Lunchables, Kool-Aid,
Jell-O. Velveeta. Some of
America's most beloved products, all
manufactured by the Kraft Heinz Company. With six
$1 billion brands. Nearly $27 billion in
annual revenue in more than two centuries in
business between two labels, Kraft Heinz,
separately and together, has been at the forefront
of what's happening in food over the past 100
years. You have a significant
responsibility for what that means to deliver
elevating food experiences for consumers and
families. You think Oscar Mayer, you
think Kraft mac and cheese. You've got Lunchables. Those are iconic brands
that consumers have grown up with in a lot of
instances, and that they've known for a long
time. Yet in less than a decade
since the company's $49 billion mega-merger. Fundamentally, what went
wrong with Kraft Heinz? The stock's down over 25%. It's what a poorly run
monstrosity like Kraft Heinz. Kraft Heinz has been such
an unmitigated disaster. It's been called one of
Warren Buffett's worst investments. But we paid too much for
for for Kraft. Ultimately, what Wall
Street and everybody else missed is that in
packaged food, you need to innovate. You need to
invest in your brands. You need to invest in
R&D. You need to keep up with
consumers' changing habits and tastes. Already
leading into the merger, both Kraft and Heinz were
not doing that. What the original merger
got wrong was the idea that they could conclude
this transaction and then buy their way into new
growth by tacking on a lot of acquired companies
using the bigger size and scale of the combined
Kraft Heinz Company. And that didn't work out. As consumer preferences
shift and inflation pushes shoppers to the massive
private label industry, can the king of mac and
cheese and condiments make a comeback? Despite a market cap of
about $45.5 billion and a portfolio that spans over
200 brands and nearly 200 countries, Kraft Heinz's
stock has been on a steady decline since 2017. Investors have soured on
Kraft Heinz just because of years of
underperformance. Long are the days of the iconic
blue cardboard box mac and cheese that we all grew
up with. It's just not what our
kids are into or what we're necessarily giving
our kids. It's processed food. When the trend is moving
away from processed, it's not fresh. In 2023, net sales only
increased by 0.6% compared to the prior year. That was partly due to
price increases, which affected many packaged
goods companies. Given that SNAP benefits
were reduced in March, that had an outsized
impact in terms of their performance. In addition,
they faced some trade timing, retailer
inventory, de-load things of that nature. Shortly after being named
company CEO, Abrams-Rivera delivered underwhelming
fourth quarter 2023 results. In the short time we saw
that our food service business actually is
growing faster than our competition and gaining
share our and that is both in the US and globally. We're going to maintain a
disciplined approach to how we think about
pricing. At the same time, we also recognize that
the consumers are looking for better value in all
the choices they're making. It all started in 2015,
when two of the biggest companies in America
merged to become the Kraft Heinz Company. The $49
billion deal was engineered by Warren
Buffett's Berkshire Hathaway and Brazilian
private equity firm 3G Capital. The two had
partnered to buy Heinz for $28 billion in 2013, the
largest ever acquisition in food industry history. There were great
expectations from investors, with that duo
coming in to put this deal together that this was
going to be a juggernaut and a hugely profitable
investment. It's one of the biggest
surprises. Ultimately, what happened
next. There's a huge cultural
disconnect in the early stages within the Kraft
and Heinz side of things, Heinz had always been
kind of like a family run company, you know, very
paternal. And he merged it with
Kraft, which by the time of the merger had already
been owned by 3G for a while. And so it had that
kind of private equity meritocracy. In 2017, as part of the
original goal, Kraft Heinz pursued a $143 billion
takeover deal of Unilever, but it was immediately
rejected. The Unilever people were
horrified at this because culturally, the two
companies could not be more different. Unilever
basically rejected it and Warren Buffett wasn't
going to be participant to a hostile takeover. He
just doesn't do that as a matter of policy. That kind of left the
Kraft Heinz Group with not too much in the arsenal. 3G Capital was known for
its aggressive, zero-based budgeting strategy,
something that had been successful at companies
like Anheuser-Busch InBev and Burger King. In 2019, a group of
shareholders filed a class action lawsuit alleging
that 3G indiscriminate cost cutting measures had
gutted the company's ability to generate
