Kraft Heinz’s cost-cutting measures continued to deliver strong profit in the second quarter, but revenue fell for the third quarter in a row.
Net sales were $6.7 billion, down 1.7% on the same period last year due to unfavourable currency impact and a 0.9% fall in organic net sales. Kraft Heinz has not reported a year-on-year increase in sales since the third quarter of last year, and this is now the third consecutive three-month period in which sales have fallen.
The picture is bleakest in Canada and Europe, where sales fell 6.4% and 4.9% respectively. The US market returned sales 1.2% lower than the second quarter of last year, but still delivered 3.2% growth in pre-tax earnings.
Despite losing sales in key economies, Kraft Heinz continued to perform strongly on profit. Operating income for the second quarter was $1.92 billion – up 17.5% from $1.64 billion last year.
Since Kraft Foods merged with Heinz in 2015, the combined company has not delivered a quarter in which profit fell year-on-year. In fact, apart from nominal decline in the first quarter of 2017, Kraft Heinz has only reported a quarter-on-quarter drop in operating income once since it was formed – also in the third quarter of 2016.
Kraft Heinz CEO Bernardo Hees said: “As expected, our second quarter results were sequentially better than our first quarter, and we expect this momentum to continue into the second half of the year. Our plan from the start has been to drive strong cost savings to fuel investments in people, capabilities and brands that can lead to sustainable, profitable growth. That’s what we see happening now, and expect to continue going forward.”
Outside its established markets, Kraft Heinz sales rose 1.6% to $851 million. Organic sales in the so-called ‘rest-of-world’ segment increased 3% on the same period last year, with increased pricing offsetting negative currency impacts in various countries, particularly in Latin America.
Strong growth in condiments and sauces was more than offset by a combination of significantly lower shipments in India, unfavourable holiday-related shipment phasing in Indonesia, as well as the impact of distributor network realignment in several markets.
Product-by-product, the biggest winner was condiments and sauces, which was cited by Kraft Heinz as a driver of growth in both Europe and the US.
In focus: condiments and sauces
One of the quarter’s biggest winners in category terms was condiments and sauces, which Kraft Heinz said helped alleviate decline in both the US and Europe. They play an important role in Kraft Heinz’s business and the next few quarters could prove to be a test of character for Heinz products, amid increasing competition from rival companies. In July, McCormick swooped for Reckitt Benckiser’s food arm in a $4.2 billion deal. McCormick said the addition of condiment brands like French’s mustard and Frank’s RedHot sauce would help it improve its performance in foodservice, in particular. Unilever paid $140 million for US condiment maker Sir Kensington’s in April, which will put it in direct contention with Kraft Heinz on the ketchup battlefront. It is also ramping up activity within its Hellmann’s brand, including the launch of a range of ketchups, which could be a more mainstream challenge to Heinz’s dominance. Heinz ketchup still holds sway for consumer loyalty, but new moves in the condiments category will be an unwelcome affront at a time when Unilever is growing and Kraft Heinz is not.
The company is continuing to focus on margins, but volume reductions in established markets – a familiar scenario across the packaged food industry – has cast doubts on its ability to deliver sales growth.
It attempted an audacious takeover of Unilever and is known to be interested either in bidding again for Unilever or – more likely – finding an alternative target. It has been linked with the likes of Mondelēz and Colgate-Palmolive, with CEO Bernardo Hees defending the company’s strategy by saying that acquisitions are part of Kraft Heinz’s corporate culture.
© FoodBev Media Ltd 2020