The Kraft Heinz Co. challenged by the pace of change at retail

by Keith Nunes
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Lunchables, P3 Protein Packs, Kraft Heinz
Kraft Heinz noted consumption-led growth in Lunchables and P3 packs during the third quarter.
 

PITTSBURGH — Like many of its peers, the Kraft Heinz Co. remains under pressure in the United States due to the rapid pace of change taking place at retail. It was a theme that came up repeatedly as management discussed third-quarter results with financial analysts in a Nov. 1 conference call. A key challenge facing the company is how to ensure its broad portfolio of brands and products are effectively placed and priced in traditional and emerging retail channels.

Georges El-Zoghbi, Kraft Heinz
Georges El-Zoghbi, strategic adviser for The Kraft Heinz Co.

“…The change in the retail landscape is not something new,” said Georges El-Zoghbi, strategic adviser for The Kraft Heinz Co., during the call. “What is new is the frequency and the speed at which the market is changing.

“So, we are seeing the majority – the vast majority of retailers investing to provide consumers with more shopping options. So, we see almost everyone now trying at some stage in the cycle to offer in-store pickup, delivery to home and people coming and shopping inside their stores as usual. Our job is to be agile enough to deliver the relevant offering and the bundle that ... caters to a consumer’s shopping option. That’s what we need to do, and that’s where we’re making the majority of our investments.

“For us, it is not a question that, for instance, we have to choose between an e-commerce versus a traditional channel. It is operating in every channel effectively. And that’s the job to be done, and that’s the job that we are focusing on.”

For a company as diverse as The Kraft Heinz Co., it is a job that also is daunting.

Paulo Basilio, Kraft Heinz
Paulo Luiz Araujo Basilio, zone president for Kraft Heinz’s U.S. business

“It centers on capturing several opportunities we have to drive better consumption trends, including: leverage data to make our marketing as effective as possible, from marketing mix to quality impressions; executing our strong pipeline of innovation and renovation; sharpening our category management skills through revenue management and assortment management capabilities; continue to invest in sales to ensure we have the right product range at the right account in the right geography; as well as ramping up our effort outside traditional channels to capture incremental growth opportunities, including food service and e-commerce,” said Paulo Luiz Araujo Basilio, zone president for Kraft Heinz’s U.S. business.

As management strives to achieve its goals, it remains under pressure in the United States, the company’s largest business unit.

Capri Sun and Oscar Mayer cold cuts, Kraft Heinz
The timing of promotional activity for Oscar Mayer cold cuts and Capri Sun affected pricing.
 

For the third quarter ended Sept. 30, The Kraft Heinz Co. recorded net income of $944 million, equal to 78c per share on the common stock and an increase compared with the same period of the previous year when the company earned $842 million, equal to 69c per share. Management attributed the earnings increase to lower efficiency program and restructuring costs, higher net sales and favorable foreign currency.

Sales for the quarter were $6,314 million, which compared with $6,267 million the year prior.

In the United States, sales fell slightly to $4,380 million, down from $4,395 million the year before.

David Knopf, Kraft Heinz
David Knopf, c.f.o. for Kraft Heinz

“To the plus side were consumption-led growth in Lunchables and P3, gains in food service, and a roughly 30 basis point benefit from hurricane-related consumer pantry loading,” said David Knopf, chief financial officer. “But these are more than offset by distribution losses in nuts and cheese as well as lower shipments in meats and coffee.

“By contrast, pricing began to come through stronger in Q3, reflecting higher prices in cheese and bacon to address rising commodity costs as well as pricing in desserts that were partially offset by the timing of promotional activity versus last year in a number of categories, including Oscar Mayer cold cuts and Capri Sun ready-to-drink beverages.”

Mr. Knopf added that management’s focus now is to finish the year strong and build momentum into fiscal 2018. To achieve the goals, executives will focus on growing organic sales through innovation and capturing “white space.”

“On cost savings, we’re now targeting between $1.7 billion and $1.8 billion of cumulative Integration Program savings by the end of 2017 or $500 million to $600 million of net incremental savings in 2017 versus 2016,” he said. “Ramping up supply-chain-related savings will be a key factor. We’re confident that the savings are there, it’s more a matter of timing relative to the end of the year.” 
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