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Change of menu: Kraft Heinz bets on old brands to win new consumers

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An 84-year-old macaroni cheese brand might seem like an unlikely saviour for a company struggling with debt and shrinking sales. 

Yet Kraft Macaroni and Cheese, first sold during the Great Depression, is among the products made by the US food company Kraft Heinz that flew off the shelves during the pandemic, and which the company thinks can help it attract a new generation of consumers. 

Kraft Heinz wants to reinvigorate old brands such as the blue-boxed mac and cheese as part of efforts to push up sales and profits from existing products, a marked shift in strategy from the focus on large-scale acquisitions espoused by its key investor, the Brazilian investment group 3G.

Four years ago, Kraft Heinz shocked the market with an unsuccessful, unsolicited bid for Anglo-Dutch rival Unilever. Now it is focused on revamping its own brands to appeal to healthier, more climate-conscious consumers.

Miguel Patricio, the chief executive selected two years ago by 3G, said: “What we concluded is that we need to grow organically, and that is the most sustainable way of keeping the company growing. They (3G) understood that very well. And they empowered me to make that happen. Because that’s a big change in direction.”

For 3G, however, the stakes are high. The Brazilian group, which built its reputation with the assembly of the world’s largest brewer Anheuser-Busch InBev and of Burger King owner Restaurant Brands International, is known for big acquisitions followed by ruthless cost-cutting to boost margins.

Miguel Patricio, Kraft Heinz chief executive: ‘What we concluded is that we need to grow organically, and that is the most sustainable way of keeping the company growing’ © Kraft Heinz via AP

Peter Brabeck-Letmathe, the former Nestlé chief executive who is now the group’s chair emeritus, admitted after the merger of Kraft and Heinz in 2015 that 3G’s model had had a “revolutionary impact” on the food industry.

David Kass, a finance professor at the University of Maryland’s business school, said: “Everyone is looking at this. This is [3G’s] largest investment, and they have a great reputation for cutting costs, but the question is how successful will they be in growing a company’s top line and bottom line?”

Hard bargains after the big deal

Now 3G is working closely with Kraft Heinz executives — many of which it has handpicked over the past year — on its new strategy.

Patricio, a veteran of AB InBev, took charge in 2019 after Kraft Heinz took a $15.4bn impairment charge, cut its dividend and announced it faced an accounting investigation by the US Securities and Exchange Commission.

Meanwhile, its share price had dropped by more than half since the combined group had been engineered four years previously by 3G and its investment partner, Warren Buffett’s Berkshire Hathaway.

The two groups brought Kraft and Heinz together because they spotted an opportunity where the food industry had not yet gone through the consolidation that had happened in the alcoholic drinks sector, say people familiar with the situation.

Kraft Heinz has underperformed against its global rivals

But by the time Patricio took charge, Kraft Heinz had $31bn of debt, was losing ground — like many rivals — to start-ups and own label products, and staff were demoralised after thousands of job cuts. 

“They were disengaged because they were not achieving targets, because there was a big turnover [of staff], because . . . the strategy that was in place was not working the way that had been expected,” Patricio said.

Product launches before Patricio took over included a ketchup-mayonnaise mix called “Mayochup” and a children’s salad dressing called “salad frosting”, that drew derision for marketing that urged parents to trick children into eating vegetables.

Then an unexpected boon arrived: the pandemic. People stuck at home turned back to familiar products and net sales rose 6 per cent for Kraft Heinz in 2020, compared with a 2.2 per cent drop a year earlier.

Analysts also put the improvement down to 3G’s overhaul of the company’s leadership over the past year, including a new US president, head of US sales and head of global growth.

© Kraft Heinz

The boost from the pandemic, plus sales of the cheese and peanut brands for $6.6bn in total, have given Patricio flexibility to pay off debt. In September he announced a turnround plan that organises Kraft Heinz’s portfolio into six business lines, including snacking and fast fresh food, and will shift investment into fast-growing areas.

The plan also has long-term financial goals of organic net sales growth of 1-2 per cent; growth in adjusted earnings before interest, tax, depreciation and amortisation of 2-3 per cent; and growth in earnings per share of 4-6 per cent.

A new type of consumer

Patricio, who spent much of his career working alongside 3G executives at AB InBev, still adheres to the Brazilian investors’ trademark zero-based budgeting, in which each new business expense must be justified afresh in each accounting period.

But as Kraft Heinz seeks to expands its market share for key brands, it plans to increase spending on marketing and research and development, areas that were previously slashed. Marketing spending will rise 30 per cent this year, it said, while it will work towards $2bn of efficiency savings elsewhere.

