The center of your grocery store is dying.
News that 3G Capital is selling down its stake in Kraft Heinz (NYSE:KHC) is just one more nail in the coffin.
The consumer-packaged goods (CPG) companies that once dominated American grocery retailing are getting slammed this decade. Whether it’s Campbell Soup (NYSE:CPB), Mondelez (NASDAQ:MDLZ), Kellogg Company (NYSE:K), General Mills, Inc. (NYSE:GIS), or The J.M Smucker Company (NYSE:SJM), all the companies that sell products in the center of your grocery store are under pressure.
The solution seems to be another wave of mergers and sacking CEOs in favor of younger dealmakers, as PepsiCo, Inc. (NYSE:PEP) is doing. The model is Sean Connolly of Conagra Brands, Inc. (NYSE:CAG), who is using the $10.9 billion acquisition of Pinnacle Foods to get onto the sides of the store, where frozen foods, fresh foods, and prepared meals now reside.
Packaged Food’s Remake Hasn’t Delivered
But the problem may be more secular. The merger that was supposed to remake the packaged food industry simply hasn’t delivered. Since its formation through a 2015 tie-up blessed by no less than Warren Buffett of Berkshire Hathaway Inc. (NYSE:BRK.A) — which has not reduced its stake — Kraft Heinz has gone precisely nowhere. Its 2017 sales were lower than those in 2016, and its current pace is just in line with that. Profits are expected to do little more than match 2016’s $3.45 billion.
The problem is that shelf-stable, mediocre-quality food is no longer good enough for most American tables. Consumers are either buying prepared meals or making dinners from scratch. As those trend lines have gone up, KHC stock was stuck in the $78 range. Then 2018 began and the shares started to fall, now standing 20% lower.
Kraft Heinz is trying to innovate, and with brands like Oscar Meyer and Kraft Cheese it does have a presence on the sides of the store. But most of the innovation still involves the kind of simplified mediocrity, like Just Crack an Egg, a microwave breakfast bowl, that shoppers are moving away from.
Tech Save Us
Still, CPG is a $760 billion industry and technology is letting these companies address markets more nimbly. But nimble is not leading to growth. Tastes have changed.
So we’re looking again at mergers, often with consumer giants buying smaller, innovative producers. But much of it looks like the kind of deal-making a mediocre sports team makes, dumping big brands like high-priced superstars and buying smaller ones like young shortstops, as The Proctor & Gamble Company (NYSE:PG) has done, all to try and get ahead of the growth curve.
Kraft Heinz, however, looks set to go after another elephant, with speculation increasing about the possible purchase of Pepsico, Mondelez or, more likely, Campbell Soup. The idea is that 3G could work its zero-based budgeting/cost-cutting magic on other slumping brands, add some innovation to combine products into new foods, and make packaged foods great again. Yum!
But if that were such a great deal, it would have worked with Kraft and Heinz. It hasn’t.
The Bottom Line on Kraft Heinz
There are problems that can be solved with deals and there are problems deals simply can’t fix.
And the problems in the center of the grocery store won’t be solved with deals.
The middle-class, middle-market products in the center aisle are no longer attractive to consumers, who either have time to cook and want fresh ingredients or, if they don’t, want food that’s freshly prepared or, in a pinch, they can pull out of the freezer. The 20th century American food technologies of pre-packaging and mass-producing food with chemical preservatives aren’t working.
The best thing investors can do may be to follow the shoppers and walk away from the group, beginning with their KHC stock.
Dana Blankenhorn is a financial and technology journalist. He is the author of a new mystery thriller, The Romantic Detective Finds Her Family, available now at the Amazon Kindle store. Write to him at danablankenhorn@gmail.com or follow him on Twitter at @danablankenhorn. As of this writing he owned no shares in companies mentioned in this article.
