Kraft Heinz facing the painful downside of austerity approach
NEW YORK: The American food giant known for its iconic ketchup and hotdog brands is facing the downside of austerity as a strategy for boosting profits.
Kraft Heinz, born of the US$49 billion merger of Kraft Foods and Heinz in 2015, had a disastrous fourth quarter, posting a net loss of US$12.6 billion on Thursday, leading to a plunge of 27 per cent in the share price on Friday.
A scathing article in the Wall Street Journal called that proof that the company’s “experiment in radical cost-cutting has failed.”
“The company’s management has few good options,” it said.
Controlled by the SwissBrazilian billionaire Jorge Paulo Lemann, via the investment firm 3G Capital, and American billionaire Warren Buffett, who holds 25 per cent of the company’s capital, Kraft Heinz has relied on its famed zero-based budgeting approach to cost-cutting.
Basically, that system requires every expense to be justified in each period, pushing managers to drastically reduce spending.
But that philosophy can lead to the elimination of investments needed to drive profit and sales growth, and it can be undermined by a market downturn.
The food industry has for several months faced a rise in logistic costs and ingredients and materials.
Kraft’s strategy worked for two years, allowing it to generate profit margins that were the envy of its rivals.
But growth in sales stalled in the first quarter of 2017, and six consecutive quarters of poor performance led to an asset writedown of US$15.4 billion on two of its flagship brands, Kraft and the Oscar Mayer meat products.
JPMorgan analyst Kenneth Goldman warned that “the intense cost-saving efforts will, over the long run, sort of erode brands ... if the belt-tightening strategy goes too far.” Kraft has built its reputation on products such as ready-to-eat macaroni and cheese, while Oscar Mayer is known for deli meats and hot dogs and Heinz for its ketchup and other condiments. But consumer tastes have been changing, with rising concerns about health issues and a growing shift from processed foods to fresh produce.
“All they have done is lower costs as competing companies like Danone and Nestle invest in products that are more in line with current public demand,” said Gregory Volokhine at Meerschaert Capital Markets.
Many companies in the food industry have responded to the changing trends: McDonald’s, the world leader in fast food, in 2016 stopped selling chicken treated with antibiotics, and now offers hamburgers made with fresh beef. — AFP