revenue. They bring in ruthless
cost cutting. They load the company up
with debt. With luck, they're able
to create a more streamlined operation for
it, and then either they exit or they hold it for
the profits. It turns out when you're a
packaged food company that needs to keep up with
consumer tastes and habits and grow, you need to
have innovation. The 3G cost cutting model
certainly can help lead to profitability. But on the
growth plan, if you're not doing major acquisitions
to grow, which had been the strategy of AB InBev,
then it leaves the company without much. Kraft Heinz's reputation
took a further hit after reporting a trifecta of
bad news in February 2019: an SEC probe into
accounting misconduct cuts to its annual dividend in
that it would be taking a $15.4 billion asset write
down for brands like Kraft and Oscar Mayer. The
company wiped $16 billion in market value in a day. This was a disaster of a
stock. It's been a. Disaster since the
beginning of 2017. They announced a more than
$15 billion impairment charge, meaning their
brands weren't worth as much as they had been
holding them on the balance sheet. And Warren Buffett
publicly expressed his regret. We overpaid in in Kraft. Uh, I don't think we
overpaid in Heinz. The business does not
earn more just because you pay more for it. The company announced a
new CEO in April of that year. He made a vow that it was
really going to be a transformation. He
recognized the company was was in a pretty bad
place. And so the way he would describe it is he
started with the people, you know, let's get the
people on the team. He spent a lot of time on
the front lines, talking to the people in the
factories and talking to the people in the plants. Kraft Heinz settled with
the SEC for $62 million in 2021, and reached a $450
million settlement in the class action. Lawsuit. Following the merger,
Berkshire Hathaway and 3G held 51% stake in the
company. However, over time, 3G
has quietly sold off its shares and according to
FactSet, in the third quarter of 2023, the
Brazilian private equity firm left Kraft-heinz for
good. Berkshire Hathaway is the
sole major stakeholder as of April 2024. In a comment to CNBC, a
company representative wrote that 3G has not
been involved in the management of Kraft
Heinz, nor have they been on the board for several
years. We did learn from their recent filing that
3G exited Kraft Heinz stock entirely in 2023. The pandemic gave Kraft
Heinz the opportunity to course-correct some of
its mistakes. Consumers are stuck at
home, and they're looking for products that they
trust that they know they have a familiarity with. And we think that that's
really what steadied the business and has led to
the improved performance. But we don't believe
that's reflected in the share price. It fixed its relationship
with its retail partners by delivering products on
time and keeping up with demand. Something smaller
companies couldn't. I think one of the biggest
things we're incredibly proud of is we've reset
the fundamentals over the last four years, and that
is reengineering from the inside out and a focus on
growth. As it refocused on its
core brands, the company trimmed less popular
products from its portfolio. It sold off
part of its cheese and nuts businesses for more
than $6.75 billion between 2020 and 2022. That helped them in a
couple of ways. It allowed them to pay
off some of that debt, and it allowed them to create
some cash flow, which would then go into
innovations. Its innovative ketchup
mixing dispenser has brought the company
recognition. They take that information
about how consumers are adjusting the flavors,
and then they sell that information back to
restaurants, which is kind of interesting because if
you're making a hot chicken, it actually
turns out it matters if it's jalapeno or habanero
peppers that people prefer. Beyond that, Kraft Heinz
is exploring ways to offer more promotions and
create value packs geared towards its core
customers. We actually increasing the
number of products we have available in club,
whether it's our meal club, whether our mac and
cheese, we are making sure we have more availability
of the dollar type of products. So that way we
can make sure that they're accessible to our brands. And there's more room to
grow and new channels to try. They will try to deepen
and and elaborate on the brands they have that
they think are strong. So if you take just Heinz
Ketchup as an example, there's now eight
different flavors of Heinz ketchup. So they're going
to try to appeal to more and more fine grained
groups of consumers. In 2024, it launched plant
based versions of its beloved mac and cheese
and Oscar Mayer hot dogs. The US plant based market
is projected to grow about 115% between 2023 and
2030. Emerging markets are the
