Kraft-Heinz Can’t Ketchup with Millennials—And It's Not Alone

The Brazilian private equity firm 3G Capital bought food processing company H.J. Heinz in 2013. Together with Warren Buffett’s Berkshire Hathaway, the company merged Heinz with packaged foods giant Kraft two years later. Things looked promising at first, but a recent spotlight on the company is exposing weaknesses in 3G’s cost-cutting strategy. Over the past two years, Kraft-Heinz shares have fallen by more than 30 percent while the S&P 500 conversely gained 30 percent. Last week, the company suffered a $15.4 billion asset write-down, resulting in a $2.7 billion loss for Berkshire Hathaway. 

The missteps that led up to last week’s announcement could be considered a warning sign of changing consumer preferences, which have similarly sidetracked other long-entrenched brands, including Anheuser Busch-InBev and L Brands’ Victoria’s Secret.  

The beginning of trouble for Kraft-Heinz 

The Kraft-Heinz merger cost 3G Capital and Berkshire Hathaway $62.6 billion, a price tag that Warren Buffet now admits was too high. At the outset, the move was designed to diversify both companies. Heinz had a wide global presence, while Kraft conducted 98 percent of its business within North America. Partnering with Heinz gave Kraft the potential to expand into foreign markets with its classic American brands. Kraft scratched Heinz’s back by providing access to its large economies of scale in North America, adding up to a predicted $1.7 billion in combined cost savings. 

3G Capital planned to further improve operating margins at Kraft-Heinz with the implementation of zero-based budgeting. This accounting method involves justifying every expense each year, a strategy that ultimately starved the company’s brand names of research and development. R&D costs fell from $120 million in 2016 to $93 million a year later. The company also slashed marketing expenditures, leading many to conclude it was overly reliant on brand recognition. It also failed to keep pace with millennials’ tastes for healthy, natural foods: over $4 billion of Kraft’s total $18 billion revenue in 2016 came from cheese—a dangerous position for a company catering to the generation blamed for killing American cheese. 

Dwindling love for Bud

Anheuser Busch-InBev, the creator of Budweiser and Bud Light, has faced similar difficulties in keeping up with new consumer preferences. Research indicates that millennials are more likely to drink wine or spirits than beer, while Generation Z is barely drinking at all.  

As preferences continued to shift, AB-InBev’s two largest brands suffered slipping sales throughout 2018, though premium beers such as Shock Top and Goose Island saw an uptick in revenue.

In a recent interview with Business Insider, Chief Marketing Officer Marcel Marcondes outlined AB-InBev’s plans to appeal to younger generations with low-carb, organic beers. The company announced several new products recently, such as Budweiser Select 55, a beer with only 55 calories. The Budweiser Reserve Collection takes an untraditional route by flavoring Budweiser with Jim Beam, drawing in people who favor spirits. 

The secret is no longer safe 

L Brands’ once shining star, Victoria’s Secret, has been another victim of new consumer appetites. The company’s stock lost 55 percent of its value in 2018 despite it being a great year for consumer spending. Sales were down 5 percent comparing August 2017 with the same month in 2018, even as the company increased promotional expenses. Victoria’s Secret still holds a place in the hearts of millennial and Gen Z women, according to a 2018 retail survey from Condé Nast and Goldman Sachs, but as we can see in Kraft-Heinz’s debacle, consumer sentiment does not pay the bills. 

The company has been slow to form itself into a brand with which millennial women can relate. Victoria’s Secret built its business around cleavage-shaping bras, an image that most women are straying away from. The new Dream Angel collection is designed to align its luxury brand with young women’s preference for bralettes. Is it already too late for the company to pivot its product offerings?  

The bottom line

Companies like Kraft-Heinz, AB Inbev and L Brands are not alone in their struggle to keep pace with changing consumer preferences. As documented in a recent report from the environmental nonprofit CDP, some of the world’s most recognizable brands—including Coca-Cola and Unilever—find themselves in a similar situation. As brands continue to navigate these rapidly changing waters, high-profile shakeups are likely to continue. 

Image credit: Mike Mozart/Flickr