Kraft Heinz's recipe turns sour

Source: https://www.just-food.com/alerts/viewmail.aspx?id=106134&list=2

It's fair to say your correspondent’s jaw almost hit his keyboard yesterday when Kraft Heinz made its latest stock-market filing.

The Kraft cheese, Heinz ketchup and Oscar Mayer meats maker raised eyebrows across the industry, with a multi-faceted announcement that included an SEC probe into the company’s procurement, fourth-quarter profits that missed expectations, an outlook for 2019 that also disappointed Wall Street and the small matter of a US$15bn write-down on certain assets.

Shares in Kraft Heinz tumbled post the closing bell being rung in New York yesterday and they've continued to slide today, down more than 27% at the time of writing.

"Our model is working," Kraft Heinz CEO Bernardo Hees insisted as he spoke to stunned analysts after the announcement.

But such an announcement will naturally prompt questions about the strategy of Kraft Heinz and its owners Berkshire Hathaway and 3G Capital. Kraft Heinz's modus operandi has been built on M&A and then driving synergies from the transactions to grow margins. 

Its margin improvement has been strong – and has in recent years prompted almost all listed majors to take long, hard looks at their own cost base. 

However, the question about Kraft Heinz has always been about its long-term growth. Savings can only go so far. Management has, in recent quarters, sought to emphasise the work the company was putting in to try to grow its sales. On an organic basis, Kraft Heinz's sales grew 2.4% in the fourth quarter year-on-year.

Nevertheless, Kraft Heinz is facing questions on Wall Street a

bout its strategy. "All said, while a challenging industry backdrop is likely partly to blame, frankly, we believe some of Kraft Heinz's issues are distinct," Barclays analyst Andrew Lazar wrote today.

It also appears clear the fabled 3G model of M&A plus synergies equalling profits and returns to investors has not proved the right recipe for a business laden with centre-store, legacy brands facing a squeeze from the rise of private label in its home market on one side and, in the US and in a number of markets around the world, the growing popularity of smaller, more agile, on-trend insurgent brands on the other.