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Based on the case study answer the following -

Step 1 - Find the identification of problem explain in detailed manner

Step 2 - Answer the following question in detailed manner - Summarize the reasons for the decline in sales of Kraft foods product and explain its strategies for growth.

Step 3 - Also explain its strategies for growth. detailed manner

Read the case study provided below in the pictures on the topic -Growth Strategic Options of Kraft Heinz

Case - Growth Strategic Options of Kraft Heinz

Abstract This case discusses how a leading U.S.-based food retailer, Kraft Heinz Co (hereafter Kraft Heinz), was, by February 2019, performing poorly in the stock market. Critics believed that heavy debt, its implementation of zero-based budgeting, and lack of innovation in organic food categories, where there was a significant shift in consumer preference, were key reasons for Kraft Heinz's downfall. The company not only tried to introduce new products and brands but also expanded into the organic food category by acquiring startups. Kraft Heinz intended to sell some of its existing brands as well, yet several challenges remained for CEO Miguel Patricio, who was appointed in July 2019. Students are asked to consider what strategic options Patricio should pursue for the growth of Kraft Heinz. Should he discontinue the implementation of zero- based budgeting and invest more in innovation? Is a high debt-earnings ratio likely to impact Patricio's decision? How should Patricio manage the brand portfolio of Kraft Heinz? Case Learning Outcomes By the end of the case study discussion, students should be able to: outline the principle components of the Ansoff Matrix; . examine the appropriateness of zero-based budgeting using the product life cycle theory; . describe the BCG matrix as a brand portfolio management tool; and analyze how a firm could attain long-term sustainable growth. Introduction In February 2019, Pittsburg, U.S.-based Kraft Heinz Co (hereafter, Kraft Heinz), which produces a wide variety of food products, made three announcements. Kraft Heinz stated that it had written down brand goodwill by USD 15.4 billion, implying that expected future earnings could be 25% lower than previous estimates (Tully, 2019). It also informed shareholders that the U.S. Securities and Exchange Commission was probing into some of the company's accounting policies. Finally, in the fourth quarter of 2018, the company incurred USD 12.6 billion in losses ("Kraft-Heinz is in trouble," 2019). According to Bemardo Hees, then CEO of Kraft Heinz, brands were written down due to supply chain and operation problems ("Kraft-Heinz is in trouble, " 2019). Industry experts had differing opinions about the perils of Kraft Heinz, which they primarily attributed to zero- based budgeting (ZBB). ZBB involves the creation of a budget from scratch rather than by extrapolation from previous year's expenditures. Under ZBB, all expenses incurred for each new period require justification. The process of budgeting begins from a "zero base"; each year, every function within an organization analyzes its needs and costs ("Zero-based budgeting," 2020).Kraft Heinz adopted ZBB from 3G Capital Inc to enhance efficiency. 3G Capital Inc is a New York-based global investment company and a substantial shareholder in Kraft Heinz. Commenting on ZBB, Eddy Hargreaves, an analyst at Investec Lid, an international investment group, stated that other consumer product companies, such as Unilever, Mondelez International, Diageo, and Kellogg, also used ZBB but that these companies did not experience consequences similar to those of Kraft Heinz. Hargreaves further explained, "I think it's a black eye for Kraft Heinz management for not implementing it in as a [sic] sophisticated way as might be necessary, or maybe they just implemented it too hard, too fast." He further added, "I don't think ZBB per se is the problem" (Geller & Naidu, 2019). Also, the head of investment at a European consulting firm stated, "To catch up with the shift of consumer demand for better-for-you and sustainable food, you have to innovate. And to innovate you simply can't use ZBB" (Geller & Naidu, 2019). Page 3 of 15 Growth Strategic Options of Kraft Heinz SSAGE businesscases SAGE SAGE Business Cases O Arpita Agniholri and Saurabh Bhattacharya 2021 Furthermore, Kraft Heinz became the worst-performing S&P 500 Consumer Staples Food and Soft Drink Products stock (see Figure 1). In February 2019, Kraft Heinz had leverage (Le., debt-to-equity ratio) that was 4.4 times the company's 2018 adjusted earnings. The company stated that its