The company also may be better positioned than some for managing inflation because it has slowly increased pricing over the past year, which has contributed positively to its net sales in seven of the last eight quarters, US Zone President Carlos Abrams-Rivera told investors during the company’s first quarter call April 29.
“I feel good about our ability to deal with the inflation that we have and making sure we do this in a way that is positive for the company,” he said, noting much of it can be passed through to consumers.
Most of the inflationary headwinds facing the company will kick up in the second quarter and back half of the year as the company laps a “very low price in cheese last year and a high price of pork bellies this year,” explained CFO Paulo Basilio. However, he emphasized, Kraft Heinz is anticipating only a slight inflation in its big four commodities for the full year, some of which it is hedged against for as far out as six to nine months.
In North America, the company also is grappling with inflation around packaging, logistics and select ingredients, including soybean and edible oils, CEO Miguel Patricio told analysts in prepared remarks.
Innovation, renovation helps justify price increases
Kraft Heinz is able partly to offset and pass through inflation thanks to its efforts to renovate and innovate products that resonate with consumers.
For example, “we leveraged our insights into trending restaurant flavors, launching Heinz Ket-Chili and Buffa-Ranch to help consumers further embrace the fun of cooking at home,” as well as insights that revealed consumers don’t want to share the last bite of food – “especially when it’s cheesecake,” which led to the launch Cheesecake Crumbles with its Philadelphia brand, Abrams-Rivera said.
Kraft Heinz also launched Omelet Rounds as part of its Fast Fresh Meals platform to double down on breakfast-at-home, which Abrams-Rivera predicts “will continue, even as markets reopen,” creating “a big opportunity to lead in this space.”
These launches come at a time when many retailers continue to restrict selection – a practice that many began during the pantry-loading days of the pandemic to ensure top-sellers remained on shelves while supply chains were strained.
Continued strong sales of limited assortments prompted many retailers and brands to reconsider the breadth of their offerings, rationalize lower performing options and raise the bar for new product innovation.
While this trend may appear to run counter to Kraft Heinz’s innovation effort, Abrams-Rivera said it has actually helped the company build a higher level of trust and transparency with retailers to ensure the right assortment – including of new products – to improve velocity. Overall, he said, Kraft Heinz has reduced 20% of its SKUs going into 2021 versus what it offered in 2019.
Patricio added that the broad SKU rationalization across the food and beverage industry has been positive for Kraft Heinz because it has enabled it to focus on products with higher rotation and improve efficiencies at factories and on cost – further protecting it against inflation.
Kraft Heinz leans in on marketing, out on promos
To drive excitement around new launches and reinforce consumer awareness of and loyalty to existing brands, Kraft Heinz also is “driving greater creativity in marketing,” while also pulling back on promotions in January and February for a one-two punch that allowed it to more easily pass cost inflation through to consumers, Abrams-Rivera said.
For example, he pointed to strong sales and share growth of Lunchables following declines from the pandemic-related school closures “thanks to focused programs like our ‘Leave it to Lunchables’ Rewards and a new $1 pack.”
He also noted that sales of Velveeta mac-and-cheese increased 30% in Q1, largely by taking share from store brands, after the company’s “V by Velveeta” April Fool’s skincare launch when viral.
Looking forward, the brand launched this week a new campaign for Oscar Mayer that will be more consistent across packaging design to communication and will emphasize the brand’s quality, fun and taste, Abrams-Rivera said.
“I’m incredibly proud of our team’s accomplishments to date, and it’s just the beginning of what you can expect to see from Kraft Heinz as we discover new occasion-based insights and bring creative, culturally relevant ways to drive stronger engagement with our consumers and customers,” he said.
$400m in efficiencies stem from ‘robust revenue management initiatives’
Finally, the company expects to deliver $400m in gross efficiencies in 2021 from “robust revenue management initiatives around our iconic brands that is supported by a strong agenda of equity-building investments,” Patricio said.
Despite this and a “very, every encouraging start of the year” in which organic net sales grew 2.5% in the first quarter and 8.7% versus 2019, Patricio said it is too early to change the outlook for the year. As such, he confirmed mid-single-digit growth for the second quarter compared to the same period in 2019 and that he is “very pleased” with how the year has begun.