Warren Buffett's Troubled 'Kraft Heinz'...Why the Company Is Splitting Again [Business & Issue]

Breakup Amid Sluggish Performance... Effectiveness in Doubt
Core Product Sales Continue to Fall
"Will Focus on Core Business"
Out of Step with Health Food Trends
"Change Is Needed"

The headquarters of Kraft Heinz located in Chicago, Illinois, USA. Photo by AFP

Kraft Heinz, which has been struggling with sluggish sales, has announced a breakup nearly 10 years after its merger. The company plans to use the split as an opportunity to focus on its core products-sauces and shelf-stable foods-in hopes of recovering its performance. However, major investors, including Warren Buffett, are opposing the move. The investment industry also believes that the split is unlikely to serve as a long-term solution. There are concerns that without developing new brands in line with health trends, it will be difficult for Kraft Heinz to overcome its poor performance.

Kraft Heinz Announces Breakup 10 Years After Merger..."Problems Remain Unsolved"

On September 4 (local time) at the Nasdaq Stock Exchange, Kraft Heinz’s share price closed at $26.96, down 12.38% from $30.77 at the beginning of the year. This is a relatively poor performance, especially considering that the Nasdaq index has risen 12.58% since the start of the year. Kraft Heinz has been shunned by investors after posting a massive operating loss of $8 billion (about 11.15 trillion won) in the second quarter of this year.

The management’s announcement of a corporate breakup also failed to elicit a positive response from the market. On September 2, Kraft Heinz announced that it would split its business into two publicly listed companies to improve operational efficiency. Under the new plan, Kraft Heinz will separate into one company focusing on its core products-such as Philadelphia Cream Cheese and Heinz Ketchup-and another company concentrating on its North American meat processing business.

Warren Buffett, chairman of Berkshire Hathaway and the largest shareholder who led the 2015 merger of Kraft and Heinz, is opposed to the breakup. In an interview with CNBC, Buffett expressed his disappointment, saying, “The split itself is unlikely to create value and will only incur costs,” and “Separating the company and making the ketchup taste better will not solve the underlying problems.” Since merging Kraft and Heinz with private equity firm 3G Capital in 2015, Buffett has remained the largest shareholder, currently holding a 27.5% stake.

Sales of Core Products Like Ketchup and Cream Cheese Continue to Decline..."Focus on Main Business"

Kraft Heinz Homepage

Kraft Heinz management expects that by breaking up the company, it can improve the quality of its core products and escape from sluggish sales. They argue that managing more than 200 food brands under one company made it difficult to focus and prioritize, leading to underperformance.

In a statement released right after the breakup announcement, Miguel Patricio, chairman of the Kraft Heinz board, said, “Each Kraft Heinz brand is structurally too complex, with business divisions scattered around the world, making effective capital allocation, setting business priorities, and expanding into promising areas difficult. By splitting into two companies, we can maximize the potential of each brand and focus on elevating product quality.”

Kraft Heinz’s sales last year were $25.85 billion (about 36 trillion won), down 2.98% from the previous year, and this year’s performance has also been weak. First quarter sales fell 6.4% year-on-year to $6 billion, while second quarter sales dropped 1.9% to $6.35 billion. The company’s full-year sales are also expected to decline by more than 3.3% compared to last year.

Robert Moskow, an analyst at U.S. investment bank TD Cowen, pointed out, “In the food industry, focusing on specific brands is more likely to succeed in the long term than diversification, but splitting the company again could complicate distribution and partner arrangements, leading to higher-than-expected costs.”

Short-Term Risks Overcome, But..."Must Be More Sensitive to Changing Food Trends"

Reuters Yonhap News

Experts advise that Kraft Heinz should focus less on splitting the company and more on following new consumer preferences and trends if it wants to overcome sluggish sales. In the current environment, where consumers are increasingly interested in diet and health foods, Kraft Heinz’s existing products have developed a strong negative image.

Peter Galbo, an analyst at Bank of America (BOA), said, “The biggest problem for Kraft Heinz is that it has failed to keep up with rapidly changing consumer tastes since the COVID-19 pandemic. Its core products-seasoning sauces, processed cheese, and processed meat-do not appeal to customers looking for healthy and organic foods or those trying to lose weight with obesity treatments.”

Pressure from U.S. health authorities is another challenge. Robert F. Kennedy Jr., Secretary of the U.S. Department of Health and Human Services, instructed processed food companies earlier this year to remove all artificial coloring from their products by 2027, stating that “artificial coloring has no nutritional value and harms children’s health.” Kraft Heinz also pledged in a statement last June to eliminate artificial coloring from all its brands by 2027.