Kraft Heinz lost volume in the first half to further double-digit pricing but the losses are now expected to “moderate” and turn positive in 2024.
After raising prices by 11% in the second quarter to average 12.8% year to date, CEO Miguel Patricio indicated Kraft Heinz is now done in its bid to recover inflationary costs, as he flagged in February. Those input pressures are foreseen in the low-to-mid-single-digit area in the back half, compared to mid-to-high single digits for fiscal 2023 as a whole.
Pricing initiatives have exceeded Kraft Heinz’s competitors, which have also invested more than the ketchup maker in promotional activity, Patricio said today (2 August) in his results presentation. That will now change as expanded gross margins, now approaching 2021 levels, allow for investment.
“Yes, we lost share in the second quarter, but this was a headwind we expected as we priced above the market. Here’s the good news – the pricing is done – and even with elevated price gaps, we aren’t losing incremental share to private label,” Patricio explained.
“We are, however, losing incremental share to brands who are promoting more than we are. Meanwhile, we are taking a disciplined and surgical approach to protecting our profit dollars in certain categories. With this approach, and by continuing to unlock efficiencies across our value chain, we are generating margin gains.
“With these margin gains, and in line with our strategy to drive further growth, we are investing more in marketing, R&D and technology.”
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Marketing spending increased 23% in the second quarter over the prior year, while investment in R&D rose 10%.
Pricing supported second-quarter sales, which climbed 2.6% and 4% in reported and organic terms to $6.7bn. For the year so far, they increased 4.9% and 6.6%, respectively, to $13.2bn.
Year to date, adjusted EBITDA was up 8% at $3.1bn, while operating profit was 58% higher at $2.6bn. Net income climbed 75% to $1.8bn.
Kraft Heinz margin boost
While Kraft Heinz’s volumes dropped 7% and 6.2% over the two time periods, it was a different story for margins. The adjusted gross profit margin rose 180 basis points to 33.3% in the second quarter and 160 points for the half to 33.1%.
CFO Andre Maciel outlined the trajectory for gross margins: “We are now expecting year-over-year expansion for 2023 to be between 150 and 200 basis points. Gross margin levels in the second half of the year are expected to be roughly in line with [the] first half as inflation eases and promotions increase. Q4 margins are typically higher than Q3 due to seasonality.
“We have seen elasticities revert to more normal levels. “And for the remainder of the year, we expect volume declines to moderate. We expect volume to turn positive in 2024, with future top-line growth balanced between volume and price.”
The CFO acknowledged Kraft Heinz was losing market share to a faster rate of promotional activity from its branded competitors, which, he said, “sold 35% of volume on promotion, while we were at 29%”
However, Maciel added: “The returns on our promotional activity continue to improve. Our average ROI increased approximately 15 percentage points as compared to 2019, and approximately five percentage points as compared to [the] prior year.”
Patricio said: “If you look at the industry as a whole today, promotional levels are still below 2019. What we are seeing is that our branded competitors are actually closer to those levels. And what we are working on is how do we continue to make sure that we act with a thought of protecting our margins and building the virtuous cycle as we continue to improve on our marketing, continue to improve our services [and] our innovation.
“And importantly, that we stay focused on driving the revenue management needed in order for us to be rational in terms of the effectiveness of our promotions.”