Commentary

Debt And D2C: What We're Learning From Kraft Heinz

by Dave Morgan , Featured Contributor, March 14, 2019

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 Heinzby 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?

cpg, d2c, food

3 comments about "Debt And D2C: What We're Learning From Kraft Heinz".

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Jack Wakshlag from Media Strategy, Research & Analytics, March 14, 2019 at 6:25 p.m.
Sometimes companies amass too much debt to acquire and merge and believe they can grow sales more than historical data shows and also cut costs. Are people buyong less ketchup and beans or are they not so buying them online? Sometimes people just pay too much.
Reply

James Smith from J. R. Smith Group, March 14, 2019 at 8:38 p.m.

Dave, is it possible that firms in the K/H situation are just too beaurcratic, via legacy management structures, to pivot? To foster innovation?

Servicing debt is hardly new; cost-cutting to generate savings in operating costs is also familiar territory. But isn't that financial-person stuff? And how many folks out of finance have been leaders in brand innovation? (No offense meant to financial people.) Of course, one wonders, if a CPC foods company can't make an easy opening/closing packet of Swiss cheese...their forecast is already: cloudy, with rain ahead.

Dave Morgan from Simulmedia replied, March 15, 2019 at 5:15 a.m.

Jack, thanks for making the point i was trying to, and doing it in a much simpler way. Net. Net. There is too much debt because they paid too much. In a less competitive world - without direct seiing and online shopping - they could have probably driving more profit from price and channel stuffing. But, no more.