Growth Through Variety: Kraft-Heinz's Somewhat Contrarian Approach to 2024
Growth Through Variety: Kraft-Heinz's Somewhat Contrarian Approach to 2024
Peers are cutting products left and right while the company is doubling down on channel-specific items
In 2023, Kraft-Heinz Co. boosted organic net sales to $26.7 billion, an increase of 3.4% compared to last year. The mustard and cheese maker achieved this mostly through raising prices, with 8.9% worth of price increases mitigating a 5.5% fall in volume. In 2024, the company predicts just 0-2 percent organic growth, the lowest since COVID. Organic sales account for acquisitions/divestitures and currency fluctuations.
The processed food giant faces the same issue as all its major competitors. High prices are holding down sales volumes, which is slowing growth. There are a lot of ways to combat this. The obvious answer is to lower prices, but I've written before about how lowering prices is more complex than it looks. Instead, most consumer goods companies are trying to combat sagging volumes by boosting marketing and simplifying their product portfolios through SKU rationalization. That's eliminating low-volume items, simplifying production and expanding margins. In 2023, Unilever cut nearly 20% of its products, and P&G is taking similar actions.
The company informed investors that it significantly expanded its assortment of channel-specific products in 2023, with plans to expand in 2024. According to the company's internal data, low-income shoppers combat rising prices through dollar stores, while high-income shoppers are headed to club retailers like Costco and Sam's Club. CEO Carlos Abrams-Rivera highlighted the direction: "In 2024, we'll have a 20% higher number of offerings into the club than we did in 2023."
This expansion includes introducing popular products like Capri Sun and Lunchables to club retailers and diversifying its range of barbecue sauces and mustards in dollar stores. Club stores, known for selling items in larger quantities, typically allow for volume efficiencies. After all, Kraft is selling the same 72-ounce ketchup at Walmart and Costco, just two of them. Kraft's dollar stores strategy faces a different dynamic. Since they're dollar store specific, the company probably won't achieve any major gains in production efficiency by introducing them.
Will the strategy work? I have no idea. It's certainly interesting and goes to show that executives will try almost anything to hold off lower prices.
North American Recap
For 2023, Kraft North America grew organic sales by just 1%, with higher prices driving volumes down 6.5%. From a GAAP perspective, the company actually 1% sold less in 2023 than in 2022.
In the fourth quarter, the numbers were even worse. The company saw sales decline by 3 percent compared to last year. Executives blamed lapsing SNAP benefits.
Kraft-Heinz’s Tech Team is leading the way
Kraft-Heinz has a dedicated 75-person team whose sole job is to optimize pricing through analytics. The team has increased promotion effectiveness by 5% yearly since 2019.
On the supply chain side the company is using technology to save $2.5 billion by 2027. Right now it is saving 3.5% on production costs with a goal to reach 4%.
Lack of Competition Drives Kraft’s strategy
One of the dirty little secrets of America is that it’s incredibly concentrated. In 85% of all food categories, four companies capture nearly half of all category sales.
Kraft-Heinz is no exception. The company dominates 75% of the categories it competes in. The only real competition is from private-label, or store brand items.
The company categorizes all of its products into three different strategies: Accelerate, Protect, and Balance. Balance is the only product class with pricing constraints (evidenced by the low gross margin), which coincidentally features high private label competition.
Generally, the company is probably dependent on pricing growth since all three categories are declining or stagnant.
They said it:
CEO Carlos Abrams-Rivera on the company’s dominance in North America
North America retail growth will come from our Accelerate platforms, driven primarily by innovation as well as elevated brand superiority built through our new brand growth system, and I'll talk about that in a minute. We already have incredibly solid positioning here. Within the U.S., we have household penetration of 94% with 77% of our products holding the #1 or #2 position in their categories. And 59% of our portfolio categories gained share in the most recent quarter. In our Away from Home business, we have significantly opportunity to capture share.