Kraft Heinz’s woes speak to the coun­try’s chang­ing tastes

The Washington Post - - ECONOMY & BUSINESS - BY TAY­LOR TELFORD tay­[email protected]­post.com

Food con­glom­er­ate Kraft Heinz took a $15.4 bil­lion write-down in two of its most pow­er­ful brands this week, a jar­ring warn­ing that even the most iconic Amer­i­can names are vul­ner­a­ble to shifts in con­sumer tastes.

The hit on the value of the Kraft and Os­car Mayer la­bels on Thurs­day high­lights the strug­gles pack­aged food com­pa­nies face as they try to keep up with evolv­ing palates and the rise of smaller, or­ganic and on­line com­peti­tors. Though Kraft Heinz boasts some of the most dis­tinctly Amer­i­can prod­ucts — Jell-O, Kool-Aid, Kraft Mac­a­roni & Cheese — nos­tal­gia isn’t enough to guar­an­tee sales in the age of fresh-fo­cused eat­ing.

Con­sider Kraft Sin­gles. The ra­di­ant or­ange slices have been the gooey glue of Amer­i­can lunches since the 1960s. The founder of Kraft Foods, James L. Kraft, cre­ated early ver­sions of “process cheese” with hopes of mak­ing a sliced cheese with a longer shelf life. Kraft and re­searchers found a way to kill off the bac­te­ria that spawn mold, but it took an­other 15 years of tin­ker­ing be­fore their in­di­vid­u­ally wrapped cre­ation hit mar­kets, the New York Times re­ported. The prod­uct was her­alded for the ways it sidestepped the fail­ings of store-bought cheese. Slices didn’t dry out or curl up at the ends; they were beloved for their uni­for­mity and con­ve­nience.

Now, the same fac­tors that made Kraft Sin­gles an Amer­i­can house­hold sta­ple are erod­ing its ap­peal for mod­ern con­sumers, who pri­or­i­tize fresh ingredients and have a vested in­ter­ested in how their food is pro­duced. A June re­port from Nielsen found that fresh cat­e­gories are driv­ing nearly half of all growth in bricks-and­mor­tar gro­ceries, with fresh and per­ish­able foods gen­er­at­ing more than $177 bil­lion in sales. Con­versely, the vol­ume of pack­aged prod­ucts sold in the cen­ter aisles of gro­cery stores fell 1.7 per­cent.

“Con­sumers are seek­ing craft, not Kraft,” said Matt Gould, ed­i­tor at Dairy & Food Mar­ket An­a­lyst. “Peo­ple want a story, and they want some­thing that’s nat­u­ral. They’re afraid of preser­va­tives.”

Re­cent years have seen a surge in the pop­u­lar­ity of nat­u­ral cheeses, and a cor­re­spond­ing drop-off for pro­cessed ones. Pro­cessed-cheese sales fell an es­ti­mated 1.6 per­cent in 2018 — a fourth straight year of de­cline — ac­cord­ing to a study from Euromon­i­tor In­ter­na­tional. The past decade has seen the evo­lu­tion of the gro­cery store cheese sec­tion, as Amer­i­cans have de­vel­oped a more ad­vanced taste for cheese, Gould said.

That might ex­plain why con­sumers have turned away from Kraft Sin­gles, which of­fi­cially is a “pas­teur­ized process cheese food” be­cause it doesn’t meet the Food and Drug Ad­min­is­tra­tion’s def­i­ni­tion for cheese; to do that, it would have to be at least 51 per­cent real cheese.

Ex­ec­u­tives have tried to paint the prod­uct’s un­nat­u­ral qual­i­ties as a virtue. Peter Cot­ter, gen­eral man­ager of cheese and dairy for Kraft Heinz, told Bloomberg News in Oc­to­ber that the “melt” fac­tor of Kraft Sin­gles is a unique as­set, a byprod­uct of its ar­ti­fi­cial makeup.

“Hon­estly, you can’t get that in a nat­u­ral cheese,” Cot­ter said. “It’s a unique prod­uct. The creamy smooth tex­ture and melt of the cheese. The nat­u­ral cheeses, they just don’t melt that way.”

Kraft Sin­gles sales are flat, even though about 40 per­cent of U.S. house­holds still buy it, Cot­ter told Bloomberg. And as shop­pers have scaled back on pro­cessed cheese, so have restau­rants. Last year, McDon­ald’s elim­i­nated ar­ti­fi­cial preser­va­tives from its own squares of Amer­i­can cheese (as well as its buns and Big Mac sauce) to show con­sumers it has pri­or­i­tized clean ingredients. Chains like Pan­era Bread and Cracker Bar­rel have jet­ti­soned clas­sic grilled cheeses from their menus in fa­vor of sand­wiches with ched­dar and Gouda.

“Cus­tomers are be­com­ing more de­mand­ing around re­ally know­ing what’s in their food,” Chris Kem­pczin­ski, pres­i­dent of McDon­ald’s U.S. busi­ness, said as he ex­plained the in­gre­di­ent changes in a Septem­ber con­fer­ence call.

The bulk of Kraft Heinz’s prod­ucts are suf­fer­ing from the same shifts in con­sumer tastes and in­creased com­pe­ti­tion, and it’s show­ing in their busi­ness. The con­glom­er­ate, which counts Velveeta and Capri Sun among its big­ger brands, re­ported losses of $12.6 bil­lion in the fourth quar­ter, com­pared with a profit of $8 bil­lion a year ear­lier. On Thurs­day, Kraft Heinz cut its div­i­dend by 36 per­cent. Chief Fi­nan­cial Of­fi­cer David Knopf said the com­pany ex­pected to “take a step back­ward in 2019” in a post-earn­ings con­fer­ence call, and in­vestors are brac­ing for the worst.

AN­DREW HAR­RER/BLOOMBERG NEWS

Kraft has some of the most iconic Amer­i­can prod­ucts, but nos­tal­gia isn’t enough to guar­an­tee sales.

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