Kraft's Cost-Cutting Binge Helps It Cope With Grocery Slowdown

August 4, 2017 10:13 AM

(Bloomberg) -- Kraft Heinz Co.’s legendary zeal for cost-cutting helped the food giant cope with a punishing grocery industry last quarter.

The company’s belt-tightening efforts, orchestrated by private equity backer 3G Capital, boosted profit above analysts’ estimates. The stronger earnings came despite another decline in sales during the period.

The revenue drop at Kraft Heinz was less than severe than those reported by its competitors amid a darkening horizon for packaged-food companies this year. Investors are hoping for another blockbuster deal and will remain patient as long as Kraft Heinz stays on track with its savings targets, said Brittany Weissman, an analyst at Edward Jones.

“The hope is that there’s an acquisition and they can run this playbook again,” she said.

The shares rose as much as 1.2 percent to $87.58 after the open of trading in New York. They have been largely flat for the year, falling less than 1 percent through Thursday’s close.

Slower Demand

The maker of Velveeta and Oscar Mayer blamed its sales decline on slower demand for cheese, meats and food-service items. The results extended a long slump on that front: Kraft Heinz, formed in a 2015 merger of two food giants, has yet to post a quarter of sales growth since it was created.

Heavy competition in the grocery industry -- coupled with a record-setting bout of food deflation -- has made life difficult for the packaged-food industry. Many consumers also are switching to private-label brands, at the expense of the long-iconic household names that Kraft owns. Its stable of products include Jell-O, Kool-Aid, Lunchables and Maxwell House.

Against that backdrop, Kraft is relying heavily on zero-based budgeting, a belt-tightening tactic that puts every expense under a microscope. The company aims to squeeze $1.7 billion by 2018.

“It’s right on script -- their priority has been cost cuts,” Bloomberg Intelligence analyst Ken Shea said. “And it’s even more important because of the tough environment.”

Earnings Bump

Excluding some items, second-quarter profit amounted to 98 cents a share, fueled by the cost cuts. That topped Wall Street’s 95-cent estimate. Kraft, which has dual headquarters in Pittsburgh and Chicago, also boosted its quarterly dividend by 4.2 percent to 62.5 cents a share.

“Our plan from the start has been to drive strong cost savings,” Chief Executive Officer Bernardo Hees said in a statement. “That’s what we see happening now and expect to continue going forward.”

Sales dropped 1.7 percent to $6.68 billion in the second quarter, missing analysts’ estimates by about $50 million.

Kraft isn’t alone in feeling the pain. The largest food and beverage companies have lost roughly $20 billion in retail sales since 2011, according to Robert Moskow, an analyst at Credit Suisse Group AG.


©2017 Bloomberg L.P.

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