Kraft Heinz Co reported earnings February 21st and the results were well, not great, Sales were up, but they literally cooked the books as far as compliance goes, slashed the dividend, and wrote down the value of their products.
Before I break down that long sentence I’ll give a little background. Heinz was bought out by Warren Buffett and his Berkshire Hathaway Investment arm back in 2013 for 23 billion. He partnered with a Brazilian PE Firm 3G Capital and gave them a mandate to cut expenses. 3G obliged and what used to be a great place to work and make a living turned into hell on wheels at Heinz.
Manufacturing plants were closed, employees could no longer have free products or a mini-fridge at their workstation. To make a copy, employee’s had to ask permission from their supervisor; plus, they couldn’t print in color and were required to print double sided. Essentially employees were made to feel like they were back in school, under a ruthless teacher.
Every expense was questioned and if unjustified, it was denied. Executives installed by Buffett and 3G used to scold employees saying there is no work/family balance, you should devote all your time to Heinz. Layoffs were plentiful and executives were never afraid to swing the axe. After about 2 years of doing this, and out of ideas they bought Kraft. Buffett & friends, combined the companies and well…lather, rinse, repeat the same process. The combined company now loaded with debt, was aggressively trying to dig its way out…then the problems occurred.
Kraft Heinz fell victim to a corporate profit mentality. They are run by people who have zero experience in the consumer packaged goods field and the results show it. Jim Cramer of CNBC said it best, “Look at these products they make. They are tired and old and not healthy for you. Don’t believe me, look at the ingredients, could win a lot of scrabble games with some of those words!”
In today’s health conscious society people are reaching for products that are “organic, no antibiotics ever, and even buying the farm to fork lie.” Sadly this company offers nothing as far as those choices go. That being said, the advertising and development budget was essentially cut to zero, so I guess it’s a race to see how many bottles of Heinz Ketchup one can sell each quarter?
Kraft Heinz also competes in way to many segments where competition is stiff. Just a couple examples: look at the salad dressing market, it’s basically a race to the bottom, look at the competition and there is no more pricing power. The point I’m making is the store brand is selling for $1, it’s very hard to sell your product for $3. While the brand may be worth something, once you taste the cheaper brand and you see there is not much quality difference it’s not hard to make a switch. As a result Kraft Heinz was forced to lower their price to $1, and the margin on products sold for a dollar cannot be very high, likely you see a couple pennies in profit. The company has lost its way.
On to the disaster quarter. They cut the dividend 40%! Keep in mind, while people like Buffett get rich off this money, many retirees depend on it to subsidize their lifestyle. In addition Kraft Heinz was viewed as a stable company, not flashy, but stable in a sense they weren’t going broke like Sears. Also, heck everyone has at least 1 Kraft or Heinz product in their house. Kraft Heinz also wrote down the value of Oscar Meyer and Kraft by 15 billion, essentially saying the brands they paid for aren’t worth near what they thought they were. So in essence they loaded a company with unsustainable debt and now the brands aren’t even worth much anymore. Even more concerning was the report that they are being investigated by the SEC for accounting irregularities. I will say one thing, I don’t want the SEC investigating me for anything because they are not just a regulator agency; they can literally bring your company to their knees. To add insult to injury, the NASDAQ stock exchange has filed a report that the company is not in compliance with their rules after failing to file a 10-K report at the end of the calendar year. Ouch. Employee morale no longer exists, as evidenced by a 20 percent employee turnover rate annually. Also they have explored the idea of selling brands to try to pay down debt.
How to fix the company
If I were in charge, I would ask Buffett to buy the company outright. I would urge him to take us private and then we could work on the accounting and legal issues without being under intense scrutiny. There would be no dividend being paid out so that money could be put toward debt extinguishment. I would ramp up innovation and advertising dollars because it has become clear the brand power is no longer selling itself. Kraft Heinz has exactly two new products they have launched in the past decade, both were successes; Devour frozen food, and Just Crack an Egg by Ore Ida. This shows the company still has it when it comes to innovation. I would raise employee pay and while this may take a short term hit on profitability, I want employees productive and not looking to jump to a competitor. 20% employee turnover is something only a jerk would be proud of. Also there would be a moratorium on closing plants. Employees are the life blood of the company. I would create an incentive plan to bonus all workers based on production and quarterly sales goals.
As far as selling products for a dollar, that is gone. Advertising should be poured in to make our products worthy of customers trading up for value as opposed to buying it for a dollar because it’s on sale. When it comes to Oscar Meyer meats chock full of bad ingredients, the damage is done, I would create a different brand, with clean, simple ingredients and market it and price it as such. Regarding the current product mix, I would eliminate/sell several. Look at the barbecue sauce aisle alone; Kraft BBQ, Bull’s Eye, Heinz BBQ, and Jack Daniels line are all sold by the same company! In essence you are competing with yourself! Holy smokes, even the most uneducated will tell you they will reach for the cheapest one. Look at this example. Say the Chief kills a wild boar and brings it to Williams for a BBQ. William won’t care what kind of sauce I brought unless it’s a horrible tasting or very obscure one. Eliminating brands will go a long way to simplification and increase profitability. Paying down the debt and increasing employee morale, rather than looking for the next acquisition will go a long way toward getting back to prosperity.