A funny smell at Kraft Heinz

A boy eating some jelly © Alamy
Kraft Heinz’s empire is starting to wobble

The HP Sauce maker will restate earnings for three years. The group has been struggling since the merger that created it in 2015. Alex Rankine reports.

“You can turn any investment into a bad deal by paying too much,” lamented Warren Buffett of his Kraft Heinz holding during the recent Berkshire Hathaway shindig (see page 14). Berkshire took a $3bn impairment on its 26.7% stake in the consumer food group in February following its $15.4bn writedown to reflect the fall in the value of some of its top brands. Buffett insists that though he overpaid, Kraft is “still doing very well operationally”. Yet this week’s news that the US maker of Jell-O, Capri Sun and HP Sauce will restate earnings for almost three years because of “employee misconduct” casts new doubt on the Sage of Omaha’s rosy assessment.

Kraft Heinz announced more than $180m in adjustments after it uncovered mistakes in how it books costs and rebates from suppliers, says Alistair Gray in the Financial Times. The changes equate to “between 0.7% and 1.5% of adjusted profits in each of the years in question”. The food giant is now more than two months late in publishing a regulatory filing required for it to report first-quarter results, with analysts speculating that the delay is due to probes into its procurement and accounting practices by America’s Securities and Exchange Commission.

Squeezed on all sides

The repeated accounting fiascos have helped wipe nearly $20bn off the value of Kraft, says Heather Haddon in The Wall Street Journal. The group’s private-equity backer, 3G Capital, has faced repeated questions over its aggressive approach to cost-cutting. Slashing the workforce and investment after the 2015 merger between Kraft and Heinz proved unwise at a time when “signature packaged-food brands” are losing market share to hipper alternatives, leaving Kraft’s revenues flat for the last three years. Self-defeating cost-cutting is a problem across the big food industry, says Rupert Steiner in Barron’s. Some analysts caution that “bold margin targets” at Anglo-Dutch consumer goods group Unilever could lead it down a similar path of underinvestment that ultimately jeopardises sales growth. It isn’t just changing consumer tastes, point out Lauren Hirsch and Michael Sheetz on CNBC. The rise of online retailers has prompted US bricks-and-mortar establishments to sell more private-label (own-brand) products in order to remain price competitive. Kraft’s portfolio of large famous brands has proven “particularly vulnerable” to that shift.

Yet compare the travails of Kraft Heinz with the soaring market valuation of vegetable-based burger maker Beyond Meat, says Aaron Back in The Wall Street Journal. The latter has cannily expanded its appeal beyond vegetarians by seeking to convince meat eaters of the health and environmental benefits of its products. Kraft has appointed a new boss, Miguel Patricio, who will try to revive the neglected marketing operation. The success of Beyond Meat shows that investors in the “food aisle” are “hungry for new ideas”.