Oscar Mayer. Velveeta Sun of Capri Kraft Heinz CEO Miguel Patricio admits: Some of the company’s flagship products had become “a bit dusty”.
“For a while, we apologized for the brands we had,” Patricio told CNN Business. “We got distracted thinking that the future was launching new small brands, niche brands.”
Recently, “we stopped and said, let’s go back” to the basics, Patricio said. “We are proud of the brands we have. Because they’re amazing.”
More than half of Kraft Heinz’s business comes from just eight brands, the three mentioned above, plus Kraft Mac and Cheese, Philadelphia Cream Cheese, Heinz, Lunchables and Ore-Ida. They may not look glamorous, but they are the very brands the company is banking on in its years-long effort to turn around the world’s fifth-largest food and beverage conglomerate.
Processed foods are “where the industry makes its money,” said Alexia Howard, senior analyst who covers US Food at Bernstein. “This has traditionally been what works in packaged foods.”
So Kraft Heinz reworked its portfolio to shrink its healthier nuts and cheese business and focus on processed icons, putting them front and center in flashy, even silly, marketing campaigns that have captured the attention of social networks. (Think the eight-foot-long Velveeta box that appeared in New York City’s Central Park.) But this strategy isn’t without risks, especially as consumers gravitate toward healthier options.
For Kraft Heinz, which is relying on Patricio to execute a comeback, the stakes are high.
Kraft and Heinz came together in 2015, a deal orchestrated by Heinz’s owners at the time, Warren Buffet’s Berkshire Hathaway and investment firm 3G Capital. At first, investors were bullish, buoyed by 3G’s success in using mergers to create powerful conglomerates, such as Restaurant Brands International (QSR), which owns Burger King and Tim Hortons. But in this case, the winning formula has fallen to the ground. After a few years, the company began to lose value, rapidly.
Critics said an extreme cost-cutting strategy stifled innovation. And in 2019, the company disclosed that the Securities and Exchange Commission was investigating its accounting practices. It wrote down the value of its Kraft and Oscar Mayer brands at $15 billion, posted a loss of $12.6 billion in the fourth quarter of 2018, and had to revise previous financial statements and then pay millions of dollars in a agreement
Even the venerable The Harvard Business Review weighed in with harsh criticism. “While investors were hungry for growth, 3G was unable to shift Kraft Heinz’s legacy brands quickly enough to meet consumer demand for healthier, fresher and, in some cases, cheaper private label products ” proclaimed a 2019 article in the magazine. “While Jell-O, Kool-Aid and Velveeta were piling up on the shelves, the tectonic plates of big-box food were shifting beneath Kraft Heinz’s feet, and they couldn’t adapt fast enough.”
Enter new management.
In 2019, with the company in crisis, Patricio joined Kraft Heinz from Anheuser Busch InBev (BUDFF). Given that 3G Capital had also handled AB InBev’s big merger in 2008, this connection set off alarm bells for some. “Everybody was like, ‘Oh my God, is this really going to work?'” Howard said.
“He had a monumental task when he first came in,” he noted. The company’s stock had fallen sharply, sales were faltering and investor confidence was low.
Today, Kraft Heinz shares are worth about $37 each, an improvement from their 2020 lows of about $22, but far from their high of nearly $100 a share in 2017. In the third quarter of this year, net sales grew to $6.5 billion, up 2.9. % increase compared to the previous year.
“Three years ago, our company was at the bottom,” Patricio said during a Bernstein conference in June. “Today we feel that we are a good company.”
But that is not enough. “We think we can be big. And to be big, it’s a whole different game,” he said.
Patricio has streamlined operations, invested in supply chain improvements and increased advertising. It has also had potential risk changes in the company’s portfolio.
To focus on core categories, Patricio began eliminating divisions.
In 2020, Kraft Heinz announced that it would divest its natural cheese business. The following year, Planters said the same, saying goodbye to the iconic Mr. Peanut
This move may seem like a head-scratcher, since natural nuts and cheese are more easily positioned as healthy foods than processed meats and cheese. But they are also difficult to differentiate from competitors.
Natural cheese and nuts didn’t fit with “our strategy for the future,” Patricio told CNN. “It’s not … where the growth would come from.”
Those two categories are especially exposed to private labels or stores, he said, and experts agree. Shoppers are “very price-driven” when it comes to these items, said Daniel Hooker, a senior professor of applied economics at Cornell University with experience in food industry management.
And competition is especially fierce right now, because consumers have become increasingly interested in retailer brands as grocery prices skyrocket. Changes in ingredient prices can reduce costs, especially in these categories.
coming those brands “helped us immensely,” Patricio said.
Hooker noted that Kraft Heinz’s current portfolio is less likely to face competition from generic brands. Heinz Tomato Ketchup is by far the leading brand in that category, and “there’s no private label equivalent, really, of Capri Sun,” he noted.
“The best way to compete with store brands is to have very strong brands,” said Patricio. “They really play a role in the hearts of consumers. So we have more loyalty.”
For this reason, Kraft Heinz has been inclined to promote its legacy brands, and with sometimes outrageous marketing. In Patricio’s words, “we have to be creative and get consumers talking about these brands.”
In the case of Velveeta, Kraft Heinz partnered with a meat chain to sell Velveeta martinis and created a Velveeta-themed nail polish, as well as tweaking the processed cheese brand’s logo.
Other Kraft Heinz brands have also used eye-catching marketing campaigns. Over the summer, Oscar Mayer introduced the “cold dog,” a popsicle that tastes like a hot dog. The item was sold for a limited time at Popbar locations in a handful of cities. Kraft Real Mayo has partnered with Juicy Couture to create sweatshirts. The pants say “Smooth” on the back.
Efforts like these increase brand awareness, help build online popularity and gain media attention. Kraft Heinz brands now have a presence on gaming platforms like Roblox, in addition to social media channels and other platforms. In his discussion of the company’s third-quarter results, Patricio noted that six of the company’s campaigns this year have earned more than one billion earned impressions each, referring to views received by the coverage of the means of the promotions.
In a rapidly evolving media landscape, it takes “a lot more work and people to reach consumers,” he said he told CNN.
But clever promotions may not be enough to convince consumers to opt for Kraft Heinz’s highly processed products.
One way to reach health-conscious consumers without overhauling core brands is to partner with outside companies. Kraft Heinz recently began working with NotCo, which makes dairy and plant-based proteins. Acquiring a company would be expensive, Patricio noted, so a partnership was the way to go.
It looks like Patricio is leaning toward partnerships, Howard said. For him, “it may be the way to take advantage of some of these bigger and more disruptive changes that will affect the industry” in the coming years.
Kraft Heinz said in October that the joint venture’s first product, plant-based American cheese slices, had been launched in a test market.
The company has also made more substantial changes to some products to try to make them healthier: a recent commercial, lamenting the problems of “the grown-up,” promotes Heinz’s no-added-sugar ketchup. Over the summer, the company launched a reduced-sugar formula for Capri Sun. Kraft Mac and Cheese is made without artificial flavors, colors or preservatives and comes in gluten-free and whole grain varieties.
“It’s definitely a trend in the world to have healthier food, and we have to be a part of that,” Patricio said. “We have to adapt … and we have been doing that.”
However, even with ingredient changes and marketing pressures, there is a limit to how many adjustments the company can make without fundamentally altering the products.
“Some of these brands can only make them so much healthier, before they stop being the products they are,” Cornell’s Hooker said. “You get to a point where you can’t do much more.”
So far, things seem to be working, noted Howard, the food analyst. “Three years later … it’s actually moving things in the right direction.”