Column chart of Organic revenues  ($bn) showing Kraft Heinz’s pandemic boost

Marketing is a speciality for Patricio — he was in charge of it at AB InBev. “He’s a brand guy . . . not like the traditional 3G leaders,” said a person close to the company.

One key challenge is to respond to shifting consumer priorities towards healthier, more “natural” and sustainable products, which have boosted plant protein brands including Beyond Meat and products with reduced sugar and fat such as Halo Top ice cream.

European rivals Nestlé and Unilever “have both been innovating to some extent in the food product area”, said Kass. Unlike them, Kraft Heinz has not moved into plant-based substitute meats, though Patricio points out it does make bean burgers and “protein pots”.

He acknowledges the need to make Kraft Heinz’s products “cleaner and greener”, such as by changing the ingredients of classic brands. It removed several artificial ingredients from Kraft Macaroni and Cheese after the merger, and has sought to hang on to increased sales with initiatives such as a version that turned pink for Valentine’s Day. Oscar Mayer, the meat products brand, is also set for an overhaul.

As Covid-19 recedes, Kraft Heinz faces a fresh challenge: maintaining sales as consumers revert to something closer to their old eating habits © Zbigniew Bzdak/Chicago Tribune/Tribune News Service/Getty

There will be fewer but better innovations, Patricio said, to avoid the “cannibalistic” effect of past launches; a new hazelnut spread is selling fast in Canada, setting an example.

“With our new strategic plan, we’re all intensely focused on putting the consumer at the heart of everything we do,” said João Castro-Neves, a partner at 3G and board member at the food company, where he is closely involved in the turnround. “We believe [this] will drive the most growth and value.

“We don’t rule out transformational deals, but they are the culmination of many different variables converging at once.”

Keeping up to speed as Covid recedes

Kraft Heinz is also echoing European groups in pushing green changes such as recyclable packaging, though it lacks big targets such as Unilever’s pursuit of zero emissions from sourcing to point of sale by 2039.

A large US retailer said Kraft Heinz’s performance had improved, citing new marketing ideas and close collaboration to deal with swings in demand during the pandemic. “The change is ramping up all the time. Every quarter it gets better and stronger,” an executive at the retailer said.

Andrew Lazar, an analyst at Barclays, said high staff turnover had affected Kraft Heinz’s supply chain. “Recent improvement in its supply chain staffing is critical to the company delivering on its targeted $2bn productivity goal by 2024. So too could progress on talent acquisition and retention in its sales organisation prove key in rebuilding trust and credibility with its core retail customers,” he said.

Column chart of Net debt/ebitda ratio (x) showing Kraft Heinz has reduced its debt burden

In another break with the past, 3G founding partner Jorge Paulo Lemann announced this month he would retire from Kraft Heinz’s board. The company said this was part of an effort to cut the 81-year-old’s travel commitments, and that 3G will remain a long-term investor. Patricio took over Lemann’s board seat. 

Kraft Heinz’s share price has doubled over the past 12 months and is up by 14 per cent this year, while Unilever’s is down 10 per cent, close to where it was a year ago. However, Kraft Heinz would still need to almost double to reach the levels of soon after its 2015 merger.

As Covid-19 recedes, the company faces a fresh challenge: maintaining sales as consumers revert to something closer to their old eating habits. This will make Kraft Heinz’s financial goals hard to hit in the next two years, said Brian Weddington, analyst at Moody’s. 

“They will be facing much more intense competition,” he said. “Most major branded food companies intend to hold on to as many of the consumers that they have gained during the pandemic as they can. They intend to do that through more advertising and marketing — and obviously they can’t all win.”



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Analysis

Iranian TV action thriller delivers warning to Zarif

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It is hardly surprising that Mohammad Javad Zarif, Iran’s foreign minister and nuclear negotiator, is not a fan of Gando, a popular television drama that depicts an incompetent minister who scuppers nuclear talks with world powers by hiring dual nationals who turn out to be spies for MI6.

The series — made by an institute believed to be affiliated to the elite and hardline Revolutionary Guards — “is a lie from the beginning to the end” that “damages foreign policy more than me” by fuelling public mistrust, Zarif said.

By focusing on the nuclear talks, the Guards’ motive goes beyond creating compelling drama, reformist analysts say. Iran is in discussion with western powers about reviving the nuclear deal, a key reformist achievement, and hardliners want to deter the popular foreign minister from declaring his interest in the presidency in what is a crucial election year.

“I’ll be grateful to Gando-makers to let us continue our current job,” Zarif said this month, and commented that he would not run for the presidency.

