Food giant Kraft Heinz discussed in its latest quarterly results call why its innovation and sales activations led to the brand’s woes and why it’s now re-focusing on building brands and growing from the core: key lessons in sound marketing theory.
The topline: Kraft Heinz’s results come at the end of a brutal year, marked by a write-down in February and an accounting charge in August, and sales continued to slip – down 5% year on year. However, as the market had been expecting worse, a slight improvement in profits (69 cents per share) was above analysts’ pretty gloomy predictions, and the market responded with a 13% rise on the day of the announcement. It’s been a rough road, however, as Kraft Heinz’s stock price had fallen by 34% throughout 2019.
Problems began in 2015, following the $63 billion mega-merger of the two groups thanks to the belief of major stakeholders Berkshire Hathaway, the investment firm, and 3G Capital, the private equity firm, that big rewards awaited on the other side of a radical cost-cutting exercise. The new owners’ inspiration came from strategies that had worked for other big companies – admittedly, in totally different categories.
The impact of cost-cutting was, according to analysts, damaging both financially and behaviourally, diminishing the company’s ability to innovate on, or advertise, its products at a key time. Consumer taste was shifting and the competitive environment was becoming more intense just when strong brands were most necessary to the company. In February, one analyst calculated that the company had spent just 2% of sales on advertising and marketing and 1% on research and development, when the FMCG sector averages are around 5% and 3% respectively.
What happened shouldn’t have been a surprise, and yet, there are many more companies that continue to ignore these lessons. In a recent piece of research from DVJ Insights, it is clear that growing companies follow the basics; slowly or non-growing companies are hung up on cost, often leading them to fail in supporting their innovations with marketing. (For more on the study, read WARC’s in-depth report How winning brands grow, and why stagnant brands don’t.)
Speaking on last week’s earnings call, Kraft Heinz’s Miguel Patricio, appointed as chief executive this year, acknowledged that the results “remain below our potential” but was “encouraged” by recent progress.
Still, he was also willing to point out some of the failures he had witnessed in the company since starting. He called what he saw when he arrived, a “frenzy of innovation” thrown around with the hope it would somehow compensate for the decline in net sales.
“We have not been successful on that,” Patricio admitted. “We brought a lot of complexity to the system but this innovation was not translated into additional sales. It was very cannibalistic and brought much more complexity. And as a consequence, a lot of supply chain losses and lower margins.”
His idea for how the company goes forward illustrates some of the core lessons that the company had appeared to have forgotten in its recent history. While it is important for driving growth in future, “we are evaluating shifting innovation support to fewer, bigger, better initiatives, launches that promise to be more incremental to our base,” he said, adding that the company had been pursuing inorganic growth and neglecting the core.
As Les Binet, group head of effectiveness at adam&eveDDB, pointed out in a comment on the DVJ report, innovation is only worthwhile if the basics are strong: “innovation is not enough, you need to grow from the core.” There are also different levels of innovation and varying qualities these bring to the effectiveness of that brand’s marketing. Innovation gives you something to say, but it does depend on the radicalness of that innovation.
Key to innovation thinking, however, is that innovation is no replacement for brand. With high innovation brands it is important to tilt more towards brand rather than short-term sales.
Patricio, speaking to investors, echoed a similar sentiment: “we are seeing significant positive momentum where we have something to say.”
“We identified the opportunity to reallocate a substantial amount of dollars to work in 2020 as well as redirect dollars disproportionately towards support of our flagship brands,” he added. “Based on this alone, we will see a significant percentage increase in media spend and an even greater increase for the brands that are the biggest drivers of our profitability.”
The basics are basics because they work, it seems. If Kraft Heinz returns to growth, sound marketing theory can count it a victory.
Sourced from Seeking Alpha, WARC