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Kraft Heinz
Nov 18, 2024 4:54 PM

  

Kraft Heinz1

  The Kraft Heinz Company is one of the world’s largest food and beverage manufacturers. A conglomerate formed in 2015 by the merger of Kraft Foods Group and H.J. Heinz Holding Corporation, Kraft Heinz is one of the top 20 consumer staples companies in the U.S., with a product lineup that includes dozens of the world’s most recognizable brands. Kraft Heinz is headquartered in Chicago and Pittsburgh.

  Major business segments and productsKraft Heinz holds a portfolio of more than 200 brands that are produced and sold in more than 40 countries. Its main product categories can be broken down into five general segments:

  

Kraft Heinz2

  Heinz ketchup, mustard, vinegar, chili sauce, and Heinz 57 SauceLea & Perrins The Original Worcestershire SauceGrey Poupon dijon mustardKraft Real Mayo and Miracle Whip sandwich spreadsKraft salad dressingsCheese and dairy products

  Kraft SinglesCheez WhizPhiladelphia Original Cream CheeseVelveeta Meals, snacks, and meat products

  Kraft Macaroni & CheeseLunchablesJell-OOscar Mayer (hot dogs, bacon, and cold cuts)Beverages

  Kool-Aid, Crystal Lite, and Wyler’s drink mixesCapri-Sun beveragesMio zero-calorie beveragesMaxwell House and Gevalia coffeesOther grocery items

  

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  Shake ’N Bake seasoningOre-Ida frozen potato productsPrimal Kitchen condiments, sauces, and dietary supplementsTaco Bell branded sauces, seasonings, and taco products (under a licensing agreement with Yum! Brands)2013–2016: Privatization, merger, and an optimistic startIn 2013, Berkshire Hathaway and private equity firm 3G Capital collaborated to take the H.J. Heinz Company private. The end goal—which came to fruition less than two years later, in March 2015—was to create a mega company in the food and beverage industry by merging Heinz with Kraft Foods Group.

  In addition to cutting costs and increasing profits, Berkshire and 3G hoped the merger would lead to:

  Synergy in operations and products. The merger aimed to expand economies of scale, reduce the combined company’s cost structure, and boost efficiency.Strong global market position. Combining Kraft with Heinz would leverage the latter’s presence in international markets, boosting both companies’ global market position with a combined portfolio of brand offerings.Growth and innovation. The overarching goal was to generate growth through consolidation, expansion into new markets, and product innovation. In the early days of the combined company, analysts and investors seem to have bought into the idea of the whole of Kraft Heinz being greater than the sum of its parts. They were looking for the “Warren Buffett effect”—a strong historical correlation between robust stock performance and involvement by the legendary investor and Berkshire Hathaway chair. Sure enough, Kraft Heinz saw earnings growth and stock price performance improve in the two years following the merger.

  2017–2020: The honeymoon is overAfter the merger was completed, some critics argued that a lack of innovation and an inability to adapt to changing consumer tastes—namely, fresh versus processed foods—could become an impediment to future growth. Additionally, Kraft Heinz faced competition from smaller brands like Beyond Meat, Applegate Farms, Annie’s Homegrown, and others that were aggressively targeting evolving consumer tastes.

  Market sentiment may have set Kraft Heinz stock on a downward curve in early 2017. But the plunge accelerated following its February 2019 earnings release and quarterly conference call, with shares dropping 27% in a single session. In addition to announcing a dividend slash of more than 36%, the company acknowledged:

  An SEC investigation into accounting misconduct. The Securities and Exchange Commission found that Kraft Heinz falsified supplier contracts to achieve cost savings and inflate earnings from 2015 to 2018, misleading investors about the company’s financial health.Its cost cutting practices were a misstep. 3G Capital claimed success in creating synergies between the merged companies and eliminating any remaining redundancies. The company admitted that its cost cutting measures were more expansive than originally claimed, and that these cuts damaged Kraft Heinz’s supply chain and product innovation capabilities. (Investors later filed a class action lawsuit related to the previously undisclosed cost cuts, and, in 2023, agreed to a $450 million settlement with Kraft Heinz.) Massive brand write-downs. 3G’s cost cutting led to plant closures, job cuts, and decreased spending on R&D and marketing—all of which may have weakened Kraft Heinz’s perceived value and competitive market position, leading to a $15.4 billion write-down of merger-related assets on its balance sheet. The stock market’s reaction was punishing. The value of Kraft Heinz shares sank 78% from their highest point in 2017 to their lowest in 2020. The company’s saving grace, ironically, came in the form of bad news—the COVID-19 pandemic.

  2020–2023: COVID-19 and the “profit booster”As the U.S. and most of the world went into mandatory lockdowns at the front end of the COVID-19 pandemic, many consumers, forced to dine at home, relied on prepared and prepackaged foods. Kraft Heinz suddenly saw an increase in demand for several of its products, particularly its Kraft Macaroni & Cheese and Lunchables product lines.

  Kraft Heinz had presented positive earnings beginning two quarters before the pandemic. Its stock price stabilized, but it didn’t recover until the spring of 2020. And although the company’s earnings remained positive in the years that followed, its stock fluctuations remained near the midpoint of its 2017 peak and 2020 trough. The beleaguered company would attempt a fresh start in the next two years with leadership changes and the quiet exit of 3G Capital.

  3G had begun trimming its holdings as early as 2018—even before the devastating February 2019 earnings report. From 2021 onward, 3G’s intention to relinquish its stake in Kraft Heinz became clear as founding partners Jorge Paulo Lemann and Alexandre Behring, and 3G board member Joao Castro-Neves (former CEO of AB InBev), gradually resigned from the Kraft Heinz board.

  By 2023, 3G Capital had completely divested its stake in Kraft Heinz. Warren Buffett admitted in 2019 that “we paid too much for Kraft,” but as of mid-2024, Berkshire Hathaway still owns 26.8% of the company. 

  Kraft Heinz legacy

  

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  Despite its challenges, Kraft Heinz enjoys several competitive advantages. Its brands are iconic. Its industry position—from manufacturing to limited shelf space in the grocery store—has high barriers to entry. As a company within the consumer staples sector, its exposure to economic cycles is historically low. All it needs—so it seems—is to innovate consistently and adapt to current consumer and business demands.

  Kraft Heinz’s efforts toward innovation earned the company a spot in Fast Company’s World’s 50 Most Innovative Companies of 2024 list when it introduced the Heinz Remix. The Internet-connected sauce dispenser allows users to create up to 200 different condiment combinations and track real-time data on flavor preferences, enabling restaurants to better customize their menus.

  The Heinz Remix increased the company’s sales by over 3%. Kraft Heinz hints at an “agile at scale” strategy. Whether it foreshadows future iterations aimed at innovation remains to be seen.

  Karl Montevirgen

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