How Kraft Heinz owners' belt-tightening model eroded its iconic brands

Kraft Heinz stock plunges after revealing SEC investigation

Kraft Heinz stock plunges after revealing SEC investigation

On Thursday, Kraft Heinz said it was cutting its quarterly dividend to $0.40 a share from about $0.63, citing a challenging market environment due to cost inflation.

Some analysts are now questioning the effectiveness of 3G's model, given that the company's margins before interest and taxes fell to 23.2 percent in 2018 from 27.2 percent in 2015, the year Kraft Heinz was formed.

The losses from Kraft Heinz will likely impact Berkshire Hathaway's profits.

Kraft Heinz and other food makers that dominated grocery shelves for a good portion of the last century have been whipsawed by a seismic shift in what consumers want. It also flagged to investors in its quarterly results a subpoena it received a year ago from the U.S. Securities and Exchange Commission related to its procurement practices.

The almost $13 billion loss in the most recent quarter is a devastating recognition that efforts to change the trajectory of the company have not been as successful as once thought.

A wave of bad news, which also included a dividend cut and a weak outlook for the year, sent shares plunging 26 per cent at the opening bell Friday, their largest decline in a single day.

Families, particularly in the US, have pivoted away from familiar packaged foods amid a proliferation of products marketed as being more wholesome, or that promise new tastes.

Brazil's buyout fund 3G Capital and Warren Buffett's Berkshire Hathaway Inc together own more than 50 percent of Kraft Heinz.

When Kraft Heinz was created, analysts wondered where the growth would come with a suite of aging brands, which also includes Jell-O and Kool-Aid. Its overall global sales also edged up, but its profit when excluding one-time charges still fell short of Wall Street expectations. That was the plan at Kraft, and it worked for almost two years. "For that, we take full responsibility".

"We have been bullish on KHC for its role as a likely consolidator in packaged food, but now believe we likely were overly optimistic in both its likelihood of getting a sizable deal done and of the quality of the growth profile for any ensuing company", Piper Jaffray analyst Michael Lavery said in a client note Friday.

This is not the only issue as Kraft Heinz revealed non-cash impairment charges of $15.4bn after writing down the value of assets including the Kraft and Oscar Mayer brands. Over the years, speculation about potential targets has centered on food peers like Mondelez International Inc., General Mills Inc., Campbell Soup Co. and Kellogg Co. As a result of that investigation, it said it recorded a $25 million increase to the cost of its products.

Stifel downgraded the stock to "hold" from "buy" and more than halved its price target to $35, well below the current median target of $52.

Kraft Heinz makes a range of products under the Heinz brand, as well as products like Philadelphia cheese and Maxwell House coffee.

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