Kraft Heinz's volumes sag after price hikes, but 4-prong plan to recapture share taking hold
“While we did lose share in the [second] quarter [ending July 1], as price gaps have stayed wider for longer than we would have liked, we are managing the business for the long term and still generated mid-single-digit top-line growth within the range of what we expected,” he told investment analysts yesterday during the company’s sales and earnings call.
He acknowledged the company’s US dollar share steadily dropped from January through April when it bottomed out at a loss of 0.5 percentage points below the prior year thanks in part to price increases activated in February to offset inflation followed by a reduction in SNAP benefits in March that further restricted the spending ability of a key consumer group for the company.
Overall volume mix for Kraft Heinz fell 7 percentage points in the quarter and 8.1 percentage points in North America following an 11 percentage point and 9.4 percentage point pricing increase in each respectively.
The impact of the price increases “was a headwind we expected,” Patricio said, adding: “The good news – the pricing is done – and even with the elevated price gaps, we aren’t losing incremental share to private label.”
The company is, however, losing incremental share to brands that are promoting more than Kraft Heinz, he acknowledged. In the second quarter, Kraft Heinz sold 29% of volume in the US on promotion compared to a branded competitor that sold 35% in the same period.
A four-prong plan to recapture market share returns early positive results
Looking to reassure investors and analysts, Patricio was quick to note the company is “taking a disciplined and surgical approach to protecting our profit dollars in certain categories. With this approach, and by continuing to unlock efficiencies across our value chain, we are generating margin gains. With these margin gains, and in line with our strategy to drive further growth, we are investing more in marketing, R&D and technology.”
He added that since the company began executing a four-prong plan to increase volume and capture additional share across the US retail business, volumes have begun to rebound.
The plan, announced during the company’s first quarter earnings call, includes executing joint business plans to improve shelf space and merchandising, increasing marketing investment by double digits year-over-year, ramping up innovation delivery throughout the year and addressing lingering supply constraints.
From April through June and projected into July, the company saw slow but steady dollar share recovery of almost 0.1 percentage points – growing from negative 0.5 percentage points in April compared to the previous year to about negative 0.4 percentage points in July compared to the same time last year.
The bulk of the share loss was concentrated in the same categories as the first quarter – cold cuts, cream cheese and Kids Single-Serve Beverages, Patricio said. But, he added the company expects to see improvement in Philadelphia Cream Cheese by the end of the third quarter and improvements in Kids Single-Serve Beverages and cold cuts by the fourth quarter.
“We have generated positive momentum, and we are confident that we will continue to see this trend in the second half of the year as we invest for the future across marketing, R&D, and technology,” he said.
Marketing and innovation boost begins to pay off
He explained the company has already started increasing its marketing spend – boosting in 23% in the second quarter compared to the previous year – delivering improvements.
“Our average ROIs increased approximately 15 percentage points as compared to 2019, and approximately 5 percentage points as compared to prior year,” he said.
Likewise, he said he expects net sales impact of innovation will “ramp up meaningfully” in the fourth quarter.
“In the second quarter, we boosted our investment in R&D 10 percent versus the prior year. We’re continuing to build our innovation pipeline, enabled by our Agile Innovation Engine,” including launches in the US of NotCheese, NotMayo and plant-based Philly nationally.
“We are also expanding into new aisles in the grocery store. KRAFT Mac & Cheese is finally going into the froze aisle, and with the addition of fresh fruit, Lunchables is being introduced in the produce aisle,” he said.
While Kraft continues to grapple with losses in many categories, its Taste Elevation and Easy Meals have returned to share gains, Patricio touted.
Improved gross margins hold promise
As each of these strategies continues to gain traction, the company expects the company’s organic net sales to continue to grow – allowing the company to maintain its expected 4-6% organic net sales growth projection for fiscal 2023.
“On the gross margin front, we are now expecting year-over-year expansion of 2023 to be between 150 and 200 basis points. Gross margin levels in the second half of the year are expected to be roughly in line with first half as inflation eases and promotions increase,” CFO Andre Maciel told investors yesterday.
