Kraft Heinz turns to gimmicks
Oscar Mayer. Velveeta. Capri Sun. Kraft Heinz CEO Miguel Patricio admits: Some of the company’s iconic products had become “a little bit dusty.”
“For a while, we were apologetic about the brands that we had,” Mr. Patricio said. “We got distracted believing that the future was launching new small brands, niche brands.”
Recently, “We stopped and said, ‘let’s go back’” to basics, he said. “Let’s be proud of the brands we have. Because they’re incredible.”
More than half of Kraft Heinz’s business comes from just eight brands — the aforementioned three, plus Kraft Mac and Cheese, Philadelphia Cream Cheese, Heinz, Lunchables and Ore-Ida. They may not seem glamorous, but they’re the very brands the company is banking on in its years-long effort to turn around the world’s fifth-largest food and beverage conglomerate.
Processed foods are “where the industry makes its money,” said Alexia Howard, senior analyst covering U.S. Food at Bernstein.
So the food giant, dually headquartered in Chicago and Pittsburgh, reworked its portfolio to cut its healthier nuts and cheese business and focus on the processed icons, putting them front and center in flashy, even goofy, marketing campaigns that have captured the attention of social media. (Consider the eight- foot- long Velveeta box that appeared in New York City’s Central Park.) But that strategy is not without risk, especially as consumers trend toward healthier options.
For Kraft Heinz, which is relying on Mr. Patricio to execute a comeback, there’s a lot on the line.
What went wrong
Kraft and Heinz joined forces in 2015, a deal orchestrated by Heinz’s owners at the time, Warren Buffet’s Berkshire Hathaway and the investment firm 3G Capital. At first, investors were optimistic, buoyed by 3G’s successful track record of using mergers to create powerhouse conglomerates, like Restaurant Brands International, owner of Burger King and Tim Hortons.
But in this case, the winning formula fell flat. After a few years, the company started to lose value, fast.
Critics said that an extreme cost-cutting strategy choked innovation. And in 2019, the company revealed that the Securities and Exchange Commission was investigating its accounting practices. It wrote down the value of its Kraft and Oscar Mayer brands by $15 billion, posted a $12.6 billion loss for the fourth quarter of 2018, and had to revise past financial statements.
Enter new management
In 2019, with the company in crisis, Mr. Patricio joined Kraft Heinz from Anheuser Busch InBev. Since 3G Capital had also managed AB InBev’s huge 2008 merger, that connection set off alarm bells for some. “Everybody was like, ‘Oh, gosh, is this really going to work?’” said Ms. Howard.
Today, Kraft Heinz shares are worth about $37 apiece, an improvement from its 2020 lows of about $22 but far from its high of almost $100 a share in 2017. In the third quarter of this year, net sales grew to $6.5 billion, a 2.9% increase from the year before.
“Three years ago, our company was in the bottom,” Mr. Patricio said during a Bernstein conference in June. “Today, we feel that we are a good company.”
But that’s not enough. “We think we can be great. And to be great, it’s a very different game,” he said.
Mr. Patricio has streamlined operations, invested in supply chain improvements and ramped up advertising. He’s also made some potentially risky changes to the company’s portfolio.
Goodbye, Mr. Peanut
In 2020, Kraft Heinz announced that it was divesting its natural cheese business. The following year, it said the same of Planters, bidding adieu to the iconic Mr. Peanut.
That move may seem like a headscratcher, since natural nuts and cheese are more easily positioned as healthy foods than processed meats and cheese. But they’re also hard to differentiate from competitors.
Natural cheese and nuts didn’t fit “our strategy for the future,” Mr. Patricio told CNN.
Those two categories are particularly exposed to private label, or store brands, he said, and experts agree. Shoppers are very price driven, when it comes to these items, said Daniel Hooker, a senior lecturer in applied economics at Cornell University with an expertise in food industry management.
Selling off those brands “helped us immensely,” Mr. Patricio said.
Kraft Heinz’s current portfolio is less likely to face competition from generic brands, noted Mr. Hooker. Heinz ketchup is far and away the leading brand in that category, and “there’s no private brand equivalent, really, of Capri Sun,” he noted.
“The best way to compete
with store brands is having very strong brands,” said Mr. Patricio. “They really play a role in the hearts of consumers. So we have more loyalty.”
Hello, Velveeta martinis
In Velveeta’s case, Kraft Heinz partnered with a steakhouse chain to sell Velveeta martinis and created a Velveeta-themed nail polish, in addition to tweaking the processed cheese brand’s logo.
Other Kraft Heinz brands have also used attentiongrabbing marketing campaigns. Over the summer, Oscar Mayer introduced the “cold dog,” a popsicle that tastes like a hot dog. Kraft Real Mayo has partnered with Juicy Coutureto create sweatsuits. The pants say “Smooth” on the rear.
Kraft Heinz’s brands now have a presence on gaming platforms like Roblox, in addition to social media channels and other platforms. In his discussion of the company’s third-quarter results, Mr. Patricio noted that six of the company’s campaigns this year have garnered over a billion earned impressions each, referring to views received by media coverage of the promotions.
How healthy can processed food be?
One way to reach healthconscious consumers without overhauling core brands is by building partnerships with outside companies. Recently, Kraft Heinz started working with NotCo, which makes plant-based dairy and protein.
Mr. Patricio seems to be leaning into partnerships, said Mr. Howard.
For him, they “may be the way to tap into some of these bigger, more disruptive changes that are going to hit the industry,” in the years ahead.
Kraft Heinz said in October the first product from the joint venture, plantbased American cheese slices, had launched in a test market.
The company has also been making more substantial changes to some products in an attempt to make them healthier: A recent commercial, which bemoans the woes of “adulting,” promotes Heinz’s No Sugar Added Ketchup. Over the summer, the company rolled out a reduced-sugar formula for Capri Sun.
Even with ingredient changes and marketing pushes, there’s a limit to how many adjustments the company can make without fundamentally altering the products.
“Some of these brands, they can only make them so much healthier, before they cease to be the products that they are,” said Cornell’s Mr. Hooker.
For now, things seem to be working, noted Ms. Howard, the food analyst. “Three years in ... he is actually moving things in the right direction.”