Kraft Heinz desperately needs fresh thinking to spice up its ailing packaged food empire. Instead, the maker of Maxwell House coffee and Oscar Mayer hot dogs is reverting back to an old and familiar recipe: cost-cutting topped with asset sales.
Kraft on Tuesday said it was targeting $2bn worth of cost cuts between now and 2024. Never mind that an overzealous focus on reducing expenses, while underinvesting in its products, was what got the company in trouble in the first place.
Miguel Patricio, who took over as chief executive in July 2019 after Kraft shareholders were rocked by a multibillion writedown and a SEC investigation into its accounting practices, claims it is different this time. To show that Kraft can manage new tricks, Mr Patricio also announced the sale of its natural cheese business, surprisingly to the French group Lactalis, for $3.2bn.
The projected $2bn of savings will come by focusing on procurement, manufacturing and logistics — rather than the slash-and-burn, “zero-based budgeting” practice favoured by Kraft shareholder, private equity firm 3G Capital. Some savings will fund a planned 30 per cent increase in marketing spend. Kraft said all this would create adjusted earnings per share growth of between 4 and 6 per cent.
In Mr Patricio’s defence, he may not have much choice. While the pandemic boosted demand for packaged food, Kraft still lost $1.65bn in its most recent quarter following more writedowns, taking total impairments since 2019 to nearly $20bn. The company remains heavily indebted, with net debt more than four times this year’s expected ebitda. Dividends have been slashed. Shares in Kraft have also vastly underperformed some rival foodmakers.
To turn Kraft round, Mr Patricio will not only need to boost marketing. He will need to invest in innovation to keep up with rapidly changing consumer tastes. Or at least put some more money into his strongest brands, while disposing of some tired ones. More investment plus the sale of part of its cheese business makes a decent start.
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