During the company’s first quarter, reported yesterday, organic net sales fell 0.5% to $6.4bn compared to the previous year – just missing Wall Street expectations of $6.43bn. The drop came despite price hikes of 2.7 percentage points for the full company and 2.5 percentage points in North America, where the drop in organic net sales was steeper at 1.2%.
Global CFO Andre Maciel tried to put a positive spin on the decline, noting that the sales drop was not as bad as the 0.7% decline in the fourth quarter of 2023. He also noted that the 3.2 percentage point drop in volume in the first quarter was an improvement from the 4.4 percentage point year-over-year drop in the previous quarter.
But investors do not appear to share Maciel’s optimism based on a 4.4% drop in the company’s stock price to $36.93 on Wednesday.
Cuts to SNAP benefits reverberate through packaged food industry
Kraft executives attributed the sales and volume drop to multiple factors, including lapping the one-year mark since the US government abruptly ended emergency funding provided during the pandemic to help low-income Americans pay for groceries.
In March 2023, most states curtailed extra Supplemental Nutrition Assistance Program benefits offered during the pandemic to stave off widespread hunger at a time when many Americans were out of work due in part to stay-at-home orders. As a result, the Census Bureau estimates the average family of four received about $600 less per month in benefits – leaving them with about $339 in SNAP benefits.
CEO Carlos Abrams-Rivera estimates the drop in SNAP funding negatively impacted Kraft Heinz’s US retail business in the range of 200 percentage points, but he cautioned “it is never 100% precise when we are talking about the macroeconomic model.”
The brunt of the negative impact from reduced SNAP benefits hit Kraft Heinz’ “protect platforms,” which include Cool Whip, Capri Sun, Kool-Aid, Jell-O, Jet-Puffed and Mio. Organic net sales for this group in Q1 fell 5%.
For this category, Kraft Heinz’ strategy is to protect profit margins and invest in “healthy levels,” but executives acknowledge this group holds less growth promise than its “accelerate platforms.” Among the accelerate brands are Kraft Mac & Cheese and Heinz condiments. The brands benefits from prioritized investments and saw a 2% increase in organic net sales in Q1.
Innovation could bolster results in remainder of fiscal year
While Kraft Mac & Cheese is part of a group of higher performing brands, Abrams-Rivera acknowledged that it was hit hard by SNAP headwinds. But he is optimistic the brand will rebound beginning in the second quarter when a “plethora of new innovations from gluten-free to new options on flavors in the Mac & Cheese business” hit the market.
Likewise, he said he is “excited by the renovations” in the protect platform brands, which he expects will “bring more consumer preference options as we go into the center of the year” – helping to offset linger pressure from SNAP cuts.
Overall, “we expect the headwinds related to the decline in SNAP benefits to begin to dissipate in the second quarter,” added Maciel.
The reduced impact of SNAP cuts likely will not be due to an increase in consumer confidence or spending, but rather that with the one-year mark in the rearview mirror, comps will be more like-for-like and not appear as drastic.
Nonetheless, Kraft Heinz reiterated its expectations that organic sales will increase as much as 2% for the full year.
