Barbarian at Europe's Gate No More, Kraft Heinz Stumbles at Home
(Bloomberg) -- In February of 2017, Kraft Heinz Co. swept across the Atlantic with an audacious $143 billion bid for Unilever, a sleepy giant that Kraft contended could be prodded with a dose of cost cuts and portfolio pruning.
While the unsolicited overture was quickly dropped in the face of stiff opposition from the target, it left Unilever suitably rattled, and the company set on a path to reform, weeding out underperforming assets and sharpening its focus on shareholder value.
Fast forward two years, and the boot is on the other foot. On Thursday, Kraft Heinz took a $15.4 billion writedown, in a stunning admission that some of its best-known brands have failed to keep pace with changing consumer preferences. By contrast, Unilever and its European peers Nestle SA and Danone have already moved to avoid a similar fate by focusing on new niche brands and healthier alternatives to sugar, meat, and packaged food.
Food with Purpose
Switzerland’s Nestle, for example, ditched its U.S. confectionery business and just last week put its Herta lunch-meat business up for sale. Unilever is pushing to develop what it calls "purpose-driven" brands that promote health and protect the environment, ranging from a new lineup of ice cream with postmodern flavors such as Turmeric Chai & Cinnamon while selling struggling assets like its margarine and spreads business. Danone made a big bet on vegan yogurt with its $10 billion acquisition of WhiteWave Foods Co. a few years back.
While there’s still plenty of chocolate and greasy snacks to go around, Big Food in Europe has made it a key mission to adapt to those kale-crunching, smoothie-slurping consumers who shun processed foods that are overly fatty, salty or sugary, or no longer in line with their health and ethical values. It’s a painful lesson for Kraft Heinz, which lost more than 20 percent of its market value after investors brutally punished the stock.
“Kraft Heinz had a very acquisitive model and they needed to feed it,” said Duncan Fox, an analyst at Bloomberg Intelligence. “But they have been slow on innovation and pursued the wrong trends and missed out on everything.”
For years, Kraft Heinz built a formidable machine relying on what it does best: slash overhead costs, often at assets that it gobbled up. Formed in a 2015 merger orchestrated by Warren Buffett’s Berkshire Hathaway Inc. and the private equity firm 3G Capital, other holdings in the parent portfolio also include brewer Anheuser-Busch InBev NV, which also has had more trouble finding pockets of growth and cut its payout to investors last year.
Along the way of Kraft Heinz’s cost purge, something got lost -- brands started looking dated or out of touch with consumer trends, from processed cheese to meats and sugary drinks. While the company has taken a few recent steps to catch up on health-conscious brands, buying organic ketchup maker Primal Kitchen for $200 million, the huge write-down that pushed it to an equally large loss showed it was too little, too late.
“The problems Kraft Heinz is facing are company specific, as the company has implemented the zero-based budgeting model for several years, a model 3G systematically uses,” Alain Oberhuber, an analyst at MainFirst Bank AG, wrote in a note, calling the product portfolio “mediocre compared to its peers.”
It’s a malaise afflicting not just Kraft Heinz. General Mills Inc. has worked to innovate its traditional lineup of cereal, yogurt and snacks, but those divisions are still struggling. The company has been searching for growth with Yoplait, including the recent addition of YQ, a new variety that’s less sweet and made with ultra-filtered milk. Campbell Soup Co., too, has been facing a decline in popularity for its signature product: canned soup. In November, the company reported that sales fell for its ready-to-serve and condensed soups.
By comparison, turnarounds are in full swing among European rivals. At Nestle, where Chief Executive Mark Schneider has called the radical cost-cutting approach taken by Kraft Heinz unsustainable, sales growth rebounded for the first time in seven years. Acquisitions have focused on healthy brands, or those with emotional resonance to a younger clientele, like the Blue Bottle Coffee, a U.S.-based specialist roaster. In December Nestle announced plans to introduce its Incredible Burger under the Garden Gourmet label this spring, pushing into the booming vegan market.
Healthy Ice Cream
Unilever also hasn’t stood still. Recent acquisitions include eco-friendly detergent Seventh Generation and vegan condiment maker Sir Kensington’s. It poured significant resources into developing a new line of ice-cream called Culture Republick with the goal of stopping the march of Halo Top, the U.S. startup that touts its low use of sugar and cream. And at Danone in France, the yogurt company has added products like probiotic shot drinks.
To be sure, the companies are all acting under considerable pressure. Nestle has activist shareholder Dan Loeb breathing down its neck, demanding higher returns. Unilever just emerged from the bruising experience of having to abort its plan to leave its U.K. listing after shareholders rebelled, and Danone is operating with a growth outlook for this year that left analysts disappointed, with the company pointing to a slower start to the year before growth accelerates in the second half. With slowing economies at home, particularly in the U.K., food companies and the supermarkets they supply have been squeezed on the pricing front as the shrinking effect of Brexit on the pound trickles down into consumers’ bills.
"Changing a company as large and complex as Nestle was always going to take time, but it’s becoming increasingly clear that real change is underway," Dan Loeb’s Third Point said in a statement on Thursday, saying it was encouraged by the turnaround.
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