Food & Beverage

Kraft Heinz targets $2 billion in cost cuts over 5 years, sees long-term organic net sales growth of 1% to 2%

Key Points
  • Kraft Heinz said it will cut $2 billion in costs over five years to fuel investment as part of the company's turnaround plan.
  • The company expects long-term adjusted earnings per share growth of 4% to 6%.
  • Kraft Heinz has cut more than 1,100 products from its portfolio and is updating its products to focus on consumer trends, including cutting down on sugar and using fewer ingredients.
Characters at the Berkshire Hathaway company Kraft Heinz booth pose with a reporter at the shareholder shopping day as part of the Berkshire Hathaway annual meeting weekend in Omaha, Nebraska, May 5, 2017.
Rick Wilking | Reuters

Kraft Heinz is looking to capitalize on consumers' rediscovered interest in store-bought mac and cheese and Ore-Ida french fries as it unveiled a turnaround plan Tuesday that will shave $2 billion in costs through 2024 and invest some of that in marketing its products.

The company is expecting long-term organic sales growth of 1% to 2% and adjusted earnings per share growth of 4% to 6%. The company said the financial targets reflect its confidence in its ongoing recovery. In 2019, its organic net sales shrank by 1.7%.

As Kraft Heinz looks to make its business more relevant to consumers, it announced the $3.2 billion sale of part of its cheese business to Lactalis. The deal is expected to dilute its adjusted earnings per share by 5%, and the proceeds will be used to pay down its debt. 

Shares of the food giant rose 1% in morning trading Tuesday. The stock, which has a market value of $39.5 billion, has risen less than 1% this year.

The billions of dollars in savings are expected to come from integrated business planning for more efficiency between its manufacturing, procurement and logistics operations. Its procurement division alone is supposed to see $1.2 billion in savings over five years, in part due to closer collaboration with suppliers.

CEO Miguel Patricio, who joined the company in July 2019, said during investor presentations that the cost savings will fuel its investment back into Kraft Heinz. For example, the company will raise its marketing and advertising spending by 30%. Kraft Heinz will also spend 20% more on capital expenditures over the next three years on projects like renovating its packaging and making production more efficient.

This is the first long-term turnaround plan under Patricio. He said that the turnaround strategy does not include any plans to reduce or grow its workforce.

"We are committed to returning Kraft Heinz to consistent growth on both the top and bottom lines," CFO Paulo Basilio said in a statement.

In recent years, Kraft Heinz has struggled as consumers shopped more around the perimeter of the grocery store in search of fresh foods. The sales downturn led the food giant to report billions of dollars in write-downs on some of its brands, including Cool Whip, Oscar Mayer, Kraft and Maxwell House, and to reshuffle its leadership.

However, the coronavirus pandemic has lifted sales, helping it during its comeback. Since March, the company's household penetration has increased by 70%, according to Carlos Abrams-Rivera, its U.S. head. E-commerce has become a larger part of its business, accounting for 90 million pounds of its mac and cheese sold this year.

Boosted by pandemic buying patterns, Kraft Heinz updated its third-quarter outlook on Tuesday, saying it now expects organic sales growth in the mid-single digits. The company will announce its quarterly results in October.

The company said it has stopped thinking of its portfolio in terms of its range of products, an approach that executives said slowed down its innovation. Instead, Kraft Heinz is going view its products by how they fulfill consumer needs. One new category, for example, groups together Ore-Ida, Kraft Mac and Cheese and Bagel Bites because all can be a part of an easy meal.

"The problem is not the categories we are in. The problem is how we have been playing in these categories," Basilio told investors.

Based on the category, Kraft Heinz will decide whether to focus on growing, energizing or stabilizing its sales. Its Jet-Puffed and Jell-O brands are expected to see organic sales growth shrink by 1% to 3%, better than its historical decline of 4%.

Kraft Heinz's innovation plan focuses on fewer new products that are designed to make a bigger splash and based on consumer insights. Abrams-Rivera said the company has opened two ghost kitchens in Canada to use Kraft Heinz products in new foods and generate new ideas.

The company is planning on updating its core products, like ketchup, with fewer and less processed ingredients. It has also committed to cut down its use of sugar. One target of Kraft Heinz's innovation is Oscar Mayer, which has been hit by write-downs in 2019 and 2020. The deli meat is undergoing a brand revamp, which will be backed by media investment.

Additionally, Kraft Heinz is trimming less popular products from its portfolio. Abrams-Rivera said that it has eliminated more than 1,100 products, or 20% of its business, in recent months to reduce cannibalizing sales and lower procurement costs. 

Outside of the U.S. and Canada, the company intends to invest "disproportionately" in emerging markets like China and Brazil.

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