Kraft Heinz Co. KHC 0.31% is parting with a big chunk of its cheese business, a sign of the challenges facing food companies whose scale complicated operations as the coronavirus pandemic drove unprecedented demand.
Kraft Heinz said Tuesday that it had reached a deal to sell its U.S. natural-cheese business and a mix of other cheese brands in North America and internationally to France’s Groupe Lactalis SA for $3.2 billion.
The Wall Street Journal first reported that the sale was imminent earlier Tuesday. The maker of Heinz ketchup and Oscar Mayer deli meats, among many other foods, said the sale is part of its plan to simplify its business and focus on brands that have the best potential to resonate with contemporary consumers.
“We wandered away from the consumer,” Kraft Heinz Chief Growth Officer Nina Barton said Tuesday at a virtual meeting with investors. “We are rebuilding the connection.”
Sales of groceries including packaged foods have surged during the coronavirus pandemic as consumers have stocked their pantries and shifted to eating mostly at home. But some established companies have lost market share even as their sales have risen because they can’t keep up with the unexpected demand. And the sudden need for more cleaning supplies, protective equipment and delivery trucks cut into their profit margins.
Kraft Heinz had just begun an overhaul of its portfolio of dozens of brands when the pandemic hit. While Kraft Heinz struggled to make enough macaroni and cheese to meet demand, competitors gained ground, such as General Mills Inc. with its Progresso soup and Betty Crocker baking mixes. The pandemic reinforced a theme evident in Kraft Heinz’s challenges since the company was created in a 2015 merger: bigger isn’t always better.
Kraft Heinz has struggled since the merger with consumers defecting to foods that seem trendier or healthier, and to lower-priced store brands. The pressure to revive sales has tempered its ability to improve profitability. That is reflected in a stock that has lost more than half its value since early days of the merger, giving it a market capitalization today of about $40 billion, not much more than its debt load of nearly $30 billion. Some proceeds from the sale to Lactalis are earmarked for debt reduction, the company said.
Kraft Heinz said at its investor meeting that it plans to cut $2 billion in costs over five years, returning to the strategy that inspired the company’s formation in the merger five years ago. It is starting with $350 million to $400 million in gross savings this year.
Kraft Heinz’s shares edged up 0.3% on Tuesday to $31.97.
Closely held Lactalis, a global dairy company based in France, produces brie, ricotta and other cheeses in the U.S. and sells them under brands including President.
The company entered the U.S. about 40 years ago and has been on an expansion spree, acquiring Stonyfield organic yogurt from Danone SA in 2017 in a deal valued at $875 million.
Adding the Kraft cheese business would boost the company’s footprint further at a time when demand for staple groceries is higher than ever amid the coronavirus pandemic.
The sale will include Kraft shredded and blocks of cheese and the Cracker Barrel brand in the U.S., Breakstone’s cottage cheese and sour cream, and some other assets. Kraft Heinz will keep Philadelphia cream cheese, Velveeta, Cheez Whiz and Kraft Singles in the U.S. It will also retain its macaroni-and-cheese business world-wide.
The brands Kraft Heinz is selling had about $1.8 billion in sales over the past year, representing roughly 7% of the company’s annual revenue.
In 2018, Kraft Heinz agreed to sell its Canadian natural-cheese business to Parmalat for over $1 billion.
The sale to Lactalis comes as Kraft Heinz reorganizes its business under six new platforms that it says are more focused on what consumers want, such as more convenient meals and snacks, instead of 55 different grocery categories. The new approach, executives said, will help the company be more agile and innovate more effectively.
In the years following the merger, Kraft Heinz slashed costs to generate about $1.7 billion in net savings. Its sales growth and market share suffered.
That contributed to several of its biggest brands losing value. Since February 2019, Kraft Heinz has written down the value of its brands by about $20 billion.
Kraft Heinz Chief Executive Miguel Patricio said the company, which is partly owned by Brazilian investment firm 3G Capital, was too focused on cost cuts and made shortsighted decisions under its prior leadership. “We are changing that mind-set,” he said in an interview.
Mr. Patricio said Kraft Heinz will be more strategic about how it cuts costs and will invest more of the savings in marketing its brands, rather than passing it all on to the bottom line as the company did in the past.
“Do we need to reduce margins to grow brands? The answer is no,” he said.
RBC Capital Markets LLC was Kraft Heinz’s financial adviser and Paul, Weiss, Rifkind, Wharton & Garrison LLP served as its legal adviser. Perella Weinberg Partners was Lactalis’s financial adviser and Dentons served as its legal adviser.