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What Was Wrong at Kraft Heinz?
Last week the stock of the packaged food giant, Kraft Heinz, took a nosedive. The stock fell by 28% on news of a SEC investigation of the company’s accounting practices but more so the nosedive was due to gigantic losses in the last year. The package food business is very competitive and companies need to balance quality, price, advertising, and new product lines in order to stay competitive as much so as to gain an advantage. What was wrong at Kraft Heinz was that they seem to have lost their way. Cost cutting became the order of the day in order to maintain healthy profit margins. But, consumer tastes are always evolving and old, tried and true products can easily lose ground, especially in an era when everyone wants “organic.”
Kraft Heinz was formed just a few years ago in a merger of two companies with hundred-year histories, Kraft Foods and Heinz, the famous ketchup maker. The deal was pushed by none other than Warren Buffett and is a classic Buffett investment. The so-called “Oracle of Omaha” only invests in companies when he fully understands how they make money and how they will continue to do so for years on end. The company formed by two packaged food stalwarts was a typical Buffett investment and is company, Berkshire Hathaway, owns slightly more than a quarter of Kraft Heinz stock shares.
Management sought to make the company more profitable by cutting $1.7 Billion in “excess costs.” And, prior to the recent debacle, Kraft Heinz as returning more per shareholder dollar than competitors like General Mills. That is no longer the case!
The company traded for $80 a share after the merger and from early 2016 to the middle of 2017 rose to the $90 range. Since that time the cost cutting at Kraft Heinz was not working so well as the share price gradually fell to the upper $40 range. Then the bombshell exploded.