As supply chains become more reliable, commodity costs begin to moderate and consumers become increasingly price-sensitive, many CPG companies are ramping up promotional levels with some returning to, and even exceeding, pre-pandemic levels. But not Kraft Heinz – its promotional levels currently lag many of its competitors, which could cost it market share, at least temporarily.
Carlos Abrams-Rivera, the company’s current president of North America and rising CEO, however, isn’t too worried or in a rush to ramp up promotions, which often drive volume at the expense of margins, consumer loyalty and the ability to reinvest in the business.
“We cannot be prisoners of the moment and not think about the long-term viability of the business, which will come from protecting that gross margin,” he said last week at Barclays’ Consumer Staples Conference in Boston.
That means structurally operating promotions at a lower level than in 2019, but also ensuring that those promotions are more effective than they were pre-pandemic.
“If you look at our business today and you compare it to 2019, today, we’re about 10 points better than we were in 2019 in terms of level of promotions. And for us, that is critical. And the way we are able to do that is by making sure that all the investment we have made in AI-enabled solutions on how we think about revenue management make [sure] that any investments we’re making in promotions have a high ROI,” he said.
“In fact,” he added, “our ROI has improved 15 points from a year-ago. So we are … promoting more in a disciplined way and that will continue to be the way we’re going to move forward.”
He acknowledged that promotions will increase slightly in the fourth quarter, but it will “be with that level of discipline, even maintaining the mid-30% proportional levels.”
Kraft Heinz’s more conservative approach to promotions comes in part from difficult lessons learned between 2017 and 2019 when CFO Andre Maciel said that company increased promotions by $1bn in the US “and a good chuck of that was very negative return.”
Instead of investing more in promotions for poor returns, Maciel said the company is focused on price optimization.
“We have 50 people dedicated to pricing optimization in the US alone. Millions of dollars in our proprietary solution that we have visibility for hundreds of the events that we run in the US, that we continue to learn from the past events to improve the calendar forward,” he said. “We are very content that we can maintain our lower level of promotions moving forward while increasing the needs that we have for the dollars were deployed.”
Innovation consumers want will drive volume
The company also intends to drive volume by investing more in marketing and R&D, added Abrams-Rivera.
“In Q2, we invested about 23% more in marketing dollars. We continue to invest in R&D, another 10% year-to-date in our resource in R&D, and more for driving innovation that is sustainable for consumers as well, too,” he said, adding, “We have much better, stronger consumer insights that allow us to have innovation that actually drive the volume that we are going to continue to see as we go in the future.”
Among the innovations recently launched by Kraft Heinz about which Abrams-Rivera says he is excited is Crisp from the Microwave technology for which the company holds patents and “that allows us to make sure we take out of the microwave something that will taste like you have grille it,” Abrams-Rivera said.
“The first foray to that will be this year with Crisp from the Microwave grilled cheese,” he added.
Other innovations include expanding Kraft Mac & Cheese to the frozen aisle, where Abrams-Rivera says, “it is doing spectacularly well.”