Kraft Heinz hopes to return to a position of leadership and growth by cutting $2 billion in costs through efficiency upgrades by 2024, reinvesting in its brands and using a new platform-based approach to change the way the company looks at its products and the spaces in which they compete, leaders said Tuesday morning at a virtual investor day presentation.
CEO Miguel Patricio used a football analogy to explain how the strategy differs from the one Kraft Heinz had used in past years.
"Kraft Heinz has played defense for far too long," Patricio said. "...We are now moving to offense. We are leading instead of following, and we are making decisions to win big, not just to make small safe plays. I'm excited about the plan. We are going to deliver, and here is why: Our new strategy is groundbreaking. We are changing the game."
Patricio has been talking about the comprehensive plan he hoped to bring to Kraft Heinz since he became CEO last July. He took the helm of the mega-company at a time when new leadership and a new outlook were desperately needed. Last February, Kraft Heinz shocked the markets when it reported a net loss of $12.6 billion and cut its dividends more than 36%.
Patricio has spent his first 15 months on the job examining the company's brands, operations, relationships with employees and resonance with consumers. He's also filled vacancies in top jobs worldwide with experienced professionals — both from within Kraft Heinz's ranks and other CPG companies.
The new strategy has already been implemented throughout the company, and company officials said it is already paying dividends. Patricio said that is apparent through the way the company has been able to perform well during the coronavirus pandemic — which has driven increased grocery sales, but has also required hard work to keep ingredients coming, factories rolling and store shelves supplied.
"Our business is executing well through COVID because our transformation was already underway. And we are investing in our brands and in our future," Patricio said.
From 55 categories to 6 platforms
Sales analysis firms tend to break down their analysis of products into what they are: ketchup, cream cheese, lunch meat and marshmallows. And so for years, Kraft Heinz looked at their products the same way, considering their competition and place in the market as just single products.
Chief Growth Officer Nina Barton detailed how this came to be a problem.
"We were fighting too many small battles, diluting our efforts and slowing us down," Barton said. "This narrow focus caused us to miss the larger, more holistic consumer needs that would truly shift the business. And our size was working against us, instead of our scale working for us. By 2019, our innovation was taking longer, and yielding much smaller results than that of our competition — 50% smaller, in fact."
Consumers don't consider isolated items when they buy food anymore, Barton said, so it was time for Kraft Heinz to start working with its products using the broader viewpoint its customers have. They broke the company's brands up into six platforms: Taste Elevation — enhancing taste, flavor and texture of foods; Easy Meals Made Better — meals that are both simple to make and healthy; Real Food Snacking — snacks that are nutritious, convenient and clean label; Fast Fresh Meals — to help consumers quickly prepare fresh, easy meals; Easy Indulgent Desserts — sweet, indulgent treats and desserts; and Flavorful Hydration — drinks and mixes for both kids and adults.
Through the platform approach, Barton said, Kraft Heinz is broadening what it looks at from how it can do better in a single product category to how it can meet emerging consumer needs. She gave the example of Kraft Heinz's Canadian peanut butter business, where it has a 66% marketshare. Before this approach, Kraft Heinz tried to add to its sales by trying a host of other peanut butter flavors, including chocolate, honey and extra roasted. Each innovation only boosted sales by about 1% and did not grow the brand. Under the platform approach, Kraft Heinz asked how it could make consumers' breakfast tastier, which led to the launch of a hazelnut spread. This spread has quickly brought Kraft Heinz a 13% share of Canada's sweet spreads market, which is growth in the company's core business.
The company has then taken these six platforms and organized them by their growth potential, which indicates how much time and effort will be put into innovating, reformulating and marketing. The platforms that are under "Grow," which currently include about 50% of Kraft Heinz's global sales, include Taste Elevation, Easy Meals Made Better, and Real Food Snacking. Barton said these align with global consumer priorities and trends, with strong brands and are in areas where Kraft Heinz has the right capabilities to win. Under "Energize" — defined as areas where Kraft Heinz has strong brand positions and good opportunities through growth, especially through renovating existing products — are Fast Fresh Meals and Easy Meals Made Better. Barton said these categories represent about 30% of global sales. The platforms ranked as "Stabilize" — with smaller sales but brands that command more consumer loyalty — are Easy Indulgent Desserts and Flavorful Hydration. Barton said these platforms, representing about 20% of sales, are important to Kraft Heinz, but will receive just select innovation to help grow.
