This news is all bad
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It’s fair to say that Kraft Heinz sits perfectly and uncomfortably in an existential crisis. The global consumer group, one of billionaire Warren Buffett’s largest investments, last week released a barrage of news — all of it bad. Kraft Heinz, in a fourth-quarter earnings update, said it had been subpoenaed by the US Securities & Exchange Commission over an investigation into its accounting policies.
It slashed its dividend by more than a third and announced a $15.4bn write-down of goodwill, pushing it into a $12.6bn loss for the period. Oh, and it warned that profits in 2019 would be well below expectations. About $16bn was wiped from the company’s market value after that disastrous trading update.
Kraft Heinz typically operates in the centre of a store, selling things like boxed mac & cheese, mayonnaise, ketchup (what we call tomato sauce) and tinned soup. Consumers, in particular millennials, are shunning packaged foods for natural, fresh or organic options — mostly found in the front of stores.
Some background is important. Buffett’s Berkshire Hathaway, along with private equity firm 3G Capital, helped finance HJ Heinz Co’s merger with Kraft Foods Group in 2015. A plume of reverence seemed to hover over the merged entity — 3G Capital had a reputation for making bold acquisitions, quickly followed by brutal cost cuts, a surge in profitability and then high returns. It would seem that management’s strategy of nimble deal-making and its brutal zero-based budgeting approach to cost-cutting (in which managers need to justify all costs) aren’t working. What with plant closures and well over 5% of its workforce slashed since the merger, Kraft Heinz can’t get any leaner. Lest we forget: two years ago Kraft Heinz made a rather embarrassing play for Unilever, the maker of Magnum ice cream and Dove soap. And the Anglo-dutch group told it to stick its $143bn takeover offer.
3G Capital hasn’t been able to clinch any other large-scale deals. Among the recent downgrades, Jpmorgan analyst Ken Goldman titled his report “Flat, shrunk, and levered is no way to go through life”. He went on to say Jpmorgan would have kept its overweight rating, “if we still had confidence in the company’s strategy”.
Kraft Heinz is not alone in needing to pander to changing consumer preferences. Coca-cola, Procter & Gamble and Nestlé are all adjusting. 3G Capital’s approach to costs has meant that Kraft Heinz has lagged in R&D and advertising spend compared to peers.
Laurent Grandet, Guggenheim Securities’ lead food and beverage analyst, reckons Kraft Heinz has spent 2% of sales on advertising and marketing and 1% on R&D. The fast-moving consumer goods sector averages are around 5% and 3% respectively.
Consequently, it has lost market share in seven out of eight market segments, he told Bloomberg TV.
That 3G Capital isn’t a big spender when it comes to supporting brands is worrying. More worrying is that during an industry sea-change, much of Kraft Heinz’s management comes from 3G Capital, rather than them being food sector veterans. It’d do well to hire a few of the latter.