Kraft Heinz turns to gimmicks and nostalgia to revive its ‘dusty’ brands

CNN, CNN BUSINESS

By Danielle Wiener-Bronner, CNN Business

Oscar Mayer. Velveeta. Capri Sun. Kraft Heinz CEO Miguel Patricio admits: Some of the company’s iconic products had become “a little bit dusty.”

“For a while, we were apologetic about the brands that we had,” Patricio told CNN Business. “We got distracted believing that the future was launching new small brands, niche brands.”

Recently, “we stopped and said, let’s go back” to basics, Patricio said. “Let’s be proud of the brands we have. Because they’re incredible.”

More than half of Kraft Heinz’s business comes from just eight brands — the aforementioned three, plus Kraft Mac and Cheese, Philadelphia Cream Cheese, Heinz, Lunchables and Ore-Ida. They may not seem glamorous, but they’re the very brands the company is banking on in its years-long effort to turn around the world’s fifth-largest food and beverage conglomerate.

Processed foods are “where the industry makes its money,” said Alexia Howard, senior analyst covering US Food at Bernstein. “That’s traditionally been what works in packaged food.”

So Kraft Heinz reworked its portfolio to cut its healthier nuts and cheese business and focus on the processed icons, putting them front and center in flashy, even goofy, marketing campaigns that have captured the attention of social media. (Consider the eight-foot-long Velveeta box that appeared in New York City’s Central Park.) But that strategy is not without risk, especially as consumers trend toward healthier options.

For Kraft Heinz, which is relying on Patricio to execute a comeback, there’s a lot on the line.

What went wrong

Kraft and Heinz joined forces in 2015, a deal orchestrated by Heinz’s owners at the time, Warren Buffet’s Berkshire Hathaway and the investment firm 3G Capital. At first, investors were optimistic, buoyed by 3G’s successful track record of using mergers to create powerhouse conglomerates, like Restaurant Brands International, owner of Burger King and Tim Hortons. But in this case, the winning formula fell flat. After a few years, the company started to lose value, fast.

Critics said that an extreme cost-cutting strategy choked innovation. And in 2019, the company revealed that the Securities and Exchange Commission was investigating its accounting practices. It wrote down the value of its Kraft and Oscar Mayer brands by $15 billion, posted a $12.6 billion loss for the fourth quarter of 2018, and had to revise past financial statements and later pay millions of dollars in a settlement.

Even the venerable Harvard Business Review weighed in with harsh criticism. “While investors were hungry for growth, 3G could not change the Kraft Heinz legacy brands quickly enough to meet consumer demand for healthier, fresher and, in some cases, cheaper private-label products,” a 2019 piece in the magazine proclaimed. “While Jell-O, Kool-Aid, and Velveeta were being stacked onto shelves, the tectonic plates of big-box food were shifting beneath Kraft Heinz’s feet, and they could not adapt fast enough.”

Enter new management.

In 2019, with the company in crisis, Patricio joined Kraft Heinz from Anheuser Busch InBev. Since 3G Capital had also managed AB InBev’s huge 2008 merger, that connection set off alarm bells for some. “Everybody was like, ‘Oh, gosh, is this really going to work?'” said Howard.

“He had a monumental task when he first came in,” she noted. Shares of the company had fallen sharply, sales were faltering and investor confidence was low.

Today, Kraft Heinz shares are worth about $37 apiece, an improvement from its 2020 lows of about $22 but far from its high of almost $100 a share in 2017. In the third quarter of this year, net sales grew to $6.5 billion, a 2.9% increase from the year before.

“Three years ago, our company was in the bottom,” Patricio said during a Bernstein conference in June. “Today, we feel that we are a good company.”

But that’s not enough. “We think we can be great. And to be great, it’s a very different game,” he said.

Patricio has streamlined operations, invested in supply chain improvements and ramped up advertising. He’s also made some potentially risky changes to the company’s portfolio.

Goodbye, Mr. Peanut

To focus on core categories, Patricio started shedding divisions.

