By Heather Haddon
Kraft Heinz Co.'s yearslong quest for cost-cutting and profit
hurt a key element for success in the packaged-food business: good
relationships with supermarkets.
When the food giant made the surprise announcement last week
that it was slashing the value of its Kraft and Oscar Mayer brands
by $15.4 billion, it became clear its strategy failed to address
the broader consumer shift away from processed meats and other
packaged items toward healthier, more natural options.
Another problem for Kraft Heinz was its decision to scale back
in-store promotions and discounts that could have helped boost
sales of Kraft cheese slices, Capri Sun drinks and other signature
products, according to people familiar with the industry and food
sector analysts.
"We may have made a mistake in terms of trying to push hard
against certain...retailers and finding out that we weren't as
strong as we thought," said Warren Buffett, whose Berkshire
Hathaway Inc. owns more than a quarter of Kraft Heinz, in
discussing the company's troubles on CNBC on Monday. "You've got
the weaker bargaining hand than you had ten years ago," Mr. Buffett
said.
After Kraft and Heinz's 2015 merger, and as retailers
increasingly felt competition from deep-discount chains and online
sales, Kraft Heinz moved to raise prices on some items, including a
25% hike on Capri Sun drinks. Kroger executives balked at the move,
arguing that price-sensitive shoppers drawn to the low-cost fruit
drink would stop buying it, people briefed on the discussions
said.
"We lost a lot of business for eight months," said one of the
people about the increases. "It didn't achieve the sales that
Kroger wanted. It achieved the profit Kraft wanted."
Kraft Heinz officials said at the time that Capri Sun sales
dropped due to the price increase, but that it was necessary to pay
for a reformulation of the product in response to consumer trends.
A drop in promotions of boxed dinners also had hurt sales.
Investment firm 3G Capital LLC, which helped make Kraft Heinz
the world's fifth largest food company through the megamerger, was
aggressive about saving costs across the company.
"You had a change in personnel and mind-set," said Don
Fitzgerald, a food sector consultant and the chief marketing
officer for Kroger Co.'s Mariano's banner until this month. "There
was a clear shift in focus from really working with retailers and
being consumer-focused."
The salespeople hired by Kraft Heinz and third-party contractors
were armed with less leverage and ability to promote and discount
Oscar Mayer wieners, Kraft slices and other key brands, Mr.
Fitzgerald and former Kraft Heinz officials said.
Competition from nonbranded store products also grew in recent
years, particularly in commodities such as cheese that retailers
heavily discounted, Kraft Heinz officials have told investors.
Kraft natural-cheese sales declined 2% last year by volume, while
private-label versions grew by nearly 9%, according to data from
market-research firm IRI.
"House brands, private label, is getting stronger," said Mr.
Buffett in the television interview. "And it's gonna keep getting
bigger."
Supermarkets have greater options for their shelves today, and
power has shifted to retailers in recent years as grocers gain more
market data to determine what sells best. Packaged-food makers are
under pressure to be more creative in arguing why their products
draw customers, particularly in center-store aisles as more
shoppers buy fresh food.
That has made the relationship between grocers and suppliers
even more important as both try to drive sales of goods that some
consumers increasingly snub.
Kraft Heinz officials say they've made improvements recently,
including offering more discounts and distribution with retailers.
Kraft Heinz spokesman Michael Mullen pointed to a retailer survey
by the Kantar research firm showing that the company ranked fourth
among packaged-goods companies on strategy, supply-chain and other
factors last year, up from fifth in 2017.
"It was part of our commitment to have improving relationships
with all our customers as we went through the merger. That has
proven out," Mr. Mullen said.
The company said its U.S. pricing outside of commodity swings
was down 1.4% in the second half of its fourth quarter.
Those efforts are leading to gains in sales volume, market data
show. Its processed cheese products -- which includes Kraft slices,
Cheez Whiz and Velveeta -- saw a 6% increase in the volume of sales
in the month ending in January after heavy promotions and price
drops, while coffee and frozen-entrée sales also improved,
according to food-industry analysts at AllianceBernstein.
The company has expanded its own sales force to distribute and
merchandise its products at supermarkets. Kraft Heinz said in May
that its in-store sales team for the U.S. was 80% larger than last
year, which it said is helping to improve its presence with key
retailers.
"Our volume improvement was also supported with a much better
service level," said Paulo Basilio, U.S. president for Kraft Heinz,
in discussing the price increases last week.
Business relationships, however, take time to repair.
Kraft Heinz laid off roughly 5% of its total workforce after the
merger, and job cuts have continued. Veteran Kraft employees who
drove some important relationships with retailers over the years
left, and were replaced by less experienced people, the former
Kraft Heinz officials said.
"Our sales team really struggled," one of the people said.
Kraft Heinz also made late deliveries to stores. The delays of
shipments of products such as Ore-Ida potatoes dented their
prominence on shelves, Mr. Fitzgerald said.
Total annual dollar sales for Kraft Heinz in the U.S. have
fallen in the last four years, according to IRI data.
Kraft Heinz's Mr. Mullen said that like other companies, Kraft
Heinz has had periodic supply-chain issues.
Last year, Kraft Heinz began investing more in its supply-chain
and warehouse network, and executives said Thursday it had achieved
industry-leading delivery metrics for rate of orders delivered on
time and complete. New production lines for frozen potato, meat and
other products eliminated supply disruptions, company executives
said. That work was expensive, denting the company's profit.
Those in the food industry said Kraft Heinz's merchandising
missteps should serve as a warning to other brands.
"The maniacal focus on cost cutting will not ultimately serve
the interest of company stakeholders," said Bob Goldin, co-founder
of the Pentallect Inc. consulting firm, in a recent note to
clients. "We urge all companies to recommit themselves to growing
the old fashioned way."
Annie Gasparro contributed to this article.
Write to Heather Haddon at heather.haddon@wsj.com
(END) Dow Jones Newswires
February 26, 2019 07:14 ET (12:14 GMT)
Copyright (c) 2019 Dow Jones & Company, Inc.
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