Kraft Heinz to sell natural cheese business to Lactalis, unveils reorganization plans

By Elaine Watson contact

- Last updated on GMT

Miguel Patricio: Divestment will enable Kraft Heinz to focus on businesses with 'greater growth prospects' (picture credit: Kraft Heinz)
Miguel Patricio: Divestment will enable Kraft Heinz to focus on businesses with 'greater growth prospects' (picture credit: Kraft Heinz)

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As part of a highly-anticipated plan to re-engineer its portfolio and pay down debt, Kraft Heinz has unveiled plans to sell a mix of cheese brands to Lactalis in a $3.2bn deal, and find $2bn of cost savings through 2024 from efficiencies in procurement, manufacturing and logistics.

The company, which has eliminated more than 1,100 products in recent months as it focuses on bigger winners, said the cheese businesses - which contributed $1.8bn to Kraft Heinz’s net sales for the year to June 27 - would “thrive in the hands of a global dairy company like Groupe Lactalis​.”

The move will "enable us to build sustainable competitive advantage in businesses where we have stronger brand equity, greater growth prospects and can use our manufacturing scale and consumer-based platforms approach," ​said CEO Miguel Patricio, who updated the company’s outlook for the third quarter, with expected organic net sales growth now in the mid-single-digit range.

The move was welcomed by analysts at Bernstein, who have argued that the "natural cheese business had in our opinion become the Achilles heel of the company with retailers due to its lack of differentiation from private label products."

What's next on the chopping block?

The divestment is part of a strategy of “agile portfolio management to accelerate the company’s strategic plan, enhance its geographic profile, and sharpen its focus on areas of advantage while maintaining price discipline,"​ said Patricio, although he did not mention other brands potentially on the chopping block.

Brands that were "notably absent from the firm's investor presentation,​" according to Bernstein, included Maxwell House coffee, Ore-Ida frozen potatoes, and baby food in markets such as the UK, Italy and China: "We wonder whether some of these might also be shopped around over the coming months."

Terms of the deal

Under the deal, expected to close in the first half of 2021, Lactalis will acquire Kraft Heinz’s natural, grated, cultured and specialty cheese businesses in the US; and its grated cheese business in Canada. Lactalis will also acquire the entire international cheese business outside North America.

Brands included in the transaction are Cracker Barrel, Breakstone’s, Knudsen, Polly-O, Athenos, and Hoffman’s (in the US only) and Cheez Whiz (outside the US and Canada only). Kraft Heinz will also partner with Lactalis on a perpetual license for Kraft in natural, grated and international cheeses, and Velveeta in natural and international cheeses.

Lactalis will acquire three Kraft Heinz factories in Tulare, CA; Walton, NY; and Wausau, WI; and a distribution center in Weyauwega, WI. Approximately 750 Kraft Heinz employees will be joining Lactalis.

Kraft Heinz will retain the Philadelphia Cream Cheese, Kraft Singles, Velveeta Processed Cheese and Cheez Whiz businesses in the US and Canada; the Kraft, Velveeta and Cracker Barrel Mac & Cheese businesses worldwide; and the Kraft Sauces business worldwide.

Turnaround plan

The deal was announced as Patricio unveiled plans to transition from managing its portfolio as 55+ individual categories to six ‘consumer-driven’ platforms: Taste Elevation; Easy Meals Made Better; Real Food Snacking; Fast Fresh Meals; Easy Indulgent Desserts; and Flavorful Hydration.

Through 2024, bosses are also “targeting $2bn of gross productivity efficiencies,” ​added Patricio, who said that going forward, Kraft Heinz will prioritize “high return investments in growth, with a 30% planned increase in marketing and advertising spend.”

The company did not go into details about where it would find the savings, but said its procurement division alone would secure $1.2bn of savings, in part due to closer collaboration with suppliers. There are no plans to reduce headcount, Patricio told reporters.

Procurement savings

While not all commentators believe that the ruthless cost-cutting mentality the company had became known for has been replaced by a more strategic vision, Kraft Heinz chief procurement officer Marcos Eloi has acknowledged that you can’t keep squeezing suppliers indefinitely, telling this publication in January​ that a best-in-class procurement function has to build more collaborative relationships and work together with suppliers to find ways to innovate and drive efficiencies.

“Procurement is not only about cutting costs, so our plan has three key pillars: first, building a great team; second, operational excellence and great tools; and third, projects that deliver results as we invite suppliers to join us on our continuous improvement journey.”

At Bernstein, analysts noted that investors have been "scratching their heads trying to figure out where on earth more cost savings could come from given the draconian cutbacks implemented by the previous management team."

However, the operations group "presented a credible perspective that with increased focus on variable costs and increased investments in technology and analytics as well as a more integrated approach to procurement this could be a source of funds for reinvestment in the business," ​they conceded.

kraft-heinz-platforms
Moving forward, Kraft Heinz is focused on six ‘consumer-driven’ platforms (picture credit: Kraft Heinz)

‘Smaller households, including those with no kids, are finding our brands

Speaking on the firm’s Q2 earnings call in late July​ ​after posting a better-than-expected 3.8% rise in net sales, but a significant net loss (-$1.65bn) owing to impairment charges, the head of Kraft Heinz’s US business, Carlos Abrams-Rivera, said: “Across our iconic brands, we are experiencing growing household penetration and increasing the rate of repeat among new buyers​​.

“This includes big brands that were already well-established and significant leaders in their categories, such as Heinz in ketchup, Kraft Mac & Cheese, Ore-Ida, Planters, Philadelphia and Capri Sun. In terms of repeat rates, new buyers are repeating at higher rates than in the past and buying more frequently. In fact, 75% of new buyers since the pandemic started are still buying our products now.”​​

He added: “Regarding new buyer demographics, smaller households, including those with no kids, are finding our brands. And our new buyer household skewed to higher income, younger and more diverse parts of the population, where we have historically under indexed."

creative roots

Kraft Heinz will be speaking about Creative Roots​​​ - its latest innovation in the kids' beverage space - at our virtual FOOD FOR KIDS summit​​​ later this year. 

Find out more HERE.

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