Company Case Kraft Heinz: Once a Taste Maker Now Struggles as Consumer Tastes Change

In the era of high-tech Silicon Valley startups, the Googles, Amazons, and Facebooks of the world seem to get all the attention. But plenty of companies today have been leading their industries for decades, some since the start of the Industrial Revolution. Kraft Heinz is one such company. Tracing its roots back to the late 1800s, Kraft Heinz has played a big role in shaping the packaged food industry with innovative processing, production, and distribution methods. Today, you'd be hard pressed to find a household in the United States and many other parts of the world that doesn't have Kraft Macaroni and Cheese, Heinz Ketchup, Oscar Mayer deli products, Jell-O, Miracle Whip, or one of Kraft Heinz's numerous other blockbuster brands on hand.

But in recent years, the company that's put so many beloved brands on American tables has encountered some head­

scratching market conditions. All of a sudden, Kraft Heinz's once- golden brands have lost some of their sauce. In an age of rapidly increasing health awareness and the expansion of store brands, consumer tastes and preferences have shifted fast. Brand managers and product developers at Kraft Heinz have tweaked and extended the company's brands as always. But in the past few years, little has worked. After years of steady growth, Kraft Heinz's revenues have been flat for three years running. Even worse, last year Kraft Heinz posted a net loss of more than $10 billion—an amount nearly identical to the net profit posted the year before. At the same time, the company was forced to write down the value of some of its best-known brands by $15.4 billion. With its stock price in a free fall, Kraft Heinz is now desper­ately trying to figure out how to once again please the pallets and tickle the taste buds of consumers worldwide.

The Men behind the Brands

Henry John Heinz was born near Pittsburgh in 1844. By the age of 15, he was bottling and selling condiments—horseradish and pickles at first. A few decades later, Heinz Tomato Ketchup made its debut. Right about that time, James Lewis Kraft was born. Getting his start in the cheese business, Kraft founded the company bearing his family name and opened its first cheese manufacturing plant in Chicago in 1914.

In the early 1900s, fewer people were farming and more people were working in mines and factories. Thus, fewer people were growing and raising their own food. As a result, many were getting sick from foodborne illnesses. At that time, "healthy" mostly meant "stable." With demand for food products with long shelf lives skyrocketing, both the H.J. Heinz Company and J.L. Kraft and Brothers were quick to oblige.

Canning was already a known method for making food shelf-stable for months. Heinz took it further, applying science and technology to solve problems like bacterial contamination as well. Similarly, Kraft got crafty with cheese, bringing it in to the industrial age with pasteurization techniques. Kraft also developed canning and dehydration methods that led to the development of brands such as Miracle Whip and Kraft Macaroni and Cheese. Both companies played key roles in stabilizing foods, making them safer as well as easier to ship and store. These characteristics played well not just with U.S. consumers but also with institutional customers. The United States and foreign governments became the biggest food-buying customers throughout two world wars and the reconstruction efforts that followed. Both Kraft and Heinz became some of the largest food producers in the world while also establishing standards for processed foods and consumer packaged goods in general.

As the twentieth century came to a close and a new millennium dawned, both Heinz and Kraft experienced various mergers and acquisitions. In 2015, the two companies combined to form the Kraft Heinz Company—the world's fifth-largest food corporation.

Like other large and established packaged food companies. Kraft Heinz is no stranger to shifting consumer preferences and trends. Kraft Heinz brands have evolved considerably over the years based on such trends. Take Kraft Macaroni and Cheese, a brand launched as a direct response to specific consumer needs. Introduced in 1937 during the depths of the Great Depression, the box of dried pasta with the familiar packet of processed cheese powder was launched in the United States and Canada as Kraft Dinner—a meal for four at the low price of

just 18 cents. Kraft sold eight million boxes the first year and 50 million boxes throughout World War II.

Today, the original-format boxed and dried Kraft Macaroni & Cheese Dinner is still the most popular version of the world- renowned brand. But you can also get your mac-and-cheese fix in microwaveable single-serve containers as well as in a creamy Deluxe form in varieties ranging from White Cheddar and Bacon to Cheddar Broccoli Cheese. And Macaroni & Cheese Shapes not only puts letters and numbers in kids' bowls but entertains them with Star Wars, Sponge Bob, Finding Dory, Trolls, and Teenage Mutant Ninja Turtles shapes as well.

A New Kind of Food Consumer

While Kraft Heinz has successfully adapted to consumer trends and has even set some trends of its own, recent shifts have stymied the company. One of the biggest shifts has been toward healthier fare. Consumers today are far more aware of the link between food and health, including the role that foods can play in the development of major diseases. This trend has been unfolding for some time, and Kraft Heinz has not sat idly by. In attempting to appeal to consumer demand for healthier products, the company initially took a "no problem, we'll fix it" approach by doing what it has always done. Customers wanted healthier food, so the company eliminated artificial flavors, colors, and preservatives from many of its brands. Still not enough? Kraft offered whole grain and organic versions of consumer favorites.

