Possible Kraft Heinz Breakup: A Buffett Investment Failure, Thanks to Healthier Tastes Among the Better Off and Need for Better Bargains for the Rest

Even though, on one level, the probable demerger of Kraft and Heinz, which became Kraft Heinz in 2015, is just another story of a a corporate combination that did not work out as planned, on another, it’s an illustration of how neoliberalism and class warfare are playing out in America.

As many readers know, among those that can afford these habits, distrust of food supplies has become widespread. And that worry is far from unreasonable. American food and water have hormones, antibiotics, pesticides, other industrial chemicals, and microplastics in them. As a result, more consumers have been opting for “organic” products, even those with comparatively weak USDA certifications. “Natural” is widely and often misleadingly blazoned on food packages and means just about bupkis in US food regulation.¹ Among the very affluent, the search for cleaner food included going to farms to pick out your steak futures on the hoof, and even choose the grass they are fed pre-slaughter.

As we’ll discuss soon, it’s not as if food giants like Kraft and Heinz are readily able to re-position themselves as terribly healthy. For instance:

During the economic crisis of the 70s, Kraft advertised their solution to feed families: Processed Mac & Cheese

While it’s cheap, it offers almost nothing when it comes to Nutrition

Here is Your Guide To Eating Well For Less: pic.twitter.com/qJnFQrYtDB

— 𝗥𝗢𝗖𝗞𝗬 (@TheWarKitchen) June 16, 2022

And for budget-stressed consumers, as we mentioned on our post on the Del Monte bankruptcy, store brands have eaten away at the market for big processed food brands. Bloomberg elaborated in 2024 in Shoppers Are Ditching Classic Brands They Once Loved:

A burst of color is washing over Kraft’s once dominant royal blue in the macaroni and cheese aisle.

Among new arrivals is Goodles, a protein-packed option with eye-catching neon branding that costs more than twice as much as a box of Kraft Mac & Cheese. At a Target in Chicago, Goodles’ Shella Good and Bling Bling Bac’n varieties are picked over; larger boxes with squeezy cheese sauce are completely sold out. Adjacent to the Kraft packages are two rows of Target’s low-cost Market Pantry brand: At 65 cents a pack, the red boxes cost about a third of the price as the Kraft perched just a few inches away.

Mid-priced items like Kraft are increasingly losing shelf space and customers to premium and low-cost products. Sales of Kraft Heinz Co.’s roughly billion-dollar brand slumped 6% in the year through July 13, according to NIQ data viewed by Bloomberg. Velveeta, also owned by Kraft, and Stouffer’s boxed macaroni, a Nestle SA brand, saw declines, too. Meanwhile, store-brand boxed macaronis saw a 6% bump in that time; Goodles doubled its sales….

These brand classics were once reliable powerhouses of growth and revenue for companies that make up a more than $1.5 trillion consumer goods market in the US alone. Catering to a burgeoning middle class, products like Kraft Mac & Cheese, Luvs diapers and Band-Aid bandages became everyday staples in cupboards across the world…

The favored term among executives is “bifurcation,” and companies that sell anything that falls in the middle are racing to catch up…

At Kraft, the company decided to try to make its macaroni and cheese more appealing to Gen Z ….
So last November, the company launched a “Fan Flavorites” contest….In July, after getting 90,000 submissions and considering 27 flavors, Kraft landed on two new ones: Jalapeno and ranch….

The company says sales of the new flavors are trending in the right direction and that Kraft Mac & Cheese remains the number one brand in the category. Still, in October, Kraft reported its 11th straight quarter of volume declines and told investors its full-year earnings and sales will come in on the low end of its prior forecasts.

And note this key admission, well into the article:

Rebuilding a once-loyal customer base is, in part, a problem of consumer goods companies’ own making. Over the last few years of elevated inflation, many raised prices on middle-market brands more than on premium or lower cost items to maintain healthy margins, said Chris Costagli, food insights lead for researcher NIQ in North America. National brands hiked prices by an average 6.6% last year, compared to 4.6% for private labels, according to data from Circana….

In recent years, some of the biggest US retailers, including Amazon.com Inc., Walmart Inc. and Target have worked to improve the quality of their low-cost store brands…

“There’s not the need that there has been in the past to have a trade off between quality and price,” Walmart’s Chief Financial Officer John David Rainey, said in an interview..

So greedflation played a role.

Let’s return to the finance part and how that relates to the story of shifting consumer tastes. I have to confess I did not track down accounts of the much-ballyhooed 2015 Kraft-Heinz merger, since the puffery puts a lot of noise into the signal. But yours truly is generally skeptical of consolidation plays, particularly between big companies. Synergies and savings often fall short of expectations.

Even as of year end 2015, as in less than six months after closing, Institutional Investor weighed in with a vote of no confidence. From Investors Remain Lukewarm About Kraft-Heinz Merger:

If you like ketchup, you’ll love Jell-O and American cheese. On that assumption, Warren Buffett and Brazilian billionaire Jorge Paulo Lemann shelled out $5 billion each to combine their privately owned condiments maker, H.J. Heinz Holding Corp., with processed-foods giant Kraft Foods Group….