goal has been to slash the leverage ratio to just three times earnings (Egan, 2019). According to analysts, high leverage could leave less cash for investment in Kraft Heinz's faltering brands (Egan, 2019). In July 2019, the company appointed a new CEO, Miguel Patricio, who as a marketing head had previously turned around Anheuser-Busch InBev SA/NV (AB InBev), a Leuven, Belgium-based manufacturer of alcoholic beverages (Egan, 2019). Patricio expressed his intent to focus on rebuilding Kraft Heinz brands such as Oscar Mayer and Velveeta. He further stated, "I think the obsession for efficiency has to be much bigger than the obsession for cutting costs" (Naidu, 2019). Analysts considered Patricio's appointment an encouraging sign of Kraft's focus on growth than efficiency (Sanchez, 2019). Figure 1. Cumulative Total Return on Kraft Heinz Common Stock Versus S&P Consumer Staples Food and Soft Drink Products (USD) 140 125.99 128 53 121.93 11544 2 120 110.18 1 14.08 100 12 07 80 67.49 Cummulative Total Return 60 40 20 July 6. 2015 December 31. December 30. December 29. December 28. 2015 2016 2017 2018 -Kraft Heinz S&P Consumer Staples Food and Soft Drink Products(Sanchez, 2019). Figure 1. Cumulative Total Return on Kraft Heinz Common Stock Versus S&P Consumer Staples Food and Soft Drink Products (USD) 140 125.99 128.53 121.93 115.44 120 110.18 114-08 100 102 07 100 80 67.49 Cummulative Total Return 60 40 20 July 6, 2015 December 31, December 30, December 29, December 28, 2015 2016 2017 2018 -Kraft Heinz -S&P Consumer Staples Food and Soft Drink Products Source: Form 10-K: The Kraft Heinz Company (2019). What strategic options should Patricio pursue for the growth of Kraft Heinz? Should he discontinue the implementation of ZBB and invest more in innovation? Is a high debt-earnings ratio likely to impact Patricio's decision? How should he manage the brand portfolio of Kraft Heinz? Background Kraft Heinz was (in 2015) the third-largest food and beverage company in North America and the fifth-largest food company in the world. Eight of its brands were worth more than USD 1 billion in annual revenue. Some of the iconic brands included Kraft, Heinz, Weight Watchers' Smart Ones, Capri Sun, Oscar Mayer, and Philadelphia. A merger of Kraft Foods and H. J. Heinz Co in March 2015 gave birth to Kraft Heinz. In 2013, Warren Buffet, CEO of Berkshire Hathaway Inc, partnered with 3G Capital to acquire Heinz for USD 28 billion. In 2015, Buffett and 3G Capital again teamed up to acquire Kraft Foods for USD 40 billion "Rosenbaum, 2019). In 2018, the merged Kraft Heinz company had 38,000 employees. For the financial year 2018, the company had net sales of USD 26.26 billion and earnings before interest, taxes, depreciation, and amortization of USD 7 billion ("Kraft Heinz Reports Fourth Quarter,"," 2019; see Table 1). Table 1. Kraft Heinz Financials (2016-2018)Source: Form 10-K: The Kraft Heinz Company (2019). 3G Capital estimated savings of USD 1.7 billion from the merger of Kraft Foods and H. J. Heinz Co (Hirsch, 2019a). One of the driving forces for the merger was the anticipation of better bargaining power with retailers and specialty stores. The company expected more shelf space, resulting in a higher operating margin (Trefis Team, 2015). Kraft Heinz also pressured retailers for in-store promotions and shelf space, based on its status of being the third-largest food company in the United States, which made them believe they would have a better bargaining power over retailers. Consequently, in 2017, they lost the contract for Planters peanuts with Walmart's Sam's Club. Later, after several rounds of negotiations, Walmart restored the contract. However, the temporary loss of this contract resulted in a 28% decline in sales in the salted snacks category of Kraft Heinz (Hirsch, 2019b). Buffet stated, "We may have made a mistake in terms of trying to push hard against certain ... retailers and finding out that we weren't as strong as we thought" (Hirsch, 2019b). Furthermore, in 2019, Kraft Heinz's Research and Development (R&D) investment was 0.4% of sales and was less than half the amount spent by competitors, such as Mondelez International or Nestle SA (Barker, 2019). According to media reports, Kraft-Heinz's marketing spend was also less than peers. In 2018, Kraft Heinz's marketing spend was 3.2% of its sales, where for AB InBev, marketing expense was 20% of its sales (Sonenshine, 2019). Consequently, for fiscal year 2018, Kraft Heinz reported losses (see Table 1). This occurred when in the United States the consumer packaged goods industry was already experiencing a rapid transition of power, from big household-name