In 2020, Kraft Heinz announced that it was divesting its natural cheese business. The following year, it said the same of Planters, bidding adieu to the iconic Mr. Peanut.

That move may seem like a headscratcher, since natural nuts and cheese are more easily positioned as healthy foods than processed meats and cheese. But they’re also hard to differentiate from competitors.

Natural cheese and nuts didn’t fit “​​our strategy for the future,” Patricio told CNN. “It’s not … where the growth would come from.”

Those two categories are particularly exposed to private label, or store brands, he said, and experts agree. Shoppers are “very price driven,” when it comes to these items, said Daniel Hooker, a senior lecturer in applied economics at Cornell University with an expertise in food industry management.

And competition is especially fierce right now, because consumers have become increasingly interested in private label as grocery prices skyrocket. Swings in ingredient prices can cut into costs, especially in these categories.

Selling off those brands “helped us immensely,” Patricio said.

Kraft Heinz’s current portfolio is less likely to face competition from generic brands, noted Hooker. Heinz Tomato Ketchup is far and away the leading brand in that category, and “there’s no private brand equivalent, really, of Capri Sun,” he noted.

“The best way to compete with store brands is having very strong brands,” said Patricio. “They really play a role in the hearts of consumers. So we have more loyalty.”

For that reason, Kraft Heinz has leaned in to promoting its legacy brands — and with sometimes outrageous marketing. In Patricio’s words, “we need to be creative and make the consumers talk about these brands.”

Hello, Velveeta martinis

In Velveeta’s case, Kraft Heinz partnered with a steakhouse chain to sell Velveeta martinis and created a Velveeta-themed nail polish, in addition to tweaking the processed cheese brand’s logo.

Other Kraft Heinz brands have also used attention-grabbing marketing campaigns. Over the summer, Oscar Mayer introduced the “cold dog,” a popsicle that tastes like a hot dog. The item was sold for a limited time at Popbar locations in a handful of cities. Kraft Real Mayo has partnered with Juicy Couture to create sweatsuits. The pants say “Smooth” on the rear.

Efforts like these raise brand awareness, help create buzz online and gain media attention. Kraft Heinz’s brands now have a presence on gaming platforms like Roblox, in addition to social media channels and other platforms. In his discussion of the company’s third-quarter results, Patricio noted that six of the company’s campaigns this year have garnered over a billion earned impressions each, referring to views received by media coverage of the promotions.

In a quickly evolving media landscape, it takes “far more work and people to reach consumers,” he told CNN.

But clever promotions might not be enough to convince consumers to go for Kraft Heinz’s highly processed products.

How healthy can processed food really be?

One way to reach health-conscious consumers without overhauling core brands is by building partnerships with outside companies. Recently, Kraft Heinz started working with NotCo, which makes plant-based dairy and protein. Acquiring a company would be expensive, Patricio noted, so a partnership was the way to go.

Patricio seems to be leaning into partnerships, said Howard. For him, they “may be the way to tap into some of these bigger, more disruptive changes that are going to hit the industry,” in the years ahead.

Kraft Heinz said in October the first product from the joint venture, plant-based American cheese slices, had launched in a test market.

The company has also been making more substantial changes to some products in an attempt to make them healthier: A recent commercial, which bemoans the woes of “adulting,” promotes Heinz’s No Sugar Added Ketchup. Over the summer, the company rolled out a reduced-sugar formula for Capri Sun. Kraft Mac and Cheese is made without artificial flavors, dyes or preservatives and comes in gluten-free and whole grain varieties.

“It is definitely a trend in the world to have healthier foods, and we need to be part of it,” said Patricio. “We need to adapt .. and we’ve been doing that.”

Even with ingredient changes and marketing pushes, however, there’s a limit to how many adjustments the company can make without fundamentally altering the products.

“Some of these brands, they can only make them so much healthier, before they cease to be the products that they are,” said Cornell’s Hooker. “You get to a point where you can’t do much more.”

For now, things seem to be working, noted Howard, the food analyst. “Three years in … he is actually moving things in the right direction.”

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