Oscar Mayer. Velveeta. Capri Sun. Kraft-Heinz CEO Miguel Patricio admits: Some of the company’s iconic products are “a bit dusty”.
“For a while we apologized for the brands we had,” Patricio told CNN Business. “We got sidetracked because we believed the future was about bringing new small brands, niche brands, to market.”
Recently “we stopped and said let’s go back” to basics, Patricio said. “Let’s be proud of our brands. Because they are incredible.”
More than half of Kraft Heinz’s business comes from just eight brands – the above three, plus Kraft Mac and Cheese, Philadelphia Cream Cheese, Heinz, Lunchables and Ore-Ida. They may not seem glamorous, but they’re exactly the brands the company is banking on in its years-long effort to transform the world’s fifth-largest food and beverage company.
Processed foods “is where the industry makes its money,” said Alexia Howard, Bernstein’s senior analyst for US food. “This traditionally works for packaged foods.”
So Kraft Heinz revamped its portfolio to slim down its healthier nuts and cheese business and focus on the processed icons that have been front and center in flashy, even goofy, marketing campaigns that have garnered social media attention will. (Think of the eight-foot-long Velveeta box that’s surfaced in New York’s Central Park.) But that strategy isn’t without risk, especially as consumers gravitate towards healthier alternatives.
The stakes are high for Kraft Heinz, who relies on Patricio for his comeback.
Kraft and Heinz joined forces in 2015, a deal orchestrated by Heinz’s then-owners, Warren Buffet’s Berkshire Hathaway, and investment firm 3G Capital. Initially, investors were optimistic, buoyed by 3G’s track record of using mergers to create powerful conglomerates like Restaurant Brands International (QSR), owner of Burger King, and Tim Hortons. But in this case, the winning formula fell flat. After a few years, the company quickly began to lose value.
Critics said an extreme cost-cutting strategy is stifling innovation. And in 2019, the company announced that the Securities and Exchange Commission was investigating its accounting practices. It wrote down the value of its Kraft and Oscar Mayer brands by $15 billion, posted a loss of $12.6 billion for the fourth quarter of 2018, and had to revise previous financial statements and later pay millions of dollars in a settlement.
Even the venerable Harvard Business Review intervened with harsh criticism. “While investors starved for growth, 3G could not change Kraft Heinz’s legacy brands fast enough to meet consumer demand for healthier, fresher, and in some cases cheaper private label products,” reads a 2019 article in the magazine . “As Jell-O, Kool-Aid and Velveeta were stacked on the shelves, the tectonic plates of the large boxes of groceries shifted under Kraft Heinz’s feet, and they couldn’t adjust fast enough.”
Enter a new administration.
In 2019, when the company was in crisis, Patricio joined Kraft Heinz from Anheuser Busch InBev (BUDFF). Since 3G Capital had also managed AB InBev’s huge merger in 2008, that association set off alarm bells for some. “Everyone was like, ‘Oh god, is this really going to work?'” Howard said.
“He had a monumental task when he first walked in,” she noted. The company’s shares had fallen sharply, sales were faltering, and investor confidence was low.
Today, Kraft Heinz shares are worth about $37 a share, an improvement from 2020 lows of about $22, but a far cry from their 2017 peak of nearly $100 a share. In the third For the quarter of this year, net sales rose to $6.5 billion, a 2.9% increase over the prior year.
“Three years ago our company was at the bottom,” Patricio said during a Bernstein conference in June. “Today we feel like a good company.”
But that’s not enough. “We believe we can be great. And to be great, it’s a whole different game,” he said.
Patricio has streamlined operations, invested in supply chain improvements and increased advertising. He’s also made some potentially risky changes in the company’s portfolio.
In order to focus on the core categories, Patricio started downsizing departments.
In 2020, Kraft Heinz announced it was divesting its natural cheese business. The following year, Planters said the same, saying goodbye to the legendary Mr. Peanut.
This move may seem like a headscratcher, as natural nuts and cheese are more easily positioned as healthy foods than processed meats and cheeses. But they are also difficult to distinguish from the competition.
Natural cheese and nuts didn’t fit “our strategy going forward,” Patricio told CNN. “It’s not… where the growth would come from.”
Those two categories are particularly vulnerable to private label or private label, he said, and experts agree. Buyers are “very price conscious” when it comes to these items, said Daniel Hooker, an associate professor of applied economics at Cornell University with expertise in food industry management.
And competition is particularly fierce right now, with consumers increasingly turning to private label as food prices soar. Fluctuations in ingredient prices can drive costs down, especially in these categories.
To sell Those brands “helped us tremendously,” Patricio said.
Kraft Heinz’s current portfolio will likely face less competition from generic brands, Hooker noted. Heinz Tomato Ketchup is by far the leading brand in that category, and “there’s really no private label equivalent of Capri Sun,” he noted.
“The best way to compete with private label is with very strong brands,” said Patricio. “They really play a role in the hearts of consumers. So we have more loyalty.”
Because of this, Kraft Heinz has focused on promoting its legacy brands — and doing so with sometimes outrageous marketing. In Patricio’s words, “We need to be creative and get consumers talking about these brands.”
In the case of Velveeta Kraft Heinz worked with a steakhouse chain to sell Velveeta martinis and created a Velveeta nail polish, in addition to tweaking the processed cheese brand’s logo.
Other Kraft Heinz brands have also run attention-grabbing marketing campaigns. Over the summer, Oscar Mayer introduced the “cold dog,” a popsicle that tastes like a hot dog. The item was sold at Popbar locations in a handful of cities for a limited time. Kraft Real Mayo has partnered with Juicy Couture to create tracksuits. “Smooth” is written on the back of the pants.
Efforts like these increase brand awareness, help generate online buzz, and capture media attention. Kraft Heinz’s brands are now present on gaming platforms like Roblox, in addition to social media channels and other platforms. Discussing the company’s third-quarter results, Patricio noted that six of the company’s campaigns have each generated over a billion earned impressions this year, referring to the views generated through media coverage of the promotions .
In a rapidly evolving media landscape, it takes “a lot more work and people to reach consumers,” he says said CNN.
But clever promotions may not be enough to convince consumers to choose Kraft Heinz’s highly processed products.
One way to reach health-conscious consumers without overhauling core brands is to build partnerships with outside companies. Recently, Kraft Heinz has started working with NotCo, which makes plant-based dairy and protein. Taking over a company would be expensive, Patricio noted, so a partnership was the way to go.
Patricio appears to be focused on partnerships, Howard said. For him, “they may be the way to capitalize on some of these bigger, more disruptive changes that are going to hit the industry” in the years to come.
Kraft Heinz said in October the joint venture’s first product, American plant-based cheese slices, had been launched in a test market.
The company has also made major changes to some products to make them healthier: A new commercial, lamenting the ailments of “growing up,” is promoting Heinz’s ketchup with no added sugar. During the summer, the company introduced a reduced-sugar formula for Capri Sun. Kraft Mac and Cheese is made with no artificial flavors, colors, or preservatives and is available in gluten-free and whole grain varieties.
“It’s definitely a global trend to have healthier foods and we need to be a part of that,” said Patricio. “We have to adapt … and we have.”
However, even with ingredient and marketing changes, there is a limit to how many adjustments the company can make without fundamentally changing the products.
“Some of these brands can only make so much healthier before they stop being the products they are,” said Cornell’s Hooker. “You get to a point where you can’t do much anymore.”
Things seem to be working out for now, noted Howard, the food analyst. “Three years later … he’s actually moving things in the right direction.”