Like many CPG companies, Kraft Heinz pulled back on deals during the pandemic because increased consumer demand for food at home coupled with ongoing supply and labor challenges made them both moot and risky.
But in recent months, as stimulus money has run out and many companies have pushed through additional price hikes to counter inflation, some consumers have begun to trade down to store brands – prompting some brands, including Kraft Heinz, to offer discounts to protect market share and long-term shopper loyalty.
“We are mindful of the current inflationary environment and how it affects consumers,” CEO Miguel Patricio told investment analysts yesterday during the company’s second quarter earnings discussion in which he reported a 2.3% drop in volume in the three months ending June 26 after Kraft Heinz increased prices 12.4%.
The price hikes helped the company beat investor expectations by generating a 10.1% increase in year-over-year organic net sales globally during the quarter. In the US, organic net sales grew 9.8% with price contributing about 13 percentage points and volume dropping about 3 percentage points in the period.
While a 12.4% price increase is high, Patricio said it represents nearly all of the additional pricing that Kraft plans to push through this year. However, he noted, that if additional pricing is needed in the back half of the year, the company will consider additional “surgical” increases.
He explained that he feels confident with the increases as elasticity remains “relatively limited” and consumption in the US continues to rise – up 6.9% in the second quarter compared to 2.9% in the first quarter. Likewise, he said, the company’s exposure to private label remains lower relative to industry and historic levels.
Kraft leverages ‘a robust assortment of effective promotions’
Still, he said, the company is aware of the financial challenges that some consumers are facing and it is trying to ease that “through a robust assortment of effective promotions, comprehensive omni-channel communication, optimization of channel mix and product innovation and renovation.”
For example, he said, Kraft will leverage its scale and consumer insights to “redeploy our programming resources in a strategic manner to provide solutions for both retailers and consumers.”
To help drive traffic and sales without significantly increasing spend, Kraft is looking for ways to bundle its products with retailers’, such as in its Art of The Burger campaign in which it pairs its condiments and cheese slices with private label buns.
“Another great example is the $1 grilled cheese sandwich night, where we combine Kraft Singles with private label bread and private label butter,” he said. “These are examples of wins for consumers with great value, wins for retailers to drive traffic and wins for Kraft Heinz!”
He added that Kraft Heinz will pursue more programs like this in the back half of the year – particularly around key occasions. However, he cautioned that promotions are unlikely to reach the pre-pandemic levels seen in 2019.
‘Service is still challenging, but we’ve made significant improvements’
The deals are possible in large part because Kraft Heinz is steadily improving its inventory and service levels, which took a hit in the past two years – as they did for all CPG companies.
“Without a doubt, it’s a tough environment out there,” and “service is still challenging, but we’ve made significant improvements,” Patricio said.
For example, he said, the company has rebuilt its cream cheese supply and is regaining marketing share, while production levels of its Lunchables also are improving, which he expects will continue to flow through Q3.
“And for the longer-term solutions, we have been making progress as well,” he said, noting a contract signed with Simplot, which will help boost production capacity and add capabilities to its Ore-Ida business.
“As a result of the great work our supply team has done, as well as what we are doing to more strongly connect with consumers, we expect to see market share results continue to rebound in the second half of the year,” he said.
Based on these gains and optimism, the company is raising its expectations for organic net sales for the full year from mid-single-digit to high-single-digit growth, and it reinforced its expectation to deliver between $5.8bn to $6.8bn in terms of adjusted EBITDA for the year, which is one week longer than last.