brands to venture capital-funded startups who offered more healthy offerings to customers (Duberstein, 2018c). Furthermore, large retailers, with their private label brands such as Costco's Kirkland brand or Kroger's Simple Truth brand, were of reasonable quality and low-priced (Duberstein, 2018b). According to research conducted by Nielsen in 2019, in the United States, private label brands experienced sales growth of 33.2% between 2012-2017, while national brands gained 1% ("Private Label Growth Outshines," 2019). Post-Merger Growth Strategy Page 5 of 15 Growth Strategic Options of Kraft Heinz SSAGE businesscases SAGE SAGE Business Cases Arpita Agnihotri and Saurabh Bhattacharya 2021 Kraft Heinz followed several growth strategies post-merger, which are discussed in the following sections. Zero-Based Budgeting Kraft Heinz was burdened with a heavy debt of USD 30 billion when the company turned to ZBB in 2017 (Gasparro & Monga, 2019). 3G Capital, the owner of Kraft Heinz, was considered a standard-bearer for ZBB. Zero-based budgeting is an accounting practice that the company had perfected and popularized, on a global stage (Gasparro & Monga, 2019). 3G Capital used a similar approach to turnaround the poor performance of AB InBev and Burger King (Dowd, 2019).Zero-Based Budgeting Kraft Heinz was burdened with a heavy debt of USD 30 billion when the company turned to ZBB in 2017 (Gasparro & Monga, 2019). 3G Capital, the owner of Kraft Heinz, was considered a standard-bearer for ZBB. Zero-based budgeting is an accounting practice that the company had perfected and popularized, on a global stage (Gasparro & Monga, 2019). 3G Capital used a similar approach to turnaround the poor performance of AB InBev and Burger King (Dowd, 2019). Using ZBB, Kraft Heinz made deep cuts to expenditure in all aspects, ranging from corporate overhead to R&D. Within four months of the merger, the company terminated 10% of the employees (Sanchez, 2019). In a single day, the company asked 11 out of 12 senior executives to leave (Sanchez, 2019). Between 2016 to 2017, Kraft Heinz first reduced its cost of goods sold by 4.4%. Next, selling, general and administrative expense was also reduced by 15% during this period. R&D expenditure was reduced from USD 120 million in 2016 to USD 93 million in 2017, which, according to analysts, implied muscle was being eliminated with the fat (Tully, 2019). Data-Driven Marketing As a part of data-driven marketing efforts, Kraft Heinz largely relied on social media interaction data to drive sales. For example, based on social media data, the company identified three consumer segments who were consuming cheese products of the Philadelphia brand. These were Quick & Easy, Kid Friendly, and Entertaining. Next, Kraft Heinz catered to these consumer segments with the most appropriate advertisement ("Post-Integration Business Update," 2018). This helped the company cut the cost of media impression by 40% between 2015 and 2017 while raising the quality of impression at the same time ("Post-Integration Business Update," 2018). Growth in Emerging Markets In emerging markets such as Brazil, China, India, Argentina, and Malaysia, an increase in disposable income has led to an increase in demand for convenience and processed foods ("Demand for Ready-to-eat," 2019). In the global ranking of the market potential index of the food processing industry, China and India stood at first and fourth positions, respectively, amongst all countries in the world ("Food Processing: Market Potential," 2017) (see Table 2). Kraft Heinz also reported growth in these markets. Its net sales for the second quarter of 2018 increased by 0.7%, largely due to growth in emerging markets ("Kraft Heinz Benefits, " 2018). To fasten its entry in emerging markets, in 2017, Kraft Heinz unsuccessfully tried to acquire Unilever for USD 143 billion, as it had a strong presence in emerging markets ("Kraft Heinz Pivots, * 2017). Kraft Heinz reinvested its foreign subsidiary earnings to support growth in international markets ("Form 10-K," 2016). In January 2016, Kraft Heinz had USD 1.6 billion of cash and short-term investments it had earned from international subsidiaries. Internationally, Kraft Heinz was present in 30 countries ("Form 10-K," 2016). As a part of its restructuring effort, 3G Capital closed some of the international plants, such as one in Spain (Colvin, 2017).Brand Portfolio For managing its brand portfolio, Kraft Heinz used different approaches for different brands. For example, in the sauces, dressings, and condiments category, Kraft Heinz's brand was the market leader in the United States (see Figure 2). Furthermore, this