Kraft Heinz's Big Breakup

0:28Hey, it's Ryan. September 5th at 10 a.m. Eastern at bit.ly slash journallive25. You can find the link in our show notes. Again, we'll be at the Gramercy Theater in New York City on Tuesday, October 7th, and tickets go on sale this Friday, September 5th. Go to bit.ly slash journallive25 to get your tickets. We hope to see you there.

0:57Jesse, I kind of want to start by asking you a controversial question that has split the American public for decades. Yep, sure. My colleague, Jesse Newman, covers the food industry. So I wanted to see if she could settle a big debate. Does ketchup belong on a hot dog?

1:20You will not be surprised to hear, or maybe you won't be surprised to hear, I don't eat hot dogs. You don't eat hot dogs? No, no. What? I'm vegetarian, so I don't eat hot dogs. Okay, that makes so much sense. So I don't really have a dog in this fight personally. A literal hot dog in this fight? Exactly. Exactly. I don't really have a hot dog in this fight personally. However, I can tell you I do eat, you know, like a tofu version of that. And I am a mustard girl. Okay. I'm not a huge ketchup fan. The reason I asked Jesse about hot dogs and ketchup is because the two are splitting up. The headline of the story is that Kraft Heinz, which is one of the country's biggest food conglomerates, is breaking up.

2:14It is breaking itself into two.

2:19Kraft Heinz is the company behind Heinz Ketchup and Oscar Mayer Wieners, among other iconic grocery store brands. In 2015, Kraft and Heinz came together in a massive merger that created one of the world's largest food and beverage companies. But the union wasn't exactly shelf-stable. The Kraft Heinz deal is just viewed as a historically bad deal. It just brought together all of these really iconic American brands that were sort of staples in a lot of American pantries. And a decade later, that deal is effectively being undone. Welcome to The Journal, our show about money, business, and power. I'm Jessica Mendoza.

3:03It's Wednesday, September 3rd.

3:11Coming up on the show, why Kraft and Heinz are breaking up.

3:29Before Kraft Heinz was one company, there was Kraft Foods, known for cheese slices, boxed mac and cheese, and hot dogs. Oh, I'd love to be an Oscar Mayer wiener. And also H.J. Hines, known for condiments like ketchup, mustard, and relish. Hines, it just doesn't taste the same with height. But about 10 years ago, the packaged food business seemed like it might be approaching its sell-by date. For one thing, this was the post-Great Recession economy. Even in 2015, consumers were still looking for ways to cut back on spending. — That sort of slowed growth for some of these big food companies. It made consumers a lot more cost-conscious.

4:13And food makers were under a lot of pressure to cut costs. — At the same time, there was growing interest in healthier food. — Consumers were also beginning to shift away from processed food. So they were starting to look for fresher things in the grocery store with simpler labels and ingredients that they could, you know, pronounce and understand. And all of that was beginning to really weigh on sales and on profit margins for these big food companies. Kraft was struggling to revitalize its older brands like Jell-O and Planter's Nuts, and net profits were down by more than 60%. Meanwhile, Heinz had recently been purchased by Warren Buffett's Berkshire Hathaway and a private equity firm called 3G.

5:03So I've heard of Berkshire Hathaway before, but I'd never heard of 3G. What was 3G known for? You know, by the time the merger took place, 3G, the private equity firm, had already gained a reputation for this really central strategy of theirs. And this was a strategy of deep cost cuts that were aimed at extracting all kinds of savings and in doing so, increasing profits and company share prices. And so that's exactly what 3G set out to do at Kraft Heinz. So here you had a company that now is going to sell Oscar Mayer, Maxwell House, Jell-O, Planters Nuts, Capri Sun, something in every aisle of the grocery store, sort of a veritable smorgasbord in the center aisles of the supermarket, and they were going to come in and cut costs.

6:03In March of 2015, Kraft & Heinz announced that they would become a single company. The ethos of the time was scale. It was acquisitions, deals to build scale. And that's what they did with Kraft & Heinz. These two big food companies came together in what at the time was one of the biggest deals in the food industry. And they created one of the world's largest food and beverage companies. So it was just this massive conglomerate.

6:36And how did things go for the merged company? Things were tough. So 3G immediately started to implement their playbook. And at the heart of their plan for Kraft Heinz was this arcane-sounding financial tool called zero-based budgeting, which is essentially this austerity measure that they were known for that slashed costs in all kinds of ways. So, you know, typical things like job cuts. But then it quickly got into small minutiae, like rationing employee access to basic office supplies. So there are well-known examples of this in which 3G would require employees to get permission to make color photocopies.

7:29Wow. Okay. So they went down to that level. So, you know, the executives at Kraft Heinz, they did what they set out to do. They turned quick profits. They closed factories. They cut thousands of jobs. They did things like banning flying in corporate-owned jets and staying in expensive hotels. So they took this really extreme approach to cost-cutting. The cutbacks did help Kraft Heinz's bottom line. For several years, the company was able to save$1.75 billion annually. But the cost-cutting also meant the company was spending less on things like research and development and marketing. And over time, that made it harder to increase sales.

8:14After a few years, Kraft Heinz, it just, it seemed as though they had wrung all of the savings that they could out of the company. And at that point, you know, executives sort of shifted their efforts to sales growth, but they pretty quickly realized that the savings, they weren't enough to cover the things that you needed to do, like innovate and market. You know, it turned out that 3G was very good at taking over these iconic American brands and squeezing out all the costs, but it just knew less about building sales. And so you've got a lot of critics of 3G who say, you know, all of these cost-cutting efforts just left Kraft Heinz brands too depleted to compete.

