“The consumer environment remains challenged and was worse than we anticipated in the second quarter,” CEO Carlos Abrams-Rivera told investors yesterday during the company’s second quarter earnings call. “Slowing income growth, dwindling savings and inflation concerns continue to weigh on consumer sentiment and increase value-seeking behavior. These dynamics are now expected to continue for longer, which has led to a delayed recovery for growth across the industry.”
As a result, he added, “we are now expecting a more gradual top-line improvement from the second quarter into the back half the year,” prompting the company to lower its expectations for organic net sales for the full year from flat to 2% growth to a range of -2% to flat, and an adjusted operating income of 1% to 3% -- down from the originally anticipated range of 2% to 4%. It reiterated its adjusted EPS outlook of 1% to 3% growth.
Despite these sobering numbers, EVP and Global CFO Andre Maciel said he is optimistic “for improved trends in the second half” – a sentiment that Abrams-Rivera reinforced with a prediction that “recovery, while slower, begins in the third quarter.”
Their shared confidence comes in part from the company’s multi-prong strategy to boost sales through ongoing innovation and marketing campaigns designed to elevate consumer perception of its brands’ value and subsequently their willingness to pay a slight premium over private label options.
In addition, the company is growing distribution in the dollar channel and continues to “unlock efficiencies at a greater pace than inflation,” allowing it to expand its adjusted gross profit margin by 210 basis points in the second quarter over the same period last year, Abrams-Rivera said.
‘Our innovation continues to resonate and provide [consumers] value in their everyday lives’
A key pillar of Kraft Heinz’s recovery plan for the back half of the year is increasing marketing and innovation across its portfolio to underscore for consumers how its products differentiate and compete with private label while simultaneously promoting to “preserve intended price gaps versus branded competitors,” Abrams-Rivera said.
“We know that value is top of mind right now for the consumer and … our innovation continues to resonate and provide them value in their everyday lives – whether it is through our high-quality, convenient solutions like our 360CRISP platform or our Taco Bell Craving Kits, which make it easier for Taco Bell fans to recreate their favorite menu items right in their own kitchens,” he said.
He also called out how the company is “evolving” core offerings “to stay relevant to consumer trends,” such as its recent Pickle Ketchup launch, its Pure J.L. Kraft dressing line made with “simple ingredients” and “globally inspired flavors,” an increased range of plant-based, dairy-free and immunity supportive products through its partnership with NotCo and its Crystal Light brand, and the recent launch of Stuffed Dogs from Oscar Mayer.
In the second half of the year, the company will launch “new shapes, variety packs and flavors across Mac & Cheese,” including Super Mario Shapes, which are rolling out now, Abrams-Rivera said.
The company also will launch Lunchables that are co-branded with Transformers and offer new combinations just in time for back-to-school season. The brand also will expand “into snack spaces that consumers have never seen before,” Abrams-Rivera added.
The company adds innovation as a percent of organic net sales increased 60 basis points year-to-date to account for 2.4%.
Kraft Heinz expands across value channels with ‘great success’
The company also is expanding its selection of products across value-oriented channels.
For example, it launched Capri Sun Multi-Serve in club channels and “provided more entry-level price points and offerings in dollar channels, including doubling our store count on Oscar Mayer SKUs in Dollar General,” Abrams-Rivera said.
He added the company has had “great success” in the dollar channel, where year-to-date sales in Dollar General increased 47% across Oscar Mayer cold cuts, hotdogs and Lunchables.
Increased trade investments and ‘unlocked efficiencies’
To support new product launches and drive home for consumers the value of its offerings, Kraft Heinz is increasing promotions, which it is funding through enhanced supply chain efficiencies so that it can preserve price gaps with branded competitors.
Maciel noted that US volume sold on promotion in the second quarter was up 2% compared to the same quarter last year, but remains below 2019 levels.
He stressed that the company is “not using tactics that undermine long-term profitability,” but is rather working with retailers to “come up with solutions that work for both parties.”
As illustrated, the company also is leaning on innovation, renovation and marketing to drive sales – lessening its reliance on and impact of promotions, he added.
