No wonder Kraft Heinz Co, Warren Buffett’s 26% owned food giant went hunting for the much bigger Unilever earlier this year – all the growth has disappeared from the merging of HJ Heinz and Kraft and associated cost cutting by Buffett’s partners, the Swiss-Brazilian private equity group 3G, and they are now looking for a new target to provide a (cheap) sugar hit to sales and earnings (and their own rewards).
Kraft Heinz suggested a $US143 billion bid for Unilever but copped a bloody nose when its target told it to go away. Unilever has since revealed plans to sell assets and shake up sleepy products, cut marketing spending by perhaps $US1 billion a year and becoming more focused on some key products.
Kraft Heinz’s March quarter report revealed a weak earnings performance and lower revenues in North America, the company’s heartland. While 3G says it will intensify cost cutting to improve returns, they are flying in the face of weak performances by Nestle and other global food giants in the past year especially in the US.
Kraft Heinz is North America’s third-largest food and beverage company, and it blamed the 3.1% fall in quarterly profit on a strong US dollar and weak demand in the United States and Canada.
Kraft Heinz Co said there was weak demand for its Velveeta cheese, Planters nuts and Oscar Mayer meats brands in the United States and Canada. Sales in Europe were fell, Europe, while the rest of world segment that includes Latin America, Asia Pacific, Middle East and Africa posted a 7.5% rise.
The company, which owns brands such as Velveeta cheese and Heinz ketchup, reported net income of $US893 million, in the first quarter ended April 1, compared with $US896 million.
Net sales fell to $US6.36 billion from $US6.57 billion, with US (which make up more than two-thirds of Kraft’s total revenue, dropped 3.5%, while in Canada the drop was a much larger 12.2% thanks to delayed contract agreements with key retailers. (as part of cost cutting moves).
Kraft Heinz has seen fall in four of the last five quarters and its supporters have defended the company claiming the cost cutting is offsetting the weaker sales growth (which is claimed to be due to the company abandoning poorly selling product sectors and markets).
But analysts say concerns are rising that the company needs to do another deal to keep growing – hence the attempted move on Unilever.
Kraft said despite raising prices by nearly 1%, organic sales dropped 3.5%, as consumption fell across its brands in the US market.
Like Coke, pepsi, even McDonald’s pizza companies, and other packaged food or fast moving consumer products companies, Kraft Heinz is running into something it can’t cut, slash or ignore – changing consumer tastes.
US consumers especially increasingly are demanding fresh, organic food than processed foods. Like its rivals, Krtaft Heinz has been forced to spend money (invest) in reformulating its products to remove synthetic colours and preservatives.
Analysts point to one recent example of the changes being forced on the company. In January the company announced it was partnering with Oprah Winfrey to create a new healthy line of packaged food called Mealtime Stories.
Bloomberg pointed out that The results "crystallize many investor concerns about Kraft Heinz. The company and its backers – private equity firm 3G Capital and Warren Buffett’s Berkshire Hathaway Inc. – have developed a reputation for acquiring companies and squeezing expenses. But they haven’t shown as much of a talent for expanding sales in a sluggish packaged-food industry.”
“They need to show that they’re more that just a financial engineer — that they can run a food business in a challenging environment,” said Ken Shea, an analyst at Bloomberg Intelligence. “The jury is still out.”
