Kraft Heinz’s Struggles Highlight the Need for Balance in CPG Strategies

3G’s aggressive cost-cutting at Kraft Heinz appears to have backfired, showing the need for CPGs to focus on balancing efficiency and innovation—as well as acquisitions and divestitures—as they look to adapt to shifting consumer tastes.

Thursday, May 23, 2019

In the food and beverage industry, 2019's biggest headline has been Kraft Heinz's $15.4 billion write-down of its beleaguered Kraft and Oscar Mayer brands in February. Since private equity firm 3G Capital merged the two consumer packaged goods (CPG) giants in 2015, 3G's aggressive cost-cutting stunted innovation and delayed the development of new products to meet consumers' changing tastes. Kraft Heinz reduced its research and development budget from $120 million in 2016 to $93 million in 2017, according to public filings.

As evidenced by the more than 30% drop in Kraft Heinz's stock price since the write-down, investors believe that now is the wrong time for CPG companies to deemphasize innovation. Consumers preferences are shifting rapidly to newer, on-trend options—such as better-for-you foods, healthy and protein-rich snacking, and plant-based foods—and turning away from more established brands in favor of emerging health-focused brands and more value-oriented private label options.

While Kraft Heinz's struggles have reverberated throughout the food and beverage industry, it is more of a wake-up call than a death knell for cost-cutting and merger activity among CPGs. Legacy players still have significant advantages in terms of resources and opportunities to leverage their immense scale. If they take the right approach, large CPGs can prosper in this changing food and beverage landscape.

But they must strike a successful balance between cost-cutting and innovation—and at the same time streamline their portfolios to focus on core competencies while continuing to make acquisitions in on-trend categories. In this issue of Food For Thought, we examine what the food and beverage industry can learn from the struggles of Kraft Heinz and how these lessons are affecting M&A activity.

Highlights include:

  • Investors seek companies that balance cost-cutting and innovation
  • CPGs look internally and externally for product development
  • Divestiture activity surges as CPGs favor depth over breadth

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