Dive Brief:
- Kraft Heinz reported net income of $8 billion for the fourth quarter of 2017, or $6.52 per share, up from $944 million, or 77 cents per share in the year-ago period, according to a company release. These results missed analyst expectations, dragged by distribution losses in Planters nuts, natural cheese and lunch meat. The spike in income came after the company received a $7 billion tax benefit related to the new U.S. tax law.
- The CPG giant saw sales rise to $6.88 billion, up from $6.86 billion last year. U.S. sales dropped 1.1% to $4.79 billion, marking the seventh straight quarter of decline for the company's biggest market, and missing analyst estimates of $4.81 billion. Losses were mitigated by gains in Lunchables, Capri Sun beverages and Kraft macaroni and cheese.
- “There's no question that our financial performance in 2017 did not reflect our progress or potential,” Kraft Heinz CEO Bernardo Hees said in the company release. “We made significant improvements in many of our businesses, and were able to accelerate some important business investments at the end of the year. This, together with benefits from the U.S. Tax Cuts and Jobs Act and additional investments in our capabilities, should help further advantage our brands and grow our business in 2018 and beyond.”
Dive Insight:
Kraft Heinz has struggled to reverse sales declines in its U.S. brands, which include category heavyweights Oscar Meyer hot dogs, Heinz ketchup and Kool-Aid beverages. And while Lunchables, Capri Sun beverages and Kraft macaroni and cheese were a bright spot for the manufacturer this quarter, their strong performance wasn't enough to turn things around.
This decline likely stems from shopper rejection of processed foods for fresh, free-from and clean label options. Earlier this week, a report linking "ultra-processed" foods such as mass-produced bread, cakes and processed meats with an increased risk of cancer circulated on Twitter and consumer media, echoing the fears of a health-conscious shoppers. Still, Kraft Heinz CEO Bernardo Hees has expressed confidence in the future of these brands, despite changing consumer sentiment. The manufacturer has already rolled out healthier versions —such as whole grain Kraft macaroni and cheese — but based on its U.S. brands' seven-quarter sales decline, it's clear further innovations need to be made.
The company will be able to invest money it gained from tax benefits under the new U.S. tax code into struggling products, which could revive growth and help reposition brands to reflect changing consumer sentiment.
“Since the HR-1 Tax Cuts and Jobs Act was signed into law, we have already taken actions and are accelerating key business initiatives,” Kraft Heinz CFO David Knopf said in the earnings release. “This includes approximately $300 million in strategic investments to build our capabilities, our people skills and our brands; more than $800 million in capital expenditures to improve quality, safety and capacity; as well as $1.3 billion to pre-fund our post-retirement benefit plans.”
These initiatives will certainly be a boon to company growth, but meaningful change for the Big Food company will likely come through M&A. After its $143 billion takeover bid for Unilever failed in January of last year, Kraft Heinz has reportedly continued to hunt for acquisition targets. Last summer, it was rumored that Kraft Heinz was looking to buy Mondelez, though famed investor Warren Buffett quickly downplayed the speculation.
Kraft Heinz's purported lack of interest in Mondelez has sparked speculation that the company may be looking to acquire a company outside of the food space. This would be an interesting move, and while there hasn't been any evidence to reflect this, the company has dipped its toe in more experimental markets as of late. Just last week, Ahold Delhaize's Peapod announced a partnership with Kraft Heinz, along with Campbell Soup and Barilla, for its new meal kit recipes.
While Kraft Heinz may not see a huge uptick in sales from Peapod's meal kits, the partnership gives the company access to a new growth channel and new consumers — the grocery delivery company reported that new buyers of its meal kits grew by 104% in 2017. At the very least, the deal will keep Kraft Heinz's brands top of mind for buyers as they assemble their kits at home. The question is whether or not the company has more deals like this one in its pipeline, and if they will be enough to recapture — and maintain — lost market share and investor momentum.