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Kraft Heinz Idea Proposal (KHC)

Kraft Heinz Idea Proposal (KHC)
 

Can a new management team and fresh approach pull Kraft Heinz out of a two-year funk?

Report Available: June 20, 2019

 

Blueshift’s initial research found KHC grappling with a host of problems, including consumer trends away from packaged foods, slow growth, and internal accounting issues. The cost-cutting playbook that helped 3G Capital – KHC’s private equity owner – engineer turnarounds in the fast food and beverage industries has not worked. The company is now turning to a new CEO with a marketing, rather than private equity finance, background, and is rumored to be looking at divesting some underperforming businesses.

 

Observations

  1. KHC’s shares are down 70% over the past two years as the packaged food giant has struggled to adapt to changing consumer preferences and had one misstep after another. Its stock fell 30% in a single day in February after the company cut its dividend, took a $15 billion write down on assets including some of its best-known brands, and offered disappointing guidance because of weak revenue growth. In May, executives said they were restating three years of financial reports because of irregularities in the way its procurement division was recognizing revenue from supplier contracts. KHC has still not filed its Q1 earnings report or its 2018 annual report.
  2. KHC was formed in 2015 through the $45 million merger of Kraft Foods with H.J. Heinz, which was owned by Brazilian private equity firm 3G Capital and Warren Buffett’s BRK-A. Since then, the combined company has scuffled as consumers have increasingly opted for fresh foods and healthier brands. KHC’s response has been to slash prices to buoy its top-line growth, but margins have cratered. Some observers have criticized 3G Capital’s management team for an extreme focus on cost-cutting while failing to invest in marketing for its iconic brands, like Oscar Mayer and Kraft.
  3. 3G’s playbook of cost cutting, zero-based budgeting, management incentives and aggressive acquisitions has worked in the past, most notably with its turnaround of QSR’s Burger King. The firm also orchestrated the 2008 mega-merger of Anheuser-Busch with InBev to create BUD. But its formula has not worked with KHC. The company has announced that its CEO – a 3G Capital partner – will step down at the end of June. Its chief marketing officer and its head of strategic projects also have announced their departures. KHC’s board has tapped BUD’s global CMO to become its new leader, giving some investors hope that the company will re-focus on brand building instead of just cutting costs.
  4. KHC, which is mired in debt, has been rumored to be looking at selling off several divisions, including its Plasmon baby food unit, Ore-Ida frozen potato business, and Maxwell House coffee brand. The sales could help free some cash for KHC to make further acquisitions in fresh and healthy foods, following the recent small purchases of a maker of paleo-friendly foods and an organic coffee producer. GIS, which has faced many of the same challenges as KHC, has responded by hiking prices rather than cutting them, divesting weaker brands, and expanding into the premium pet food market. Soup-maker CPB also has been selling off parts to reduce debt.

 

What steps will KHC’s new management take to turn around the company? How significantly will its strategy differ from what has worked for 3G Capital in the past? Are significant sales and acquisitions likely? Will such juggling of businesses help? To answer these and other questions, Blueshift will gather data and issue a market research report from independent sources in the following areas: Former 3G Capital executives involved in the management of QSR and BUD, QSR franchisees, BUD distributors, KHC food distributors, and Industry specialists.

 

Companies: The Kraft Heinz Co. (KHC), Anheuser-Busch InBev SA/NV (BUD), Berkshire Hathaway Inc. (BRK-A), Campbell Soup Co. (CPB), General Mills Inc. (GIS), Restaurant Brands International Inc. (QSR)

 

Research Begins: June 3, 2019

 

 

To see other ideas Blueshift Research is currently working on, please click here.

 

Blueshift Research’s sister company, Intro-act, is launching its Intro-act Scorecard, the C-suite’s standard, ongoing measure of corporate investor engagement.

 

The Scorecard optimizes the ROI on corporate access by measuring: Concentration, Directionality, Breadth, Impact, Depth, and Duration