9:00compete. By 2019, four years after the merger, Kraft Heinz's value was down by$15 billion. At the time, 3G conceded that while being aggressively efficient can boost margins, a company can't survive if it doesn't also spend to develop and market new, trendy products. And then, as you may remember, in 2020, the pandemic hit. Right, of course. And the pandemic really changed the narrative for Kraft Heinz and all of the packaged food companies because all of a sudden nobody could get enough of this stuff, literally. As restaurants and bars across the country shut down, people turned to their grocery stores.

9:43Suddenly, products made by big food companies like Kraft Heinz were flying off the shelves. And many in the industry thought the change might be long term. They thought that this would give them a new lease on life, that consumers had rediscovered their brands and they were going to come back to these brands and find that they'd been really improved and that even after the pandemic, they were going to stick with these bigger brands because consumers were going to fall in love with them again. But that rekindled love didn't last. That's next.

10:26The pandemic gave the packaged foods industry a reprieve. But as the country came back from COVID, problems resurfaced for companies like Kraft Heinz. A big one was inflation. So it's hard to overstate just how important cost is for many consumers. After the pandemic, what we saw was this period of, you know, incredible inflation and a sharp run-up in grocery prices, particularly for branded food. And so consumers, their grocery bills are 25, 30 percent more than they were, you know, four years ago. The price of ketchup has skyrocketed over the last year. And while it has put the squeeze on consumers, it also may have...

11:09That has had a huge effect on shopping habits. You know, consumers are hunting for deals. People are willing to give up on a big-name brand if they can find a store brand that is cheaper. Consumers are incredibly cost-conscious right now. Kraft Heinz tried to respond to consumer demands. For example, the company started offering a larger box of mac and cheese that can feed a family of five for less than$2. But at the same time, consumers were continuing to shift away from what they saw as junk food. Think of Lunchables, Capri Sun, Kraft Singles. Like, once upon a time, these were pantry staples.

11:50Now, they are just seen as the epitome of America's processed food diet. And people will say that the company's executives just didn't appreciate how quickly consumers' interest in legacy food brands was fading and how much interest was growing in healthier foods, you know, things that were labeled natural or, you know, with organic ingredients and how that was translating into much less loyalty to the brands, you know, that people had grown up eating. That trend has since been supercharged by the Make America Healthy Again movement, championed by Health and Human Services Secretary Robert F. Kennedy Jr.

12:30We're going to get rid of every ingredient and additive to the school in food that we can legally address. Having all of that out there in the culture certainly isn't helpful when you are trying to sell Kraft Singles. Did the company try to do anything to appeal to changes in consumer tastes? Like maybe make some of their products healthier? Yeah, and you know, it's not as though Kraft Heinz has just just woken up and realized all these pressures. I mean, they have been working now for years to try to adapt their portfolio to the times and to invest in healthier products that are more in line with, you know, consumer preferences.

13:11They've said they're going to remove artificial dyes from their products. And, you know, it's also a challenge. Like they have tried to do things like this before. They lowered the sugar content of their Capri Sun drinks and that basically backfired. Consumers weren't a big fan of the lower sugars. So, you know, it's this balance that all the packaged food companies are trying to strike when it comes to ingredients and cost. And it's challenging, and Kraft Heinz is having to do it on a really large scale across a lot of brands. Despite the changes the company has tried to make, things continued to slide anyway.

13:48In mid-July, Kraft Heinz's stock had fallen more than 60 % since the merger a decade prior. It had erased something like$57 billion in market value. Yesterday, Kraft Heinz announced that it was time to break up. They plan to complete the split next year. So what's going to happen now? Do they just split up as Kraft and Heinz and go back to the way that they were operating before the merger? So Kraft Heinz is splitting into two. One company will focus on spreads and sauces and condiments. It's many of the Heinz brands. The other will focus on those, you know, on the desserts, on the beverages, on frozen and refrigerated and cheeses and meats.

14:39And so essentially, they really are, you know, save for some brands here and there, they really are going back to being Kraft and Heinz. Surprisingly, though, Kraft Mac and Cheese is going to the Heinz side of the business. How is splitting up actually going to solve the problems that the company had been facing? Like, what's the idea behind it? So Kraft Heinz will tell you, and their CEO, Carlos Abrams Rivera, said that things had just gotten too complex. So they've got, you know, close to 200 brands that were sold across 55 different categories in 150 countries. And what that meant was that, you know, they were always going to focus on the highest margin products and invest there.

15:28And that that meant they couldn't invest and focus on, you know, innovation and getting into new channels for, you know, for some of the other brands. That essentially they just couldn't give all the brands all the love. What's going on at Kraft Heinz is part of a larger breakup trend among legacy food companies, ones that had merged in the last 10 years. Kellogg Company divided itself in two, with one company focused on cereal and another focused on snacks. And just last month, Keurig and Dr. Pepper announced that they were splitting up as well. There seems to be this feeling in the industry that depth is preferable to breadth, and that breadth across the grocery store actually didn't get these companies the advantages, you know, all of the advantages that they were looking for, and that now the way to succeed is to be a more narrowly focused, specialized company.

16:20It's like the great unwinding of all of these big mergers that happened in the past decade. It really is.

16:31So what does this tell you about where the food industry is right now? You know, the food industry is going through navigating an incredibly tumultuous period. On the one hand, on the cost side, with inflation and tariffs, their costs just keep going up, up and up. And they are having to weigh every day, like, how much of that cost they pass through to consumers in the form of higher prices. and risk consumers just pushing back and not picking up that, you know, box of crackers or what have you. And then there is this tremendous pressure from consumers, from regulators, from state lawmakers when it comes to improving the products and making them healthier.

17:24And so it's really these companies trying to take a really hard look at their identities and their portfolios and figure out who they want to be for consumers.

18:02Transcription by CastingWords Thanks for listening. See you tomorrow.