product category contributed most to the revenue stream of Kraft Heinz (see Table 3). In the Unites States, the sauces and condiments market was expected to grow annually by 1.3% between 2019 and 2023 ("Consumer Market Outlook: Sauces,"2019). In response to this forecast, Kraft Heinz strengthened its offering in the Ketchup category by launching Heinz Organic and Heinz Sriracha ketchup versions to suit the taste of different sets of consumers ("Post-Integration Business Update," 2018). Kraft Heinz's competence in the ketchup category was further exploited to launch mustard and barbecue sauce versions in 2018. In the packaged meal category, which was the third-most important category for Kraft Heinz, the company launched macaroni and cheese, which were free from any artificial flavors ("Post- Integration Business Update," 2018). Figure 2. Company Shares of Sauces, Dressings, and Condiments in the United States (%; 2018) 12 10.7 10 7.7 6.8 Market Share (%) 5.1 4.1 2.6 2.6 Kraft Heinz Co Frito-Lay Co Mccormick & Co Inc Campbell Soup Co ConAgra Brands Inc HV Food Products Inc Mizkan America Inc Unilever United States Inc CompanyGrowth of Competitors In 2018, global merger and acquisition activities among the world's top 50 consumer goods companies, including Procter & Gamble, L'Oreal, Nestle SA, and Unilever, increased by 45%-in comparison with 60 such deals in 2017-at a value of USD 145 billion (Cheng, 2018). Most food companies were acquiring smaller and more innovative brands that reported high growth rates, such as Kellogg's acquisition of Kashi, General Mills acquisition of Annie's Organics, or Danone's acquisition of WhiteWave Foods ("Kraft Heinz Pivots, " 2017). Conagra Foods agreed to buy Pinnacle Foods for nearly USD 11 billion, and General Mills acquired natural pet foods label Blue Buffalo for USD 8 billion. Many of these acquisitions occurred in emerging markets (Cheng, 2018). Nestle, for example, acquired Egyptian instant coffee company Caravan and L'Oreal bought a Mexican cosmetics company. Several competitors invested in startups as well. Unilever, for example, invested in the meal-kit startup Sun Basket and digital advertising startup Celtra (Cheng, 2018). The Kraft Heinz strategy resonated with these trends. In 2018, the company acquired Ethical Bean, a Canadian coffee brand, which was Canada's first "B Corporation" (l.e., a company that met certain high standards of environmental and social stewardship). For example, scanning the QR code on Ethical Bean's coffee package informed consumers about the source (Le., the farm) of coffee beans (Duberstein, 2018c). In March 2018, Kraft Heinz also launched Springboard, a platform dedicated to accelerating the growth of food and beverage startups, especially those startups that had Natural & Organic, Specialty & Craft, Health & Performance, or experiential brands. Sergio Eleuterio, General Manager of Springboard Brands, stated, "We are committed to support and partner with teams that will impact the future of our industry." "We are actively searching for emergent, authentic brands that can expand into new categories, and are looking to build a network of founders to help shape the future of foods and beverages" ("Kraft Heinz Launches New Platform," Page 10 of 15 Growth Strategic Options of Kraft Heinz SSAGE businesscases SAGE SAGE Business Cases @ Arpita Agnihotri and Saurabh Bhattacharya 2021 2018). Selected teams had a chance to not only receive funding from Kraft Heinz but also receive support for additional funding ("Kraft Heinz Launches New Platform," 2018). By March 2019, Kraft Heinz supported five selected brands, namely Blake's Seed-makers of allergen-free snacks, Brami-manufacturer of shelf-stable, marinated lupini beans, Ka-Pop!-the maker of ancient grain-based chips, Origin Almond-manufacturer of liquid essence of almonds based on cold-press technology, and Tiny Giants-maker of plant-based yogurts (Scully, 2019).Kraft Heinz competitors attempted to adopt the ZBB strategy. 