The possibility of nuclear talks with the US and other powers has complicated an already fraught Iranian political scene ahead of the June election. Many reformists are pinning their hopes on Iran’s top diplomat to reinvigorate the nuclear deal and boost support at the ballot box. Hardliners might prefer to negotiate the deal themselves after the election. The polls are also seen as particularly crucial in case supreme leader Ayatollah Ali Khamenei, 81, dies during the next president’s term.

Pendar Akbari, left, and Ashkan Delavari, right, in a scene from ‘Gando’
Pendar Akbari, left, and Ashkan Delavari, right, in a scene from an episode of ‘Gando’. The series title refers to an Iranian crocodile able to distinguish its friends from its enemies © Bahar Asgari/Shahid Avini Cultural and Artistic Institute via AP

The purpose of Gando, which refers to an Iranian crocodile able to distinguish its friends from its enemies, “is to tell Zarif that should he dare to announce his candidacy, he will be destroyed immediately,” said one reformist analyst. “When the intelligence service of the Guards truly believes in the Gando plot lines, it means even if Zarif decides to defy such warnings, he will not be allowed to run.”

Centrist president Hassan Rouhani is due to step down this year after two terms and it is not yet clear who the presidential candidates will be. Politicians register as late as May and then have to be vetted by the Guardian Council, the hardline constitutional watchdog, which can disqualify nominees. Potential hardline candidates include Mohammad Bagher Ghalibaf, the parliament speaker and a former guards commander; Ebrahim Raisi, the judiciary chief; and Ali Larijani, a former speaker of parliament. On the reformist side, speculation has centred on Es’haq Jahangiri, first vice-president, Hassan Khomeini, a grandson of the founder of the Islamic republic, and Zarif.

A US-educated career diplomat widely respected in the west for his pragmatism, Zarif was instrumental in the historic deal in 2015, under which Iran curbed its nuclear activity in exchange for the lifting of sanctions. But Donald Trump abandoned the accord in 2018, imposed sanctions, including on Zarif, and said he would pursue a new accord to contain Iran’s regional and military policies. The US move emboldened hardliners, confirming to them the untrustworthiness of the US.

Zarif’s background in the US both as a university student and as Iran’s head of mission at the UN — during which he met US politicians including then senator Joe Biden — has long made him a source of suspicion for hardliners.

This wariness of both Zarif and the west is evident to viewers of Gando, as is the heroism of the Revolutionary Guards. Mohammad, the action hero protagonist, warns that western negotiators may sabotage refineries as part of nuclear talks. Mohammad works out of elaborate facilities akin to those in a James Bond film. The fictional foreign minister is advised by a media adviser, the main culprit, “to enter into direct talks with the US and accept the conditions of the leader of the global village”.

Vahid Rahbani in a scene from an episode of ‘Gando’
Vahid Rahbani in a scene from an episode of ‘Gando’. State TV abruptly stopped broadcasting the series that was less than halfway through its 30-episode run © Hassan Hendi/Shahid Avini Cultural and Artistic Institute via AP

The dramatic scenes reflect, in part, the worldview of some of Zarif’s critics. “Reformists, Mr Zarif and his lobby group in Washington [Iranian dual nationals] should be wiped out from Iran’s politics,” said an aide to a senior hardline politician who is a potential presidential candidate. “We have to get rid of this cancerous tumour once for good.”

Gholamali Jafarzadeh, a former conservative member of parliament, said Zarif “is not a good statesman and should not run for president” while “reformists should know that their choices have no chance to be allowed to run”. 

This month, state TV abruptly stopped broadcasting the series that was less than halfway through its 30-episode run. Local media said broadcasts would resume when the presidential race was over. Iran’s centrist president Hassan Rouhani, whose signature achievement is the nuclear deal — alluded to the show on Wednesday and said “people’s money” should not be spent on “fabrication of the truth” and “distortion of facts”.

After three years of sanctions, many voters are disillusioned by the infighting and the prospect of real change, whatever the outcome of the election. “Whether Zarif or a figure more senior than him runs or not, I’m not going to vote,” said Hamid, a 40-year-old engineer. “Let the Guards win the election as they are the ones who are running the country anyway. Why shall I make a fool of myself?” 



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Analysis

Rising inflation complicates Brazil’s Covid-19 crisis

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After seven months in lockdown, Michele Marques received some unwelcome news when she returned to work: while she was away the prices of almost all the products she uses as a hairdresser had soared.

“A box of gloves rose 200 per cent. Colouring products increased at least 100 per cent,” said the 37-year-old from São Paulo, underlining how costs were rising while her revenue had collapsed. “I had to raise the price of my services, too.”