But such new products have largely missed the mark. Although such products were "healthier," discerning parents and individuals still did not view them as "healthy enough." For example, Kraft Heinz launched CapriSun Organic, made from organic

juice concentrates without added sugars or artificial ingredients. But critics and activists quickly pointed out that healthier in some areas doesn't compensate for unhealthy in others. CapriSun Organic may have left out all the unnatural ingredients, but it still packs nearly as many calories and carbohydrates per ounce as good old fashioned soda pop.

Health trends are nothing new to the food industry. But today's time-starved and health-aware consumers are looking for more than just buzz words on labels of the same old products. Customers today want ready-to-eat foods that emphasize the "prepared" but eliminate the "processed." As a result, foodbuying customers are spending more time in the produce sections as well as the refrigerated and frozen food aisles of grocery

stores. These aisles are exploding with options that have the look, taste, and nutrition of something you might have just made yourself from scratch. Individual food items and complete meal kits are proliferating. And at price points close to the cost of buying all the individual ingredients and making the dish, consumers are gobbling up these options about as fast as they hit the shelves.

More than just the foods inside the packages, it's the packaging itself. Customers are favoring labels that are simple and clean with nutritional information that is easy to find and interpret. Moreover, the very image of established food brands often seems to be incompatible with current consumer percep- tions of "healthy."

Beyond health issues, another trend in consumer food purchases hits at the very core of big food companies like Kraft Heinz. Consumers are turning away from tried-and-true na- tional brands and toward private label and niche brands. More and more, customers are finding greater value in store brands such as Archer Farms (Target), Kirkland Signature (Costco), and Wickedly Prime (Amazon), which offer lower prices with excep- tional variety and quality. Some of the fastest-growing grocery chains—such as Trader Joe's, ALDI, and Lidl—sell mostly store brands. With so many good grocery options, many consumers are questioning the logic of paying $1.59 for a plain old box of Kraft Macaroni & Cheese when they can get the Whole Foods

365 brand through Amazon Prime for 99 cents and the organic version for $1.69.

Turning the Tables

Nith control over customer purchase and traffic data—not to mention shelf and display space—retailers have been quick to identify and respond to consumer trends. As a result, many of the hot new food items in stores now bear store-brand labels, n-store real estate itself is changing as the center aisles domi-

nated by processed foods are shrinking while the fresher food sections around the perimeter of the store are growing. In other .vords, the grocery space where Kraft Heinz has thrived the most n the past is getting smaller. In the sections that are growing, the

company has little that fits current consumer needs.

Many of Kraft Heinz's current woes are due in part to the major cost-cutting efforts it launched immediately following the merger four years ago. In cutting costs, it forgot that the most CHAPTER 5 J Consumer Markets and Buyer Behavior 159

important thing for a food company is to make tasty products that people want to buy. At the same time, Kraft Heinz is not alone in its struggles. Other food giants such as General Mills, Smucker, and Kellogg are having similar problems. On average, year-over-year revenues for large food conglomerates are flat, whereas those of small, niche-oriented food companies are growing by double digits. Private label food brands are posting similar fast growth. One study shows that 90 of the top 100 consumer-packaged goods brands have lost market share over the past four years. Meanwhile, private-label brands now account for 17 percent of all groceries, a market share figure that has been rising for years.

Kraft Heinz and its peers won't likely disappear. But the degree to which they continue to lead the industry they created will depend on their ability to adapt. Each is making efforts. In some cases, those efforts are in R&D, such as Nestlé working to develop a "hollow" sugar molecule that will let it make the same candies with 40 percent less sugar. In other cases, established companies are acquiring successful niche brands—General Mills now owns Annie's, ConAgra owns Smart Balance and Udi's, Mondelez owns Tate's Bake Shop, and Kellogg owns RXBAR.

But the price of acquiring hot, niche food brands is on the rise, even as Kraft Heinz's cash-on-hand declines. The bottom line: Unless Kraft Heinz can adapt to changing consumer tastes and preferences, it will continue to see both its treasured brands and its fortunes shrink 36

Questions for Discussion

5-16 Of the factors that influence consumer behavior, which category or categories (cultural, social, personal, or psychological) best explain Kraft Heinz's current situation?

5-17 Choose the specific consumer behavior factor (for example, culture, family, occupation, attitudes) that most accounts for Kraft Heinz's current situation.

5-18 With respect for buying groceries, discuss the buyer decision process and how it has changed in recent years.

5-19 Make recommendations for Kraft Heinz that you think will turn its situation around.