3G Capital insiders mentioned that acquiescing to investors' pressure, several food companies also implemented ZBB, which made them less lucrative acquisition targets (Gasparro & Monga, 2019). For instance, Campbell restructured its organization to eliminate management layers, Kellogg slashed 2,000 jobs, and the Mondelez ex-CEO stopped flying first class. Mondelez also held "fire drills" to rehearse how executives would tackle phone calls from 3G Capital with an acquisition offer (Gasparro & Monga, 2019). In terms of product performance, some competitors, such as Conagra Foods, were doing well in the frozen meal category (Hirsch, 2018), whereas other competitors, such as Campbell soup, were facing a crisis similar to that faced by Kraft Heinz. Analysts believed these companies were experiencing difficulty because of the increasing shift of consumers towards healthy alternatives (Hirsch, 2018)- Failed Divesture Efforts In 2019, Kraft Heinz tried to sell four of its big brands that were not doing well. These included Breakstone's sour cream and cottage cheese, Plasmon baby food, Maxwell House (a leading brand in the coffee market of the United States, see Figure 5), and Ore-Ida frozen potato products. Kraft Heinz expected to sell Breakstone's for USD 400 million, Plasmons for USD 800 million, Ore-Ida for USD 2 billion, and Maxwell House for more than USD 3 billion. However, due to a lack of consumer demand for these products, potential buyers also lowered their interest and none of them could be sold (Sun, 2019). Kraft Heinz expected to use the proceeds from the divesture of these brands for debt payment (Hirsch, 2019c). In 2019, Kraft Heinz reduced dividend payments to shareholders by 36% to service its debt (Egan, 2019). Figure 5. Market Share of Leading Ground Coffee Brands (%; 2017) 35 30 30 25 20 Market Share (%) 14 10 3 Folgers Maxwell Starbucks Private label Dunkin' Peet's House Donuts Coffee CompanyThe Road Ahead Patricio was planning to upscale some of the Kraft Heinz brands. He stated, "There is a big premiumization going on, which, according to him, presented "an opportunity in the food industry" (Barker, 2019). Experts did not agree with this strategy. Tim Calkins, a former Kraft Foods executive and present marketing Professor at Kellogg School of Management stated, "It's hard to see a hot dog brand like Oscar Mayer will command a premium price. Oscar Mayer is an incredibly well-known brand. But most people wouldn't call it a premium brand" (Barker, 2019). Moreover, other experts believed that consumers were more driven by fresh foods than packaged food, offered by upstart brands ("Perspectives on Retail and Consumer Goods," 2019). For packaged food, retailers offered private-label products at a lower price, Consequently, those consumers who were not health-conscious, preferred to shift to these low-price tags (Whiteman, 2019). Lemann expressed his surprise at how consumer product companies got disrupted. He stated, "I've been living in this cozy world of old brands and big volumes... We bought brands that we thought could last forever... You could just focus on being very efficient... All of a sudden we are being disrupted" (Duberstein, 2018b). However, David Gardner and Tom Gardner, popular investors, believed that Kraft Heinz stock was one of the 10 stocks worth buying as they believed that focus on innovation and marketing, in the long run, would pay off (Duberstein, 2018a). Commenting on the turnaround of the Kraft Heinz brand, Patricio stated, "My profile will bring a much more consumer-centric [vision]." Patricio also emphasized that his focus would be on improving Kraft Heinz's speed, sales growth, and brand building (Hirsch, 2019b). According to David Kass, professor at the University of Maryland, in the Kraft Heinz merger, the problem was that Kraft Foods, not H. J. Heinz Co, required innovation. He stated, "the problem resides within the Kraft side of Kraft Heinz-the Heinz side is perfectly fine" (Reibstein & Kass, 2019). For example, between 2010 and 2014, Kraft Foods' share in the U.S. market for packaged macaroni and cheese, declined to 78% from 82% of March 2010, as consumers shifted to Annie's Inc, which was considered more natural and organic (Baertlein, 2014). Robert Moscow, a research analyst, on the contrary, believed that Kraft Heinz needed an entire reorganization around a completely new mission, where it should capitalize on the creative forces of its workforce, rather than tightening the reign through cost-cutting measures (Georgescu, 2019). In 2019, the company had a debt of USD 10.3 billion, which was likely to mature by 2024, and analysts expected that this could constrain turnaround initiatives that Patricio was intending to take (Sun, 2019). Moreover, 3G Capital and Buffet wanted to reduce the debt and bring debt to equity ratio to order of three, so that they could fund further acquisitions of competitors such as General Mills or Kellogg (Gara, 2015)- Amidst challenges of intended leverage, increasing competition from startups, and changing consumer preferences, Patricio had several issues to resolve. What possible growth strategies can he use? Should Patricio continue with zero-based budgeting? How should he manage the portfolio of Kraft Heinz brands? How can he ensure the long-term sustainable growth of Kraft Heinz