The Rise of Kraft Heinz From Food Processing to Consumer Goods Giant

Food giants are at a turning point. Consumers are abandoning the middle aisle neighborhoods where Heinz Ketchup and Velveeta reside for healthier alternatives on the supermarket perimeter.

That has forced many large food manufacturers to adapt their business models, though this won’t be easy. Here are the steps they must take.

What Happened?

Kraft Heinz had an eventful Friday, posting a significant loss, cutting its dividend, disclosing an SEC investigation and possibly restating financial results. On that same day alone, its market value dropped 25% – all because one food company with Jell-O, Oscar Mayer deli meats and Hungry Jack beans suffered such setbacks.

Investors had priced in an acquisition into the stock, according to one consulting firm’s calculations, which determined that if earnings per share growth at 5% annually over five years was expected, its stock price would have reached $59. But in reality, no deals had been closed during that time span.

Investors also expressed concern that Kraft Heinz had lost touch with consumer tastes. With consumer tastes shifting toward fresher and healthier foods, several of Kraft Heinz’ competitors have taken notice, including General Mills with its acquisition of Annie’s in 2014 and Hershey with SkinnyPop and Pirate’s Booty acquisitions last year; as well as AB InBev with investments in fresh food producers like Smucker’s (SJM) and Hormel (the maker of Spam).

Kraft Heinz was faced with similar threats and as such was compelled to increase prices as it could no longer control rising raw material costs, thus forcing it to notify its customers they will have to get used to higher food costs. It warned them they must adapt over time.

Kraft Heinz has focused on elevating its brands that fit hot trends while making them healthier, such as no sugar or no sodium options. Furthermore, Abrams-Rivera noted that Kraft Heinz currently works on one third fewer innovation projects compared to prior to the pandemic and some significant innovations will hit stores by 2021.

Kraft Heinz must recognize the shifts in consumer needs and adjust accordingly; otherwise, their margins will continue to shrink. They need to move beyond traditional processed food and condiment models by producing healthier options with transparency and environmental stewardship as key features of their operations.

Mergers & Acquisitions

Heinz and Kraft emerged as two of America’s largest food companies during a wave of mergers during the 1990s, becoming two of America’s premier food processors. Both brands pursued growth aggressively by purchasing other brands including Nabisco, Post and Oscar Mayer as they attempted to overshadow rivals like Coca-Cola. Heinz was eventually taken over by private equity firm 3G Capital who then combined it with Kraft to form one of the fifth-largest consumer goods firms worldwide.

Kraft Heinz is an impressive global corporation with almost 200 household brands that span retail channels (85%) and foodservice (15%). While they remain strong in North America, their international reach continues to expand – from Jell-O, Heinz Ketchup, Velveeta Cheese, Philadelphia Cream Cheese to Oscar Mayer Meats are just a few examples.

Kraft Heinz (KHC) investors initially expressed great satisfaction with the merger that created one of the world’s leading packaged food companies. KHC quickly went about cutting costs and increasing profits to ensure success for all stakeholders involved.

However, the merger was not without its challenges. Many of the firm’s food brands are struggling to adapt to shifting consumer tastes, while its share price has taken a significant hit over recent years.

At the same time, it has also experienced operational challenges including an SEC investigation into procurement processes and needing to restate its financial statements. And recently announced a plant would close in the Midwest costing 1000 jobs.

The plant closure in the Midwest serves to illustrate more than just the difficulties inherent to changing legacy brands; it also highlights Heinz and Kraft managers’ hard-driving style of management. Bernardo Hees, from the private equity firm that acquired Heinz in 2013, heads the consumer goods division for Kraft Heinz; Hees is well known for relentlessly tracking costs and expenses.

While Heinz’s approach has worked for them thus far in their journey from food processor to global giant, it may no longer have the same effect with companies who have been around for almost 100 years and may no longer be enough to weather any storms that come their way.

Restructuring & Reorganization

Once Heinz was taken over by Warren Buffett’s Berkshire Hathaway and 3G Capital in June 2013, its aftermath quickly manifested: Kraft Heinz began laying off workers quickly – hundreds in Pittsburgh alone were let go. Additionally, budgets were drastically trimmed using zero-based budgeting – an approach requiring managers to justify each company expense no matter how minor – while critics pointed out this approach inhibits innovation while exacting an immense human cost.

Furthermore, the company struggled to adapt quickly enough to consumer tastes that made its legacy brands look outdated and cheaper private-label products. Furthermore, its aggressive cost-cutting strategy hindered its ability to quickly adapt to changing conditions; hence its performance became front-loaded during the early years following merger.

Investors gradually lost trust. By 2019, Heinz was in serious distress, having written down the value of Heinz and Oscar Mayer brands by $15 billion, posting an unprecedented $12.6 billion loss, being investigated by the Securities and Exchange Commission for possible accounting irregularities, and its debt rating being downgraded to junk bond status.

As part of its plan to turn its fortunes around, Big Food is changing strategy. They’re placing less of their bets on big bets that feature revamps of existing brands such as Jell-O reformulated without artificial flavors, dyes or preservatives; shelf-stable mac and cheese made with better cheese; Velveeta cut into smaller blocks – and further decreasing their global footprint by withdrawing from low growth markets in Latin America and the Middle East.

However, many analysts remain unconvinced that this will be enough for investors to trust it again. A bid by Pepsico for Unilever Europe would create an unprecedented food giant: Oscar Mayer hot dogs; Heinz macaroni and cheese; Maxwell House coffee; Hellmann’s mayonnaise from Unilever and Lipton teas from Unilever would all come under its purview.

Kraft Heinz would likely satisfy its appetite for acquisitions for now, though pressure will mount for them to deliver superior financial results and faster growth as they work to reduce costs and geographical footprints.

The Future

Kraft Heinz’s approach to sustainable growth begins by understanding its consumers. To break away from its traditional processed food and condiment model, and embrace the values consumers expect such as higher-quality products, corporate transparency and good stewardship of the environment.

To meet this challenge, the company has undertaken considerable efforts in innovation across all its categories. Retooling existing brands by removing artificial ingredients and streamlining labels to make iconic products more natural is just one way in which it has taken steps towards meeting this objective. In addition, significant investments are being made in R&D research so its portfolio keeps pace with shifting consumer tastes and demands.

These efforts may pay off in the long run as the company attempts to capture the fastest-growing segments of its market. Snack foods now account for 87% of sales, so the company launched new snack foods in this category as demand surged. Furthermore, investment was made in expanding overseas markets where its portfolio of global brands continues to expand.

Kraft Heinz faces stiff competition in many of its categories from companies such as PepsiCo, Nestle and Unilever; to remain successful against these companies effectively, Kraft Heinz must continue improving consumer perception of its products – particularly among younger shoppers accustomed to purchasing through mobile shopping apps on smartphones.

As proof that Oscar Mayer is looking forward to its future, they recently established a joint venture with food-technology startup The NotCompany, who specialize in plant-based products. This may signal meatless Oscar Mayer hot dogs or dairy-free Velveeta could become realities sooner rather than later.

Early this year, food industry tremors were felt when Kraft Heinz made an unsolicited takeover offer for Unilever–one of the world’s five-largest consumer goods conglomerates–worth $143 billion. Although Unilever declined it, investors anticipate more acquisitions to come given lower margins and intensifying competition are driving food producers worldwide towards deals.