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NEW YORK, Feb. 24 – The US food giant, known for its iconic brands of ketchup and hot dogs, is facing the drawbacks of austerity as a strategy to boost profits.
Kraft Heinz, born from the merger between Kraft Foods and Heinz in 2015, amounting to $ 49 billion (RM 200 billion), experienced a catastrophic fourth quarter, recording a net loss of $ 12.6 billion Thursday, leading to a 27% fall in the title. price on friday.
A scathing article from the Wall Street Journal called this proof that "the company's experience with radical cost reduction has failed."
"The management of the company has few good options," he said.
Controlled by Swiss and Brazilian billionaire Jorge Paulo Lemann, via investment firm 3G Capital, and US billionaire Warren Buffett, who owns 25% of the company's capital, Kraft Heinz builds on its famous budgeting-based approach zero to reduce costs.
Justify any expense
Basically, this system requires every expense to be justified in each period, which encourages managers to significantly reduce their expenses. But this philosophy can lead to the removal of the investments necessary for profit and sales growth, and may be compromised by a slowdown in the market.
For several months, the food industry has been facing increased logistics costs, ingredients and materials.
Kraft's strategy worked for two years, enabling it to generate profit margins that were the envy of its rivals.
However, sales growth stagnated in the first quarter of 2017 and six poor consecutive quarters of poor performance resulted in a $ 15.4 billion write-down of the badets of two of its flagship brands, Kraft and the products. with meat Oscar Mayer.
Kenneth Goldman, an badyst at JPMorgan, warned that "intense cost-cutting efforts will, in the long run, erode brands … if the tightening strategy goes too far."
Kraft has built its reputation on products such as ready-to-eat macaroni and cheese, while Oscar Mayer is known for his deli meats and hot dogs and Heinz for his ketchup and other condiments.
But consumer tastes have changed, with growing concerns about health issues and a shift from processed to fresh foods.
"All they've done, is reduce costs, because competing companies such as Danone and Nestle are investing in products more in line with current public demand," said Gregory Volokhine, Meerschaert. Capital Markets.
New acquisitions
Many food companies have responded to changing trends: McDonald's, the global leader in fast food, has stopped selling antibiotic-treated chicken in 2016 and now offers fresh beef burgers. .
Volokhine said that Kraft Heinz seems to have "applied recipes that worked for a while, but the problem was no longer in spending, but in products becoming obsolete," like Jell-O desserts.
To overcome this shortage, Kraft Heinz quickly mobilized $ 300 million last year to strengthen brand marketing, recruit salespeople, improve its supply chain and modernize revenue.
"We were too optimistic to realize savings that did not materialize," said General Manager Bernardo Vieira Hees.
But as he added Thursday in a call to badysts, "we are still confident that our model is working and has a lot of potential for the future."
The company plans to abandon the failed brands, which would allow Hees to set the stage for a merger, which would lead to further savings and increased profits.
The company contacted Unilever, maker of Lipton soap and soap Dove, in 2017, but withdrew its offer of 143 billion US dollars after the announcement of the release of its talks with the giant Anglo-Dutch. – AFP
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