NEW YORK, Feb 24, 2019 (BSS/AFP) – The American food giant known for its
iconic ketchup and hotdog brands is facing the downside of austerity as a
strategy for boosting profits.
Kraft Heinz, born of the $49 billion merger of Kraft Foods and Heinz in
2015, had a disastrous fourth quarter, posting a net loss of $12.6 billion on
Thursday, leading to a plunge of 27 percent in the share price on Friday.
A scathing article in the Wall Street Journal called that proof that the
company’s “experiment in radical cost-cutting has failed.”
“The company’s management has few good options,” it said.
Controlled by the Swiss-Brazilian billionaire Jorge Paulo Lemann, via the
investment firm 3G Capital, and American billionaire Warren Buffett, who
holds 25 percent of the company’s capital, Kraft Heinz has relied on its
famed zero-based budgeting approach to cost-cutting.
– Justify any expense –
Basically, that system requires every expense to be justified in each
period, pushing managers to drastically reduce spending. But that philosophy
can lead to the elimination of investments needed to drive profit and sales
growth, and it can be undermined by a market downturn.
The food industry has for several months faced a rise in logistic costs
and ingredients and materials.
Kraft’s strategy worked for two years, allowing it to generate profit
margins that were the envy of its rivals.
But growth in sales stalled in the first quarter of 2017, and six
consecutive quarters of poor performance led to an asset write-down of $15.4
billion on two of its flagship brands, Kraft and the Oscar Mayer meat
products.
JPMorgan analyst Kenneth Goldman warned that “the intense cost-saving
efforts will, over the long run, sort of erode brands … if the belt-
tightening strategy goes too far.”
Kraft has built its reputation on products such as ready-to-eat macaroni
and cheese, while Oscar Mayer is known for deli meats and hot dogs and Heinz
for its ketchup and other condiments.
But consumer tastes have been changing, with rising concerns about health
issues and a growing shift from processed foods to fresh produce.
“All they have done is lower costs as competing companies like Danone and
Nestle invest in products that are more in line with current public demand,”
said Gregory Volokhine at Meerschaert Capital Markets.
– New acquisitions –
Many companies in the food industry have responded to the changing trends:
McDonald’s, the world leader in fast food, in 2016 stopped selling chicken
treated with antibiotics, and now offers hamburgers made with fresh beef.
Volokhine said Kraft Heinz seems to have “applied recipes that worked for
a time, but the problem was no longer in the expenses but in products that
became obsolete,” like Jell-O desserts.
To make up for its shortfall, Kraft Heinz rapidly deployed $300 million
last year to beef up brand marketing, recruit salespeople, improve its supply
chain and modernize its recipes.
“We were overly optimistic on delivering savings that did not
materialize,” CEO Bernardo Vieira Hees acknowledged.
But as he added in a call Thursday with analysts, “We still believe
strongly that our model is working and has a lot of potential for the
future.”
The company is considering dropping failed brands, a step that would allow
Hees to pave the way for a merger, which could achieve more savings and boost
profits.
The company approached Unilever, which makes Lipton tea and Dove soap, in
2017 but withdrew its $143 billion offer after news of its talks with the
Anglo-Dutch giant became public.