Kraft-Heinz shares dropped by 18% from $42.3 to $34.6 on Friday, 22nd Feb. Since then it has slid further to $29.4 so far. This is a staggering 66% drop in value from $88 exactly 2 years back. What went wrong?
The stock crashed after the company reported a $10 bn loss for year 2018 on 21st Feb (they made a $10 bn profit in 2017). Apart from this they also announced a slew of bad news on Feb 21. The company reduced the dividend from $0.625 to $0.40 (-36%), announced a non-recurring goodwill impairment charge for the Kraft and Oscar Mayer brand of $15.4 bn and probably most damaging of all of them, announced a SEC probe into the accounting practices of the company.
Kraft-Heinz was created by merging Kraft Foods and Heinz. Heinz owners Berkshire Hathaway and 3G capital arranged the merger. After the merger, Kraft-Heinz became the fifth largest food and beverage company in the world.
After the shares tanking, there was a lot of talk about whether the strategy of 3G capital of improving efficiency at the company failed. But I have actually not seen any evidence that points to why improving efficiency would have made the brand lose value. The points made in multiple news reports and analysis were very generic, saying something in the line of – “the cost cutting strategy does not work for growth” etc. 3G’s strategy of improving efficiency provided solid multi billion dollar cost savings for the company, and while it did fail on growing, it is a better thing to not grow at a lower cost base vs not growing with also a higher cost base.
It is true that 3G controls the management of the company and they either did not focus on growth or the ideas they have put in place failed or they will take a longer time to show results. But I actually quite like the idea of continuous focus on efficiency and optimization of costs. It leads to having more money at hand w/o raising anything from the market (and paying interest for it) that you can reinvest in your business to grow. Efficiency and growth are not mutually exclusive, a business just has to focus on both to be successful in the long run.
What’s next for Kraft-Heinz?
- The company should reinvest the money from efficiency improvements and a greater portion of the spending into focusing on growing segments, which seem to be shifting towards more organic food. They need to build a brand name that stands for quality.
- An expansion of the retailers bargaining powers has led to shrinking margins for the brands. This can’t be prevented or wished away. The reality is, brands have to cut costs and improve efficiency for mass produced undifferentiated items like processed meat.