By Annie Gasparro
Kraft Heinz Co.'s chief executive wants to create the kind of
hit new products that have eluded the company for years, leading to
a sales drought and multibillion-dollar markdown on the value of
some top brands.
Miguel Patricio, who took over as chief executive in June, has
hired executives experienced in food to lead Kraft Heinz's
operations and its U.S. business. Last year, he created a new
C-suite role -- chief growth officer -- and this year plans to cut
the number of new-product introductions in half.
"My role is to simplify this business. Fewer, bigger bets," he
said in a recent interview.
He declined to say specifically what those bets would be. He
discussed winning and losing brands with directors at a board
meeting last week.
Kraft Heinz has struggled to generate interest in the
decades-old brands on its roster that recall a bygone dining era
and now face competition from store brands. Sales of Kraft Heinz
products including Miracle Whip, Oscar Mayer lunch meat, Jell-O,
Cool Whip and Velveeta are falling.
Kraft Heinz's $26 billion in annual revenue for 2018 declined
roughly 10% versus the combined revenue of Kraft Foods Group Inc.
and H.J. Heinz in 2014, the year before they merged to form Kraft
Heinz. The company plans to report 2019 earnings on Feb. 13.
Last year, the company wrote down the value of brands including
Kraft, Oscar Mayer and Miracle Whip by nearly $17 billion.
Lower-priced competition and consumers' waning appetite for
processed foods have hurt the outlook for those brands and others,
the company said.
Mr. Patricio said some low-selling or unprofitable products
would be discontinued, while other brands would be chosen to
receive more funding for development and marketing.
Part of the problem, Mr. Patricio said, is Kraft Heinz's
variety. The company's products are sold in 56 different sections
of the supermarket.
"If you try to innovate in 56 different categories every year,
you can't execute on all of them," Mr. Patricio said. "We need to
be more selective."
Rivals including Campbell Soup Co. and Kellogg Co. also are
struggling to figure out what to do with brands left on the wrong
side of consumers' shift to more healthful and less processed
foods.
Still, shares of Kraft Heinz have fallen more than its rivals.
The stock is down 35% over the past year, while the S&P 500
Packaged Foods & Meats index is up 22%.
Kraft Heinz is partly owned by 3G Capital, a Brazilian
investment firm that, along with Warren Buffett's Berkshire
Hathaway Inc., bought Heinz in 2013.
Two years later, 3G and Mr. Buffett orchestrated Heinz's merger
with Kraft. Mr. Patricio came to Kraft Heinz from Anheuser-Busch
InBev SA, another company in which partners of 3G are invested.
At each of those companies, 3G has implemented a method called
zero-base budgeting to cut costs by scrutinizing every expense. 3G
saved money at Kraft Heinz by cutting jobs, renegotiating contracts
with suppliers and promoting younger employees to replace
veterans.
Those budget measures also spread product-development and
promotion spending more thinly across dozens of brands. Kraft
Heinz's spending on research and development in 2018 was less than
a third that of Oreo-maker Mondelez International Inc., a rival
with roughly the same revenue.
Many products Kraft Heinz introduced in recent years either
didn't find an audience or hurt profit margins. MAX by Maxwell
House iced coffee, pouches of Kraft ranch dressing and
banana-sundae flavored Planters nut mix were all discontinued.
Such misplaced bets ate into sales of existing Kraft Heinz
products, according to former employees familiar with that work.
After the merger, Kraft Heinz introduced Heinz mayonnaise -- even
though it was already selling Kraft mayonnaise and Miracle
Whip.
"We tried to tell them that people don't eat that much mayo.
You're just going to convert more people from Miracle Whip," said
Marla Grossberg, a former director of consumer insights who was
working on condiments at the time of the merger.
Heinz mayonnaise did take market share from Miracle Whip after
its debut in 2018. The company added new varieties to try to boost
sales such as a mayo-ketchup combination called Mayochup and a
mayo-barbecue version, Mayocue.
But Kraft Heinz's total share of mayonnaise sales among all its
brands rose half a percentage point in both 2018 and in 2019.
Nina Barton, Kraft Heinz's chief growth officer, said she is
pushing employees to think up new products that solve a broader
problem for consumers. As an example, she praised new snack packs
that combine Philadelphia cream cheese with bagel chips. "It's a
very different mind-set," she said in an interview.
Such successes, though, have had other consequences: lower
profit margins than older products.
Kraft Heinz wrote down the value of its Philadelphia brand last
year primarily because of higher costs, such as switching to more
expensive ingredients to entice health-conscious consumers.
Ms. Barton and Mr. Patricio said they are willing to sacrifice
some profit to boost promising brands. Kraft Heinz has the
second-highest profit margin before interest, taxes and other
exclusions among 20 publicly traded food companies, according to
JPMorgan Chase & Co.
Kraft Heinz's third-quarter results beat expectations, sending
shares up 13% on the day they were released -- the first time
investors reacted positively to the company's earnings since the
summer of 2018.
"First, we had to stabilize the business," Mr. Patricio said.
"Now, we are building a strategy for the future."
--Heather Haddon contributed to this article.
Write to Annie Gasparro at annie.gasparro@wsj.com
(END) Dow Jones Newswires
January 26, 2020 09:14 ET (14:14 GMT)
Copyright (c) 2020 Dow Jones & Company, Inc.
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