Global food conglomerate Kraft Heinz, owner of brands like Oscar Meyer, Velveeta and Maxwell House, surprised a lot of folks in mid-February when it announced a loss of over $18 billion for 2018 and said more losses would be coming in 2019 as well. Kraft Heinz stock lost more than one-fourth of its value within the day.
What happened to Kraft Heinz? Debt, flat sales and significantly increased operating costs are what happened. The Oscar Meyer maker owes $31 billion to creditors. It needs massive profits (and sales) to be able to pay off that debt. You can’t pay down money like that when your year-over-year sales are only up 0.7% (less than population growth), and you spent a bunch more money year-over-year to generate those sales. And, you had to take a $15+ billion goodwill impairment charge to boot.
As we have seen with so many other large global consumer goods companies over the past decade or more, Kraft Heinz’s owners raised massive amounts of debt to buy and merge consumer products companies based on their historical cash flow track records. They harvested much of that cash from the companies, cut redundant operations and implemented systems to run those businesses on a “do more with less” mentality. Unfortunately, something unexpected happened.
Consumer behavior changed. Just like the mega-merged newspaper and magazine companies of old that didn’t anticipate digital news and advertising delivery through the Internet, these mega-merged consumer companies didn’t realize that digital platforms could enable new, venture-based companies to attack with highly innovative products sold directly to consumer. Large companies didn’t worry about D2C companies because they were all so small and lacked big retail distribution.
Just as fire ants can kill animals as big as horses, so too can hundreds of D2C brands help kill
companies like Kraft Heinz
by collectively taking away significant percentage points of their market share.
According to Nielsen data released last year, 49% of U.S. consumers shopped for consumer packaged goods products online -- many of them food products and boxed food services that compete directly with Kraft Heinz brands for consumers' "share of stomach."
As the Kraft Heinz numbers reveal, massive debt leverage doesn’t allow it lose event a point or two of overall market share without a massive, asymmetrical impact on the financial stability of the company.
Simply put, today’s large incumbent consumer brands better have a healthy enough balance sheet to be able to both invest in their own direct-to-consumer initiatives, and to tolerate the loss of some market share to D2C challenger brands until their new strategies can take hold. If they don’t, they will probably find that debt and D2C competition don’t mix well for them.
What do you think?