It is a dynamic that is playing out across Brazil, adding an extra layer of complexity to the country’s coronavirus crisis, which has already claimed the lives of almost 350,000 individuals and pushed hospital services to the brink.

With much of Latin America’s largest economy being shuttered, inflation is surging to its highest level in years, fuelling a silent scourge of hunger among poorer citizens that has run in parallel to the Covid-19 pandemic.

“The high price of staple foods — rice and beans, for example — has led to the disappearance of these items from the table of millions of Brazilians,” said Ana Maria Segall, a researcher at the Brazilian Research Network on Food and Nutritional Sovereignty and Security. In the 12 months to the end of March, the price of rice increased 64 per cent and black beans 51 per cent.

“In Brazil currently food inflation has penalised the very poorest, preventing them from having adequate access to food and in many situations leading to hunger,” she said, adding that rising unemployment and the curtailment of social programmes were also contributing factors.

Volunteers hand out food in São Paulo © Alexandre Schneider/Getty Images

Less than half of Brazil’s population of 212m now has access to adequate food all the time, with 19m people, or 9 per cent of its inhabitants, facing hunger, according to a recent report by Segall’s group.

“I’m doing some odd jobs, but it’s not enough to keep us going,” said Jonathan, a 28-year-old who lost his job in the kitchen of a Chinese restaurant in São Paulo when the pandemic began. He said he now struggles to provide enough food for his three young children and pregnant wife.

On a 12-month basis, inflation in June is expected to surpass 8 per cent, far above earlier estimates. In the 12 months to March, food prices jumped 18.5 per cent, while the price of agricultural commodities in local currency surged 55 per cent and the cost of fuel increased almost 92 per cent.

Line chart of Percentage increase over past 12 months showing The price of rice in Brazil is soaring

The developments pose a fresh challenge to President Jair Bolsonaro, who is already under fire for his handling of the Covid-19 pandemic. Across Brazil’s biggest cities, graffiti has sprung up labelling the populist leader “Bolsocaro” — a portmanteau of his name and the Portuguese word for expensive.

The rising prices are also likely to provide useful ammunition to leftist former president Luiz Inácio Lula da Silva, who returned to the political fray last month and may challenge Bolsonaro in elections next year.

“Bolsonaro is to blame for the increase in food prices, he is to blame for everything. They have to remove this guy,” said Maria Izabel de Jesus, a retiree from São Paulo.

Armando Castelar, a researcher at the Brazilian Institute of Economics, said the government had underestimated inflation both in terms of the numbers and also “how much a concern it should be”.

He attributed the rising prices to the devaluation of the Brazilian currency, triggered in part by the stimulus packages passed by the US government — which helped to bolster the dollar and led to higher Treasury yields — and the brighter economic outlook outside Latin America.

“You have a situation where commodity prices are going up because the global economy is going to grow a lot this year. With the growth in the US, interest rates are going up and the dollar is strengthening. This puts a lot of pressure on the exchange rate in Brazil and emerging markets in general,” he said.

As the spectre of inflation loomed last month, the Brazilian central bank raised its key interest rate by 75 basis points, higher than the half-percentage point many economists had expected. A further rate rise is expected next month.

“The central bank acted correctly, but it cannot stop there. It is important not to be too lenient in dealing with this,” said Castelar.

Silvia Matos, a co-ordinator at the Brazilian Economy Institute, also pointed to Brazil’s weakening currency as a contributing factor to inflation. But she said the slide in the real was triggered by investor concerns over Brazil’s deteriorating public finances.

Following the creation of two separate stimulus packages to mitigate the impact of Covid-19, government debt has risen to about 90 per cent of gross domestic product, a high level for an emerging market economy.

The rollout of the second of these packages began this month, with 45m Brazilians set to receive $50 a month for four months.

Critics said, however, these stipends were not nearly enough to keep people both fed and at home in lockdown.

“It is essential that the emergency aid is of a greater value, so that people do not leave the house but no one also stays at home starving,” said Marcelo Freixo, a federal lawmaker with the leftwing PSOL party.

“We need to reduce the circulation of the disease. Brazil is already experiencing 4,000 deaths per day. We will reach 500,000 total deaths by the middle of the year.”

Matos says that inflation had hit poorer citizens much harder than middle-class and rich Brazilians because a larger portion of their income was dedicated to food, the price of which has increased substantially.

“The only thing that could help right now is to get out of this pandemic,” she said.

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Can CVC pull off a $20bn ‘deal of the century’ at Toshiba?

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Proposed management buyout looks like an improbable win for the Japanese conglomerate’s embattled CEO



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