We are what we eat, and that’s changing. Americans are buying more fresh food and fewer products that have been processed. Good for our health, bad for profits at Kraft Heinz, the giant company created by the 2015 merger of two of the best known names in the food biz. I don’t know about you, but I haven’t had my favorite childhood sandwich (Oscar Mayer bologna, Kraft Singles, yellow mustard — on white bread!) in a very long time.
The company’s stock closed down a staggering 27 percent Friday after Thursday’s news that it had taken a $15.4 billion write-down of the value of its Heinz and Kraft brands. The Chicago-based company also cut its dividend and said the Securities and Exchange Commission is investigating its accounting in its procurement division.
Talk about hard to swallow.
There is an interesting back story here. Kraft and Heinz combined in a deal put together by 3G Capital, a Brazilian private equity group, and Berkshire Hathaway, the investment machine run by Warren Buffett. The Brazilian company’s claim to fame is its relentless approach to cost cutting, known as zero-based budgeting. Most companies build a budget by taking the previous year’s spending and deciding how much to add or subtract from the total. With zero-based budgeting, each division starts with zero dollars and has to make a case to senior management for how much money it will get for the year.
On a conference call with analysts and investors, CEO Bernardo Hees said the company’s earnings failed to meet Wall Street estimates because executives didn’t deliver sufficient cost savings.
“We were overly optimistic on delivering savings that did not materialize,” he said.
The problem: Kraft Heinz had to spend more money on marketing its products after extensive cost reductions had hurt the brands.
According to The Wall Street Journal: “With sales stubbornly declining, Kraft Heinz spent an additional $300 million last year on marketing its brands, developing new ones and renovating recipes to make them trendier. The move accelerated what would have been three years of investments into one year. The money also went into making improvements to its supply chain and adding more salespeople to visit stores and make sure products are stocked correctly.”
Bottom line: For the fourth quarter, Kraft Heinz reported a net loss of $10.34 a share, mostly caused by the asset write-down. Excluding the write-down and other items, it earned 84 cents a share, down 6.7 percent from a year ago. Revenue rose 0.7 percent to $6.89 billion.
In a world where bologna is frowned upon, Kraft Heinz has a lot of work to do before investors start smiling again.
You can reach me at larry.edelman@globe.com and follow me on Twitter @GlobeNewsEd. Sign up for my Talking Points AM newsletter here.