A Decade After Merging, Kraft Heinz Splits Up

Turns out bigger isn’t always better. One decade after Warren Buffett and 3G Capital orchestrated the largest packaged food merger in history, Kraft Heinz is voluntarily splitting up. The giant behind brands such as Heinz Ketchup, