Kraft Heinz Co. KHC, 0.31%, is part of a large part of its cheese business, a sign of the challenges facing food companies that have complicated their operations as the coronavirus pandemic generated unprecedented demand .
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Kraft Heinz said Tuesday that it had reached an agreement to sell its U.S. natural cheese business and a mix of other cheese brands in North America and internationally to French group Lactalis SA for $ 3.2 billion.
The Wall Street Journal first reported that the sale was imminent before Tuesday. Sausage maker Heinz ketchup and Oscar Mayer, among many other foods, said the sale is part of their plan to simplify their business and focus on brands that have the best potential to resonate with contemporary consumers.
“We moved away from the consumer,” Kraft Heinz growth director Nina Barton said Tuesday at a virtual meeting with investors. “We are rebuilding the connection.”;
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Grocery sales, including packaged foods, have risen during the coronavirus pandemic as consumers have stored their pantries and switched to eating primarily at home. But some established companies have lost market share even though their sales have increased because they cannot keep up with unexpected demand. And the sudden need for more cleaning supplies, protective equipment and delivery trucks reduced their profit margins.
Kraft Heinz had just begun a review of his portfolio of dozens of brands when the pandemic hit. While Kraft Heinz struggled to make enough macaroni and cheese to meet demand, competitors gained ground, as did General Mills Inc. with her Progresso soup and Betty Crocker oven mixes. The pandemic has reinforced an obvious theme in Kraft Heinz’s challenges since the company was created in a 2015 merger: bigger isn’t always better.
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Nestlé SA, Unilever PLC and other major food manufacturers have also made significant divestments in recent years to better focus their operations.
Kraft Heinz has had difficulty since merging with consumers who were engaged in food that looks more modern or healthier and in store brands at a lower price. Pressure to revive sales has tempered its ability to improve profitability. This is reflected in a stock that has lost more than half of its value since the first days of the merger, giving it a market capitalization of about $ 40 billion today, not much more than its debt burden of about $ 30 billion. Some proceeds from the sale to Lactalis are earmarked for debt reduction, the company said.
Kraft Heinz said at his investor meeting that he plans to cut costs by $ 2 billion in five years, returning to the strategy that inspired the company’s formation in the merger five years ago. It starts with a gross saving of $ 350 million to $ 400 million this year.
Shares of Kraft Heinz rose 0.3% on Tuesday to $ 31.97.
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Lactalis, a global dairy company based in France, produces brie, ricotta and other cheeses in the US and sells them under brands including President.
The company entered the U.S. about 40 years ago and has been expanding, acquiring Danony SA’s Stonyfield Organic Yogurt in 2017 under a $ 875 million deal.
Adding the Kraft Cheese business would further increase the company’s footprint at a time when demand for basic groceries is greater than ever amid the coronavirus pandemic.
The sale will include Crushed Kraft and Cheese Blocks and the Cracker Barrel brand in the US, cottage cheese and sour cream from Breakstone and some other assets. Kraft Heinz will keep cream cheeses from Philadelphia, Velveeta, Cheez Whiz and Kraft Singles in the US. It will also maintain its cheese and cheese business worldwide.
The brands Kraft Heinz is selling had about $ 1.8 billion in sales last year, accounting for about 7% of the company’s annual revenue.
In 2018, Kraft Heinz agreed to sell its Canadian natural cheese company to Parmalat for more than $ 1 billion.
The sale to Lactalis comes as Kraft Heinz reorganizes its business under six new platforms that it says are more focused on what consumers want, such as more convenient foods and snacks, rather than 55 different grocery categories. . The new approach, according to executives, will help the company be more agile and innovate more effectively.
In the years following the merger, Kraft Heinz cut costs to generate about $ 1.7 billion in net savings. Its sales growth and market share suffered.
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This contributed to the loss of value of several of its major brands. Since February 2019, Kraft Heinz has written down the value of its brands by about $ 20 billion.
Kraft Heinz chief executive Miguel Patricio said the company, which is partly owned by Brazilian investment firm 3G Capital, was too focused on reducing costs and made short decisions under its previous leadership. “We’re changing that mindset,” he said in an interview.
Last year, Mr. Patricio took over the position of Kraft Heinz after several years as marketing director of Anheuser-Busch InBev SA, another company in which 3G partners are invested.
Patricio said Kraft Heinz will be more strategic about how it reduces costs and will invest more savings in marketing its brands, rather than passing it all on the bottom line, as the company did in the past.
“Do we need to reduce margins to grow brands? The answer is no, “he said.
RBC Capital Markets LLC was financial advisor to Kraft Heinz and Paul, Weiss, Rifkind, Wharton & Garrison LLP was its legal advisor. Perella Weinberg Partners was Lactalis ’financial advisor and Dentons was her legal advisor.
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