Kraft Heinz Co. KHC 0.31% is parting with much of its cheese business, a sign of the challenges facing food companies, the scale of which complicates operations as the coronavirus pandemic leads to unprecedented demand.
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Kraft Heinz said on Tuesday that it had reached a deal to sell its US natural cheese business and a combination of other cheese brands in North America and internationally to French Groupe Lactalis SA for $ 3.2 billion.
The Wall Street Journal first reported that the sale will take place earlier on Tuesday. Ketchup maker Heinz and delicacy Oscar Mayer, among many other foods, said the sale was part of his plan to simplify the business and focus on brands that have the best potential to resonate with today̵
“We have moved away from the consumer,” Kraft Heinz CEO Nina Barton said in a virtual meeting with investors on Tuesday. “We’re reconnecting.”
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Food sales, including packaged foods, increased during the coronavirus pandemic as consumers stored warehouses and turned to eating primarily at home. But some established companies lost market share even when their sales increased because they could not cope with the unexpected demand. And the sudden need for more detergents, protective equipment and delivery trucks is declining in terms of their profits.
Kraft Heinz had just begun a major overhaul of its dozens of brand portfolio when the pandemic struck. While Kraft Heinz struggled to make enough pasta and cheese to meet demand, competitors prevailed, such as General Mills Inc. with its Progresso soup and Betty Crocker baking mixes. The pandemic reinforced a theme evident in Kraft Heinz ‘s challenges since the company was formed during the 2015 merger: bigger is not always better.
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Nestlé SA, Unilever PLC and other major food manufacturers have also made significant sales in recent years to better focus their operations.
Kraft Heinz is struggling after the merger with consumers who are shifting to foods that look more modern or healthier, and to brand stores at lower prices. Pressure to revive sales has softened its ability to improve profitability. This is reflected in a stock that has lost more than half of its value since the early days of the merger, giving it a market capitalization of about $ 40 billion today, not much more than a debt burden of nearly $ 30 billion. Some proceeds from the sale of Lactalis are intended to reduce debt, the company said.
Kraft Heinz said during a meeting with investors that it plans to cut costs by $ 2 billion over five years, returning to the strategy that inspired the company to merge five years ago. It starts with $ 350 million to $ 400 million in gross savings this year.
Shares of Kraft Heinz rose 0.3 percent on Tuesday to $ 31.97.
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The closely-maintained Lactalis, a global dairy company based in France, produces brie, ricotta and other cheeses in the United States and sells them under brands, including President.
The company entered the United States about 40 years ago and is in the process of expanding, acquiring organic Stonyfield yogurt from Danone SA in 2017 in a $ 875 million deal.
The addition of the Kraft cheese business will increase the company’s additional footprint at a time when demand for basic foodstuffs is higher than ever amid the coronavirus pandemic.
The sale will include sliced kraft cheese and Cracker Barrel brand in the United States, cottage cheese and sour cream from Breakstone and some other assets. Kraft Heinz will retain cream cheese Philadelphia, Velveeta, Cheez Whiz and Kraft Singles in the United States. It will also keep its macaroni and cheese business worldwide.
The brands that Kraft Heinz sells have had sales of about $ 1.8 billion in the last year, representing approximately 7% of the company’s annual revenue.
In 2018, Kraft Heinz agreed to sell its Canadian natural cheese business to Parmalat for more than $ 1 billion.
The sale of Lactalis comes when Kraft Heinz reorganizes its business under six new platforms, which it says are more focused on what consumers want, such as more convenient meals and snacks, instead of 55 different categories of groceries. The new approach, executives said, will help the company be more flexible and innovate more efficiently.
In the years following the merger, Kraft Heinz cut costs to generate about $ 1.7 billion in net savings. Sales growth and market share suffered.
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This has contributed to some of its biggest brands losing value. Since February 2019, Kraft Heinz has recorded the value of its brands with about $ 20 billion.
Kraft Heinz CEO Miguel Patricio said the company, which is partly owned by Brazilian investment company 3G Capital, was too focused on cutting costs and made short-sighted decisions under its previous leadership. “We are changing this way of thinking,” he said in an interview.
Last year, Mr. Patricio took over the position at Kraft Heinz after a few years as Chief Marketing Officer at Anheuser-Busch InBev SA, another company in which 3G partners are investing.
Mr Patricio said Kraft Heinz would be more strategic in terms of cutting costs and investing more of its savings in marketing its brands, instead of putting everything down, as the company had done in the past.
“Do we have to reduce margins to grow brands?” The answer is no, “he said.
RBC Capital Markets LLC was a financial advisor to Kraft Heinz, and Paul, Weiss, Rifkind, Wharton & Garrison LLP was a legal advisor. Perella Weinberg Partners was a financial advisor to Lactalis and Dentons was a legal advisor.
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