A focus on cost-cutting at the expense of brand building and a lack of innovation have left Kraft Heinz lagging behind its rivals and led to $16bn being wiped off its market valuation last week.

Laurent Grandet, lead food and beverage analyst at Guggenheim Securities, highlighted three factors contributing to the current crisis at the food giant:
  1. three quarters of earnings are generated in the US;
  2. the company’s brands operate in the “centre of the store”. Consumers are looking for more natural products which tend to be situated at the perimeter of stores;
  3. the business has underinvested in A&M and R&D for years.
By Grandet’s reckoning, Kraft Heinz has spent 2% of sales on advertising and marketing and 1% on research and development, when the FMCG sector averages are around 5% and 3% respectively.

Consequently, it has lost market share in seven out of eight market segments, he told Bloomberg TV.

Last week, Kraft Heinz executives were putting a brave face on a $15bn write down in the value of its brands. “It reflected revised margin expectations,” explained CFO David Knopf, “and this was for really 3 businesses of ours”: Kraft cheese, Oscar Meyer cold cuts and the Canada retail business.

CEO Bernard Hees claimed in an earnings call, “Our consumption turnaround in the US has been driven by brand-building initiatives across the portfolio, not just a few categories”.

Observers were unconvinced, however, given that the group is part-owned by Brazilian private equity business 3G Capital, whose business model is centred on slashing costs.

“The essential problem facing Kraft Heinz is that it stopped investing in its brands at a time when consumer tastes and behaviors are shifting, and the competitive environment is intensifying,” said agency search consultant Avi Dan in Forbes.

“Brands are more important than ever,” he argued, thanks to e-commerce and a growing middle class in emerging markets, where Kraft Heinz has relatively little presence compared to competitors like Nestlé or Danone.

“These consumers buy brands, not commoditized products,” Dan pointed out. “They buy premium brands. And branding is essential to differentiate in a world of parity and in order to create brand preference.”

Sourced from Bloomberg TV, Seeking Alpha, Forbes; additional content by WARC staff