From a growth perspective, Heinz’s international footprint provides a platform for Kraft to take more of its brands and products overseas.
The combined company also owns eight billion-dollar brands and five $500 million+ brands. Kraft Heinz can offer customers a broader range of products and solutions to gain shelf space and grow its foodservice business.
It can also use its strong brands to expand into adjacent product categories. The company is executing what it calls its “big bets” strategy to more rigorously test new product ideas with consumers before bringing them to market. Once a new product has passed the test, it is supported with heftier marketing spending.
Recent examples of Kraft Heinz’s “big bets” are Heinz-branded mustard and barbeque sauce and Kraft’s new mac & cheese, which does not use any artificial preservatives.
While the company invested $150 million in research and development last fiscal year, it spent more than three times that amount on advertising ($464 million).
Kraft Heinz is an extremely durable business because it sells essential products and continuously benefits from long-standing consumer recognition.
Over their corporate lives, Kraft and Heinz have spent billions of dollars on marketing to favorably alter consumers’ awareness and perceptions of their products. As a result, the company can consistently raise prices without seeing a major impact on demand.
With products in virtually every U.S. household and leading market share positions across most core product categories, Kraft and Heinz are key vendors for the retailers that sell their products. They can also afford to invest in in-store displays, coupons, and rebates to help consumers buy more products.
As a result, it’s hard for new entrants to take shelf space from these giants and convince consumers and retailers that they are better. They lack the capital for marketing, and building brand awareness takes a very long time.
Kraft Heinz’s extensive distribution channels are another competitive advantage. As the company develops new products or acquires other brands, it can sell these new offerings to existing customers while improving their cost profile as they quickly scale. This helps the business respond to evolving consumer tastes to remain relevant.
Overall, the food and beverage industry possesses a number of characteristics that should help Kraft Heinz remain a major force for many years to come.
It’s also comforting to know that demand for the company’s products should continue following population growth over time – the industry’s pace of change is gradual with no risk of obsolescence thanks to the non-discretionary nature of its products (people have to eat!).
Key Risks
Like all food and beverage companies, Kraft Heinz Co (NASDAQ:KHC) can be impacted by volatility in commodity costs. However, its pricing power helps mitigate this risk to a degree, and cost volatility tends to even out over longer periods of time.
The bigger risks to the company’s long-term earnings potential are shifting consumer preferences for food and beverage products.
Simply put, consumers are increasingly aware of what they are eating and desire healthier all-natural foods. Organic offerings are taking over the shelves at many grocery stores, and some of the big brands don’t carry as much trust with consumers as they used to because they are associated with unhealthy products loaded sugar, preservatives, and artificial ingredients. The rise of digital marketing has also made it somewhat easier for small brands to generate awareness more efficiently.
As a result, the door has been at least slightly opened for new entrants to establish themselves as the healthy, natural, and organic alternative to many of the incumbent big brands out there. In fact, according to IRI, more than $18 billion in industry sales have shifted away from large companies to smaller players since 2011.
From Jell-O to Koo-Aid, Oscar Mayer, and Mac & Cheese, Kraft Heinz certainly has a number of products that could be somewhat vulnerable to the health and wellness trend in the coming years.
Kraft Heinz is combatting this trend with its “big bets” strategy and by introducing new products free from preservatives and artificial ingredients. While it might not be the first mover to capitalize on evolving consumer preferences, the company’s scale, extensive distribution channels, massive marketing budget, long-standing customer relationships, and shelf space should not be ignored.
As the company’s balance sheet improves over the coming years, Kraft Heinz will also be in a good position to potentially acquire rising threats that can give it greater exposure to healthier products and brands.
Finally, it’s worth noting that Kraft Heinz generated over 75% of its revenue from North America last year. With demand for food and beverages tracking population growth over time, the company’s growth profile is lower than some of its peers that have greater exposure to emerging markets.
It’s worth keeping an eye on the company’s organic sales growth to see if it can continue squeaking out gains in light of its merger-related restructuring, concentration in the mature North American market, and shifting consumer preferences.
