Kraft Heinz: We have invested too much in marketing costs that consumers can’t see

New CEO says the company has invested too much into marketing costs such as agency fees and production costs at the expense of media and creative.

Heinz tomato ketchupKraft Heinz is rethinking how it spends its marketing investment, looking to cut back on areas such as agency fees, production and research, so it can invest more money in its brands and people.

Speaking on an investor call today (8 August) following its first-half results, CEO Miguel Patricio says its media investments are “below where they should be”. But before it increases its marketing spend, it will be looking at how it can “reorganise and redeploy” budgets it already has.

“In marketing, we are increasing investment, but media spend is declining because we are putting money behind other things [like] agency fees, production and research. [Investment in] the things consumers see are declining to pay for other expenses. These are inefficiencies we can redeploy,” he commented.

“We can make marketing investments much better, so we invest in things the consumer sees, not what they don’t see.”

Patricio’s comments suggest that Kraft Heinz will become the next in a line of FMCG companies to reconsider how it works with agencies and spends its marketing investment. In Procter & Gamble’s annual results last week, the company said it had reduced marketing spend by $350m, in part by reducing agency fees.

Unilever has also focused on reducing agency fees and production costs, in part by shifting to a holding company relationship with WPP, rather than with individual agencies.

Kraft Heinz’s focus appears not to be on reducing marketing spent, but better deploying it. Patricio said he believes its brands need more investment, but that it needs to find a better balance between spend on innovation and its core brands.

We can make marketing investments much better, so we invest in things the consumer sees, not what they don’t see.

Miguel Patricio, Kraft Heinz

He suggested the company had spread itself too thin, not putting enough investment behind its core brands. That is despite the fact the company knows that “we win when we strongly and consistently invest in brands”.

He pointed to both Heinz ketchup and Philadelphia as brands where Kraft Heinz has invested in product, innovation and marketing, and is reaping the benefits. Heinz’s market share of the US ketchup sector hit an all-time high of 70%, while Philadelphia has grown share and the category over the past five years.

However, he said that on both brand and innovation investments, Kraft Heinz needs to become “more consumer obsessed” so it can better predict behaviour and trends, and move faster.

“Our strategy has to be based on understanding the future and the consumer. The industry is in a state of huge transformation, but that is also a moment of opportunity. The ones that take the opportunity are the ones that understand the future better than the other; they will lead and others will follow, and [followers] will not win,” Patricio explained.

‘Significant work ahead’

Patricio has been in the role for little more than a month, but joins a company that he admits has “significant work ahead” if it wants to turn around its performance. In the first half of the year Kraft Heinz saw net sales fall almost 5%, while it was forced into a massive writedown of assets and an investigation into its procurement practices.

Net sales fell to $12.4bn in the six months to the end of June, compared to $13bn a year ago. Operating income was down 54.6% to $1.3bn and net income fell by 51.4% to $854m.

That follows a disastrous close to 2018, when the company posted a net loss of $12.6bn after admitting that two of its marquee brands – Kraft and Oscar Meyer – were worth $15bn less than they had been valued at four years previously.

Kraft Heinz is in 57 varieties of trouble

Patricio said: “The level of decline we experienced in the first half of this year is nothing we should find acceptable moving forward. We have significant work ahead of us to set our strategic priorities and change the trajectory of our business.”

The Kraft Heinz CEO has three immediate goals: firstly, to better “know” the business, consumers, customers and colleagues; secondly to execute the 2019 business plan; and thirdly to lead a comprehensive review into strategy for the next three-to-five years.

“We must concentrate on setting the strategic agenda. We must ask ourselves the hard questions, not [what is happening] in the short-term or next quarter,” he said. “We must get the organisation fixated on consumers and customers, and ensure we don’t rush to give away potential value to others.”

Despite the challenges Kraft Heinz faces, Patricio said he saw opportunities in the power and scale of its brands.

“I really believe in the power of brands and we have an amazing portfolio of brands. Some are shining, some are not, but with the heritage we have, the household concentration and awareness we have, that makes me feel very positive about the possibility of turning around the trends in the brands not doing as well,” he concluded.

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