Kraft, based outside Chicago and best known for venerable convenience foods like Miracle Whip and Kool-Aid, is hardly a growth company in the era of kale and whole grains. But that is not the point for 3G, which has consolidated much of the world’s beer industry into Anheuser-Busch InBev — soon to include even more with an agreed takeover of top rival SABMiller — and acquired fast-food empire Burger King since storming out of South America in 2004. Like those companies and Pittsburgh-headquartered Heinz, Kraft is a household name whose operations have grown flabby, sources close to the deal say….

Investors gave a lukewarm greeting to Kraft Heinz’s shares, which started trading in July at $72.96. They have more or less broken even since then, a similar performance to No. 1 U.S. food producer PepsiCo and the broader S&P 500 index. If 3G can deliver on its promise to cut $1.5 billion in costs by 2017, that may change.

The stunning share price decline, which started in 2017, indicates that pledge was not met.

First from the Wall Street Journal, which broke the story:

Kraft Heinz is preparing to break itself up, a decade after an infamous merger of two of the biggest names in packaged foods that was orchestrated by Warren Buffett and Brazilian private-equity firm 3G Capital Partners.

The company is planning to spin off a large chunk of its grocery business, including many Kraft products, into a new entity that could be valued at as much as $20 billion on its own, according to people familiar with the matter. That would leave a company housing goods such as sauces and spreads like Heinz’s namesake ketchup and Dijon mustard brand Grey Poupon.

The company has given priority to its faster-growing offerings like hot sauces, dressings and condiments, which are more in line with consumer preferences than processed lunch meats and cheeses. It hopes the two separate units would be in total worth more than Kraft Heinz’s roughly $31 billion market value.

Let’s pause here. I haven’t seen other accounts consider this issue, but notice the focus on “hot sauces, dressings and condiments” as the new stars. How often do people besides professional cooks need to buy them? The answer is “not very” compared to, say, Oscar Meyer bacon (which Journal readers praised as still top quality), Kraft Singles, or Maxwell House Coffee?

The money chart:

That’s a lot of value destruction! Consider the opportunity cost. The S&P 500 closed at 2076.78 on the deal closing date of July 2, 2015. Its value as af end of trading last Friday was 6821.75. Even sticking with a money market fund would have produced better results.

FoodBusinessNews was much less charitable in its write-up of the proposed split:

In what would mark the end of a notoriously unsuccessful business combination, The Kraft Heinz Co. is considering spinning off a large part of the grocery foods business acquired a decade ago with the merger of The H.J. Heinz Co. and Kraft Foods….

While the Kraft Heinz combination appeared to go well briefly, sales and profits began flagging within a couple of years. Numerous efforts since then have failed to reignite growth.

One can wonder whether the 2015 merger played a direct role in the flagging performance of the combined entity. Mergers are distracting and disruptive to line managers. Mergers fixated on costs regularly produce inattentiveness to competitive developments. Did that result in less bandwidth (and budget) to respond to changing consumer appetites

As we’ve sometimes said, quoting a Japanese executive, marrying two sick dogs dors not produce one healthy cat. But too often, as here, that’s the premise of a deal.

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¹From Treehugger:

Some 72% of American consumers say that product packaging influences their purchase decisions—a statistic not lost on food manufacturers. This applies to not just the aesthetic design of packaging but what the labels say as well….

A new report from the USDA Economic Research Service takes a look at the prevalence of the “natural” claim on food packaging—and it’s eye-opening….

“[F]ood suppliers can use the label that claims the food is “natural” at a relatively low cost because regulatory agencies treat the claim as meaning nothing artificial was added and the product was minimally processed,” the authors explain.

Natural claims like “all natural,” “100% natural,” and “made with natural ingredients” are not defined in USDA, Food Safety and Inspection Service (FSIS) regulations. The USDA, FSIS must approve these special claims prior to food being sold, but the only standard they must meet is that artificial ingredients or colors cannot be added during processing, and the processing method cannot fundamentally alter the product.

While that is certainly valuable information to know, the problem is in consumers’ perception of what “natural” means.

“Neither the FDA’s nor USDA’s policy decisions address the health benefits or farm production methods consumers might attribute to natural-labeled foods,” write the authors. “The definitions do not address human health, the use of synthetic pesticides, genetically modified organisms, hormones, or antibiotics in crop and livestock production.”

What Most Consumers Get Wrong About “Natural”

Study after study on the topic reveals that people think a product labeled as “natural” delivers benefits far beyond what it does, with most consumers mistakenly assigning health and environmental stewardship attributes to natural-labeled food. The report cites the following, among others:

• In a 2017 study, respondents incorrectly believed that natural-labeled foods had 18 percent fewer calories across a variety of foods. 
• In a 2010 study, respondents believed that meat products labeled as “all natural” meant no antibiotics or hormones were used to raise the animals. Some also believed the label meant animals were raised free range.
• In a 2022 survey of 86 percent of respondents who purchased at least one natural-labeled product in the past 12 months, 89 percent of those reported doing so because they believed the label indicated better-than-standard animal welfare. In addition, 78 percent paid more for the label because the consumers believed the label indicated higher environmental stewardship production practices.
• Also from the 2022 study, 59 percent of consumers who reported purchasing animal welfare-certified products also reported purchasing natural-labeled foods because they believed it represented improved animal welfare standards.

Other studies showed that consumers equated the attributes of USDA Organic products with those of natural-labeled products and were willing to pay more for them. Another found consumers were willing to pay 20 percent more, on average, for natural-labeled products.