A year ago March I wrote in Forbes that Kraft Heinz wasn’t cutting the mustard after focusing on cost cutting and having to take write-downs on its Kraft and Oscar Mayer brands to the tune of $15.4 billion. Now the company has sold off its natural cheese business and pledged to spend more on marketing and R&D. Can the company change its cost-centric culture to an innovation one?
Just last week the company’s CEO, Miguel Patricio, unveiled his going forward business plan to investor analysts. Several major changes were noted including paring down the number of product lines from fifty-five to six occasion-oriented platforms:
- Taste Elevation
- Easy Meals Made Better
- Real Food Snacking
- Fast Fresh meals
- Easy Indulgent Desserts
- Flavorful Hydration
Patricio also highlighted that marketing would be increased by 30% over the next 5 years and that product development would be geared toward 60% innovation and 40% renovation.
On the surface, the company is making some welcomed strategic, focused changes. Kraft Heinz stock was upgraded twice. after the company’s investor day conference. Analysts seem pleased that the company would be reducing the number of SKUs (stock keeping units), generating $2 billion in cost savings over the next 5 years and making improvements to its cash flow.
While CEO Patricio appears to be taking necessary steps to turn his aircraft carrier around, his challenge won’t be easy. Fundamental changes need to be made to the organization’s culture along with its operating philosophy. The company was founded by the combination of two formidable but docile food companies with an imposed cost reduction regimen. This cut into the combined company’s remaining muscle and its performance subsequently languished.
A concrete signal that real change might be in the offing has been the hiring of a seasoned executive from Unilever, Miriam Ueberall, to head up the company’s international R&D group. Ueberall’s presence would hopefully moderate the company’s emphasis on operating efficiencies and give innovation a bigger seat at the table. But innovating, especially to make products that are more on trend with consumer’s desires for healthier and sustainable versions, will be a daunting test for a company dependent on brand names such as Oscar Mayer, Lunchables and Kraft Macaroni & Cheese.
There are 3 ways that Kraft Heinz can come out of its somnolence and return to its rightful stature among packaged foods companies:
- Adopt a R&D first mindset. As reported in a Hudson Institute white paper, R&D is missing in action for the food industry in general and has dampened that sector’s ability to innovate. Kraft Heinz spent a paltry 0.4% of revenues on R&D in 2019, well below its peers’ average of 1.4%, and needs to at least triple that amount to have any meaningful impact. A significant upgrade in spending and R&D expertise is necessary to get to the next level. The Cult of Cost Cutting has truncated the company’s growth potential and the 30% planned increase in marketing spend, while welcome, won’t do much to stimulate growth if it is allocated to yesterday’s products.
- Aggressively push better-for-you offerings. While familiar comfort foods have thrived during the coronavirus outbreak (and Kraft Heinz is strong here), the company must be poised to capture share of the growing better-for-you market. This is an area where the company is weak. Efforts to boost ‘positive nutrition’ should be accelerated so that the company does not fall further behind. Healthier snacking is one way to leverage its existing brand platforms for growth. And it can learn a lesson from its former sibling, Mondelez, whose CEO Dirk Van de Put just announced will be looking to acquire brands that offer healthier snacks.
- Make social impact and own it. Kraft Heinz’ annual Environmental Social Governance (ESG) progress report looks similar to most CPG companies. However, one of the company’s key stated values stands out: “We own it.” There is an opportunity for the company to build on this promise as many of Kraft Heinz’ products like Lunchables and Kraft Macaroni & Cheese are for consumption by children. They are in a position to ‘own’ child nutrition and serve as the beacon for what healthy products should be for children of all ages. This means that they should stand up and make a public, tangible commitment to set the standard for what nutrition looks like in kids’ products.
Kraft Heinz looks poised to change. Its CEO has laid out an aggressive new game plan. The question remains: Who will win – the cost cutters or the innovators?
Read in Forbes