KHC Kraft Heinz Company

By Annie Gasparro 

This article is being republished as part of our daily reproduction of WSJ.com articles that also appeared in the U.S. print edition of The Wall Street Journal (January 27, 2020).

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 27, 2020 02:47 ET (07:47 GMT)

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