Kraft Heinz plans to split, a ten-year "marriage" may come to an end

The food giant Kraft Heinz, jointly created by Warren Buffett and Brazilian private equity firm 3G Capital, is planning a significant split to separate its faster-growing condiment business from its traditional packaged food business.

On July 11, media reports indicated that Kraft Heinz plans to spin off most of its grocery business, including Kraft products, into an independent entity, with a valuation of up to $20 billion. The split plan could be finalized in the coming weeks, but the company's board has not yet made a final decision.

According to reports, the remaining company after the split will focus on the faster-growing condiment business, including Heinz ketchup and Grey Poupon mustard, among other faster-growing sauces and condiments. These categories align better with current consumer preferences and have performed better compared to processed meats and cheese products.

This significant shift marks a dramatic reversal of the 2015 merger deal. Once seen as a savior of the U.S. packaged food industry, this deal ultimately evolved into a historic failed investment. Products that were once staples in American households have gradually lost their appeal in the face of consumers seeking fresher and less processed foods. The stock price has fallen more than 60% since the merger.

As a result, the company hopes to enhance its overall valuation through the split, aiming for the total value of the two independent entities to exceed Kraft Heinz's current market value of approximately $31 billion. Following the news, Kraft Heinz's stock rose more than 2% on Friday, reversing the intraday decline.

The Failure of the "Marriage": From High Hopes to Massive Write-Downs

In 2015, Buffett's Berkshire Hathaway partnered with 3G Capital to facilitate the merger of Kraft and Heinz.

At the time, the merged company had revenues of about $28 billion and owned numerous well-known brands, including Oscar Mayer meats, Maxwell House coffee, Jell-O, and Planters nuts. However, this highly anticipated "merger of the century" quickly encountered problems.

3G Capital was known for its "zero-based budgeting" cost-cutting method, but this model did not work at Kraft Heinz. In 2019, the company announced it was facing significant pressure from rising costs and brand value, resulting in a write-down of up to $15 billion for the Kraft and Oscar Mayer brands.

Then-CEO Bernardo Hees admitted at the time:

We were overly optimistic about achieving savings, and those savings did not materialize.

Shortly thereafter, he stepped down. Since the merger, Kraft Heinz's sales have stagnated, profits have declined compared to the first year after the merger, and the stock price has fallen more than 60%, with a market value evaporating by about $57 billion. The stock price has still dropped 12% this year.

The change in shareholder structure seems to have laid the groundwork for this strategic adjustment.

By the end of 2023, 3G Capital has completely divested its stake in Kraft Heinz. Although Berkshire Hathaway remains the largest shareholder (holding about 28%), it has announced that it will no longer occupy a seat on the company's board of directors, a move interpreted by many industry observers as a signal that the company is about to undergo transformation.

New Blueprint: Focus on High Growth, Divest Traditional Businesses

Kraft Heinz's strategic focus has clearly shifted towards categories that align more closely with current consumer trends.

The categories prioritized by the company include hot sauces, condiments, and seasonings, which are growing faster than its traditional processed lunch meats and cheese products.

The newly separated entity will take on most of the traditional grocery business, while the remaining parent company will have a more streamlined and growth-oriented asset portfolio, centered around iconic brands like Heinz ketchup.

Analysts believe that Kraft Heinz's logic is that separating different business units will allow investors to more clearly assess their respective values and prospects, thereby driving an overall increase in market capitalization. However, according to media reports citing informed sources, the company is still determining which specific brands will be included in the spun-off entity.

Large food companies are facing a reshuffling. Strict government scrutiny of processed foods, the rise of weight-loss drugs, cuts to food stamp programs, and consumers' preference for fresher, healthier foods have all intensified industry challenges.

In the face of adversity, Kraft Heinz has been actively managing its portfolio. In recent years, the company has attempted to sell underperforming brands like Oscar Mayer and Maxwell House but has not succeeded.

Recently, the company announced plans to remove artificial colors from its U.S. products and earlier this week disclosed the sale of its baby and special foods business in Italy for an undisclosed amount. Company President Willem Brandt stated:

We are consciously and proactively managing our portfolio.

This potential major divestiture is undoubtedly the most aggressive step in this management strategy to date, aimed at fundamentally reshaping the company to adapt to a changed food consumption market