Northwest Arkansas Democrat-Gazette
Investors want to know what’s cooking at Kraft Heinz
Innovation name of industry game
GLENVIEW, Ill. — Robin Ross, culinary director at Kraft Heinz, doesn’t need data to know how much consumer tastes have changed since processed food reigned supreme.
When she was growing up, dinner often meant heating up a can of something on the stove, and when she was raising kids she bought a lot of McDonald’s Happy Meals. But today her adult daughter hand-breads chicken nuggets for her children, part of a broad trend of families opting for more fresh, natural, personalized meals.
That shift has dogged prepared-food companies like Kraft Heinz, whose brands became household names at a time when shoppers cared more about consistency, convenience and familiarity than that long list of ingredients on the packaging.
For many of these companies, the fight to stay relevant means rolling out innovative products that are either developed internally or brought on board as part of the acquisition of startup food companies. At Kraft Heinz, it’s Ross’ job to create products, or new versions of the old standbys, that capture the attention of a modern food shopper with discerning tastes and a plethora of options.
Innovation has not, of late, been what’s getting attention at Kraft Heinz, which employs some 2,000 people in the Chicago area and 39,000 globally. Based in both Chicago and Pittsburgh, the legacy packaged-food-maker has been criticized for focusing too much on cost-cutting and not enough on brand building or product development, a concern that resurfaced late last month as the company unleashed a cascade of dismal financial news.
The company reported a $12.6 billion loss for the fourth quarter of 2018 and announced it was writing down the value of its Oscar Mayer cold cuts and Kraft natural cheese brands by $15.4 billion, an indication that the sales and earnings potential of those brands aren’t as strong as once thought.
It slashed its dividend by 36 percent, lowered its 2019 outlook and disclosed that it had received a subpoena from the Securities and Exchange Commission related to its procurement operations. The company launched an internal investigation in response and found it should have recorded a $25 million increase in the cost of products sold in prior periods.
The company said it plans to sell some brands or business units to strengthen its balance sheet for a future acquisition, a deal some investors have been eager to see since its failed $143 billion bid to buy Unilever two years ago.
And after two years of deep cost-cutting that helped give Kraft Heinz industry-leading profit margins, the company last year boosted brand spending by $300 million and this year plans to introduce “record-level innovation,” CEO Bernardo Hees said in the company’s earnings call with analysts.
But, Moody’s analyst Brian Weddington said, “there is still some question on how effective that spend is going to be.”
The budgeting strategy at Kraft Heinz, which requires
managers to justify each cost and eliminate nonproductive spending, is to blame for some of the financial volatility, as the company is so lean that it struggles to offset cost inflation with more cuts, Weddington said.
He said that ultimately the strategy will improve profit margins, but other industry watchers said the efficiency comes at the expense of responding to consumer needs.
“If you’re constrained because of cost then the whole organization is less entrepreneurial,” said Donald Fitzgerald, a food-sector consultant and adjunct professor of marketing at DePaul University.
That’s true both for product development and for the brand salespeople working with retailers to design promotions and shelf displays that pull shoppers in, said Fitzgerald, who until last month was group vice president of merchandising and marketing at grocery chain Mariano’s.
Meanwhile, the market is rife with food startups that are laser-focused on the healthconscious consumer and able to use e-commerce to reach an audience no longer loyal to the large food companies.
To compete, many of the large companies are acquiring those upstart brands or starting venture-capital arms and accelerator programs to invest in their growth.
Chicago-based Conagra, maker of Slim Jims and Orville Redenbacher popcorn, added gourmet Mexican to its portfolio by acquiring Frontera Foods’ packaged foods business in 2016 and a year later paid $250 million for Angie’s Boomchickapop whole grain popcorn. Cereal-maker Kellogg paid $600 million for Chicago protein bar company RxBar in 2017. Tyson Foods took a minority stake in plant-based protein startup Beyond Meat in 2016 through a venture-capital fund it started to invest in food companies pioneering new products and technologies.
Kraft Heinz last year introduced Springboard, a venture fund and accelerator program for small craft and natural brands, and paid $200 million to acquire better-for-you condiments-maker Primal Kitchen, which will continue to operate as an independent company.
Those efforts are effective if the values align and the smaller companies are nourished and able to maintain their culture and energy — which doesn’t always happen, said consumer trends analyst Phil Lempert, who runs The Supermarket Guru website.
But traditional companies also have to thoughtfully develop their own products, and not just by making incremental changes to existing products, which only overwhelms and confuses consumers faced with more than 40,000 products in a typical supermarket, Lempert said.
“Do we really need 18 different brands of salsa or 100 different types of olive oil?” Lempert said. “I think we have gotten so focused on volume and so unfocused on consumer needs and what consumers really want. This is how these big companies have gotten lost, they haven’t been listening to consumers.”
While Kraft Heinz takes criticism for not investing enough in innovation, Kraft’s Ross said: “I feel like as a company and as a culinary group we have made progress with respect to understanding the folks that our company is producing products and services for.”
Lempert also sees the potential, but as he looked at the packaging of Just Crack an Egg, he was shocked that it didn’t prominently highlight the protein content of the egg dish given consumers’ obsession with protein.
The culinary team may have its finger on the pulse, but what drives success is “the support you have with these products,” he said. “How are you going to market them?