In addition to the different way Kraft Heinz will be looking at its brands, Patricio said the company plans to invest more in them. He plans a 30% increase in marketing spend as well as more attention to smart reformulation and innovation.
"Kraft Heinz has played defense for far too long. ...We are now moving to offense. We are leading instead of following, and we are making decisions to win big, not just to make small safe plays. I'm excited about the plan. We are going to deliver, and here is why: Our new strategy is groundbreaking. We are changing the game."
CEO, Kraft Heinz
With a renewed focus on the consumer and greater attention to the whole of Kraft Heinz, Barton said the company's new structure will pay off.
"We're going from an investment model that sometimes operated without rigorous prioritization to a model that's far more robust and disciplined," she said. "And we're moving from the days where we didn't fully take advantage of our impressive size to a business model that fully leverages the scale of Kraft Heinz, one of our strongest competitive advantages."
In the United States and Canada, which is Kraft Heinz's biggest market, the company has a lot to do to get back to a point of growth.
U.S. Zone President Carlos Abrams-Rivera said that as a whole, Kraft Heinz has a 97% penetration rate in these markets, meaning it's difficult to find a home that doesn't have at least one of the company's products in the refrigerator or pantry. In this region, Kraft Heinz has nearly $20 billion in organic sales, and makes about $5 billion of its earnings before interest, taxes, depreciation and amortization, Abrams-Rivera said.
In normal times, growth here has tended to be flat. But since March, when stay-at-home orders because of the coronavirus pandemic forced many consumers back into their home kitchens, Abrams-Rivera said 70% of Kraft Heinz's brands have increased household penetration in the U.S.
"And it's not just loyal customers buying our products," he said. "We're also gaining traction with new buyers, earning repeat rates that are higher than our peers over the same period. Our new buyers are younger, they have more income, they're diverse and they're from smaller households without kids — areas where we typically under index. So while the uptake in buying is partly driven by the pandemic, we are intentionally fueling this trend with sizable communication investments and media choices, and we'll continue to leverage our momentum."
But it's more than just adding more marketing and better targeted consumer messaging. Abrams-Rivera said there's an entire shift in the way Kraft Heinz is looking at innovation and products. The new platform system, he said, will help Kraft Heinz improve the way it uses its products to meet consumers' needs. It also informs how they are doing business.
New product development was once seen as Kraft Heinz's top priority, Abrams-Rivera said. Now, the focus is making what he called meaningful changes in big brands — cleaning up labels, adding healthier ingredients and taking away sugar and sodium, creating new versions of products to meet specific consumer needs, and unlocking brands' potential. About 60% of R&D time and effort will go toward new innovations, while 40% will go toward renovation, Abrams-Rivera said.
"The thinking also requires an aggressive review of the number of products we make, market and sell," Abrams-Rivera said. "We have already started his work and have so far eliminated more than 1,100 existing SKUs — roughly 20% of our business — in a few months, which helps reduce cannibalization and increases efficiency in procurement and in our operations."
Abrams-Rivera offered examples of successful innovations Kraft Heinz has brought to U.S. consumers following the platform approach, which resulted from a better look at actual consumer needs. Kraft's iconic blue box Macaroni & Cheese, which the company puts in the Easy Meals Made Better platform, has received several ingredient upgrades — including a new gluten-free formulation. But, Abrams-Rivera said, microwaveable portions of the meal were growing more quickly than the rest of the category, and consumers wanted larger portions. So Kraft Heinz created "Big Bowl" sizes of the pasta dish.
Under the Real Food Snacking platform, four in 10 consumers said they eat Lunchables as a snack, but don't finish the whole tray, Abrams-Rivera said. Kraft Heinz responded by making smaller snack-sized Lunchable trays, which meet that need and are sold for $1.
Abrams-Rivera said that this new focus on consumers and smart innovation will help growth rates change from a flat line to improvements every year.
"Our strategy in the U.S. is centered around building out our core competencies across the value chain while investing expertise and building capability," he said. "Ultimately, we drive outside growth through innovation, experimentation and disruption. [We've] literally left no stone unturned in evaluating how to best build a company of the future."