Dive Brief:
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The Kraft Heinz Company's net sales nudged up 0.7% in the third quarter to $6.31 billion compared to the same quarter last year, according to its latest earnings report released Wednesday evening. However, U.S. sales dropped 0.4% in the current quarter to $4.38 billion. The company noted that U.S. pricing increased 0.4 percentage points, primarily reflecting higher prices in cheese and desserts that were partially offset by promotions compared to a year ago.
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Net income attributable to common shareholders was up 12.1% for the quarter to $944 million, while adjusted EBITDA increased 6.7% on a constant currency basis. Diluted earnings per share rose to 77 cents, while the adjusted EPS was 83 cents, same as 2016.
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"There's no question that the retail environment, particularly in the United States, will remain both dynamic and challenging. However, the investments we've been making in our brands, our innovation pipeline, our people and our capabilities make us well-positioned to continue delivering sustainable, profitable growth in both the near and long term," Kraft Heinz CEO Bernardo Hees said in a statement.
Dive Insight:
Kraft Heinz has struggled for some time to boost U.S. sales of its brands — which include Heinz Ketchup, Kraft Macaroni and Cheese and Oscar Mayer hot dogs. The food giant has had to adjust, reformulate and reposition along the way. And while many of the company's food items remain very popular — brands like Jell-O, Kool-Aid, Ore-Ida, CapriSun and Cracker Barrel are among the company's top sellers — consumers continue to seek out clean label options, which they perceive as healthier, and turn away from processed foods.
Despite these challenges, Kraft Heinz's leadership expressed optimism that the food giant, headquartered in both Chicago and Pittsburgh, can adapt quickly to the changing retail landscape and stay relevant in all channels, as CEO Bernardo Hees put it on a Nov. 1 earnings call with analysts.
"The lesson is that the ability to adapt quickly is critical," Hees said during the earnings call, according to a transcript. "For some time now, we have been talking about building out in-house capability in innovation and renovation, marketing, category management, and go-to-market capabilities for better data-driven insights and faster decision-making, and you are beginning to see the benefits coming through in the marketplace."
Georges El-Zoghbi, who has been chief operating officer of Kraft Heinz's U.S. business and is now transitioning to a strategic adviser role, noted on the earnings call that the company's challenges have been concentrated in the same few categories for some time. He said, "We understand what needs to be fixed." The largest challenges are in cold cuts due to delays in new equipment startup, natural cheese because of increasing price gaps with private label, and ongoing weakness in the salad dressing business. But on a positive note, the company's U.S. sales have improved with growth in the frozen business, Kraft American cheese slices, Heinz Ketchup, Lunchables, P3 protein snacks, and the newly renovated Oscar Mayer hot dogs.
Kraft Heinz's e-commerce sales are up more than 70% this year, El-Zoghbi said on the earnings call. He said the company is working on its e-commerce strategy, but still wants to work as closely with retail partners. Since more consumers are shopping through store pick-up or delivery programs, the company is trying to be more agile with what it offers to consumers who take advantage of those methods. The manufacturer is also working to build its capability to address the way shoppers behave when they are in front of screens, using mobile phones, or shopping with a voice-activated digital assistant — since all are different than in a traditional grocery store.
Hees noted that the company is still scouting for acquisitions following its failed $143 billion takeover bid of Unilever, which was withdrawn in February. Speculation is that private equity firm 3G Capital, which controls Kraft Heinz — along with billionaire investor Warren Buffett — may want to look outside the CPG sector for its next target.
On the earnings call, executives said little about potential moves in M&A. In response to an analyst's question about utilizing capital allocation, Hees said that the company's framework regarding M&A strategy has not changed. Regardless of the fact that many food and beverage stocks have been less expensive lately, Kraft Heinz will not make moves that are outside of this larger plan.
"First, we do like brands that can travel, not only through geographies but to all channels. That's an important consideration for us," Hees said in the transcript. "Second, we do like good categories and business that we believe can be sustainable for the long term. And third, the right valuation, the right value creation for the long-term is critical."
Kraft Heinz's executives appear to be aware of what it will take to move forward and reinvigorate sales, particularly in the U.S. The question is whether they will be able to move nimbly and quickly enough to make the changes, take advantage of M&A opportunities when they arise, and reclaim traditional market share for the company's products — and do all those things in fairly short order.