retail news in context, analysis with attitude

Fortune has an interesting follow-up on last week’s story about how Kraft Heinz announced a multibillion dollar write-down, saying that a shift in consumer tastes - a preference for fresh over processed food - has had a negative impact on its sales and profits.

The story suggests that this announcement exposed as a disaster “a new, highly-praised strategy for reviving slogging, slow-growing brands.”

Here’s how Fortune frames its analysis:

“Over the past several years, Brazilian investment firm 3G has deployed brutal cost-cutting to raise profits at Anheuser-Busch InBev, Burger King, and Kraft Heinz, using an approach called zero-based budgeting requiring that each expense be justified from scratch each year, as opposed to the traditional approach of adding a couple of percentage points to last year’s line items. The strong implication is that managers should strive to lower all costs from one period to the next, at all costs.”

Kraft Heinz’s numbers, the story says, “since the completion of the food giants’ merger in 2015 demonstrate that it’s achieved all gains in profits exclusively from chopping costs, that starving the brands resulted in flat sales and rising debt, and that falling margins and zero growth forced the company to suddenly reverse course by swelling marketing costs. That move, in turn, hammered profits, and came too late. The damage to the brands, the announcement acknowledges, are permanent.”

Whether or not the company’s traditional brands can be revived remains an open question, Fortune writes, because “the 3G folks were too tough on costs, when Kraft Heinz desperately needed trendy new products and offshoots that only targeted spending on R&D and marketing - and creative thinking - could bring.”

The New York Times makes much the same point: “Kraft’s problems suggest that unremittingly squeezing expenses can make it harder to stay competitive. Kraft Heinz may soon need to spend more. Consumers are increasingly drawn to products they perceive to be healthier and fresher over processed products. Kraft Heinz will have to show that it can win them back with innovative new products and engaging marketing. And that could weigh on future profits.”

By the way … Reuters reports this morning that “Kraft Heinz Co has hired investment bank Credit Suisse to review options for its Maxwell House coffee business, including a potential sale,” which could be for as much as $3 billion. It would be just “one in a string of divestitures for Kraft Heinz.”
KC's View:
You wouldn’t think it would come as such a surprise that a company cannot cut its way to prosperity … it almost doesn’t matter what the company is, nor which segment it occupies.

It is extraordinary how little real innovation seems to take place at major CPG companies … maybe a new flavor or size here or there, but so much of the real innovation seems to come from smaller companies.

I do think there is an object lesson here for retailers as well. If all they do is cut, and don’t invest in the kind of real innovations that can disrupt their own businesses as well as the competition’s, then they’re not going top succeed long-term.