company's next play. Kraft Heinz reported they
grew double digits in its 2023 full year earnings. In contrast, its US
retail sales only grew 2%. Kraft has had better sales
in emerging markets and across the world lately. It's still a smaller part
of their business, so it's not moving the needle,
but it is a potential growth spot right now for
a company that is needing growth. The big hope
around the merger with Kraft and Heinz is that
because of Heinz's international exposure
and Kraft being more than 90% of North American
business, they would have avenues for growth
overseas. And that still is a promising aspect. But first, the home
market. For the first time in our
history, we have a ten year strategy, and that
puts our core brands and our portfolio at the
center. It puts innovation at the center, it puts
our people and our culture and the cultural
transformation at the center. They are making
investments. They are supporting the business. Even low single digit
performance is decent growth for a mature US
based packaged food company. There could be
opportunities to do acquisitions. Still, experts say it's
unlikely the company's stock will return to its
all time high of about $98 anytime soon. They might not be
outperforming by a material extent. They're also not
materially underperforming those domestic center of
store peers. As they've gone from
really being very badly managed and having very
poor results to now being sort of ordinary, you
know, they're kind of on track, but there are a
lot of headwinds. A number of industry wide
challenges pose risks to Kraft Heinz to consumer
habits have changed dramatically. We snack more instead of
cooking at home. Bigger meals. We don't do
TV dinners anymore. When you think of some of
the Kraft brands, that's what you think of. Inflation has been
especially brutal on packaged food companies. Kraft Heinz increased its
prices by 15.2% in 2023. Now we're at a period
where the consumer is not putting up with that. The more value oriented
consumer makes it challenging for a Kraft
Heinz to engineer a turnaround in its core
portfolio in this kind of environment. And that's
what food companies are dealing with right now. Instead, consumers are
choosing value over loyalty, trading down
already cheap products for even cheaper options like
private label brands. The explosion in private
label brands from companies like a Kroger
or a Costco or Walmart has been very competitive. They're lower in price.
And for a value oriented consumer that's looking
for ways to save money and trade down, that's an
easy way to do it. Grocery stores with their
own private labels have an easier time tracking
shopping habits, and so can launch new products
faster than the competition. Smaller
companies can also innovate quicker. The extent to which
e-commerce and social media have really grown. That's enabled these
smaller niche brands to drive and to to gain
proof of concept much quicker and a much more
cost effective manner than they would have been ten,
20 years ago. Private label sales
outpaced national brands in 2023, bringing in $3
billion more than the prior year, for an all
time record of $233 billion. More than half
of shoppers surveyed said they planned to buy much
more or somewhat more private label brands in
the future. As you take a look at
private label, the thing that we focus on is value
for money for consumers and what that actually
means in terms of, uh, how brands play a role in
their lives. There is pressure from
private label, but there's always going to be a role
that brands play. It's a threat for all of
the branded food products, and it's potentially one
reason why we've seen very little growth out of
these companies for the past few years. Weight loss drugs like we
go via Manjaro could impact the market, though
experts say it's too soon to tell. A lot of things that
Kraft Heinz sells are the kind of things people
overeat on, right? They're full of fat,
they're full of sugar, they're full of all kinds
of ingredients and preservatives and stuff
like that. And what these drugs have
been shown to do for many people is they just
depress the cravings. Undoubtedly, Kraft Heinz's
relevance hangs in a delicate position, but
with 3G's aggressive management style out of
the picture and a continued effort to
innovate, it's possible Warren Buffett and his
team can continue to deliver results. It remains to be seen to
what extent. It's not obvious to me
that there's going to be some food thing, that all
of a sudden billions of people are going to be
turning to it. I think that's more
something that you'd see in a tech or a digital
product. But I think if you have
good, strong operations and continue to focus on
on the brands that people really care about, I
think that's probably the most promising direction.
