EUR 850.00 For Business Accounts Only

Morningstar | Despite souring results, a shift at the top could indicate change is brewing at Kraft Heinz.

For nearly four years, Kraft Heinz's strategic bent has centered on driving out inefficiencies from the organization (by reducing its workforce, rationalizing its North American manufacturing network, and enhancing its supply chain). And the tangible gains resulting from these efforts are undeniable. More specifically, the firm now boasts operating margins in the low- to mid-20s, a level that towers above the mid- to high-teens generated by its packaged-food peers.However, sales have languished, falling 0.3% on an organic basis on average since fiscal 2015. We think the missing piece of the puzzle has been effective brand spending, which has amounted to just 4%-5% of sales annually at Kraft Heinz, generally lagging the mid- to high-single-digit levels at peers. Management has articulated a desire to up the ante on its brand investments to hone its organic operations, but we've yet to see evidence it is willing to sacrifice profits to any material extent over a longer horizon to do so. And these tepid investments are taking a toll on its competitive position. In this vein, the firm incurred a more than $15 billion goodwill impairment write-down in the fourth quarter, stemming from its Canadian retail business, its Oscar Meyer cold cut line, and its Kraft natural cheese mix. Although we think new management could have a greater appetite for spending on new products and marketing, the proof is in the pudding in our view.And while further opportunities for efficiency gains could still be in the cards, we don't expect any savings to materially bolster profits. Beyond affording it the opportunity to invest behind its brands, we believe this stands to offset more elevated levels of inflation it is facing. In this context, higher raw material costs, combined with elevated transportation and logistics costs (which are hampering profitability for companies across the domestic consumer product landscape), continue to take a toll and show little signs of abating. When combined with our forecast, which calls for 4%-5% of sales to be allocated to research, development, and marketing annually, we expect Kraft Heinz to essentially keep operating margins in the low- to mid-20s.