5% to $32.36 on the news. But they are still down nearly 30% since the start of the year.
Third quarter revenue fell 5% to $6.08 billion – missing analysts’ forecasts – as price increases in the U.S. and Europe failed to make up for lower sales.
Patricio didn’t say Thursday whether any other brands will be sold next year. But he said zero-based budgeting isn’t the problem.
“I see it as a way to do things better every day and to be more efficient and free up more resources to do better in the business,” he said.
Patricio said the company is revamping its research and development team and has named a chief growth officer to help speed product development.
Still, some analysts say the damage to the company’s brands has already been done. In February, Kraft Heinz slashed the value of its Oscar Mayer and Kraft brands by more than $15 billion.
Then in August, it took a $474 million impairment charge because of the falling value of six other brands, including Maxwell House, Lunchables, Velveeta and Cool Whip. Its shares fell to an all-time low.
“We think it is more than fair to ask if any fundamental value for KHC has been created since the Kraft Heinz merger,” J.P. Morgan analyst Ken Goldman wrote in a note to investors earlier this year.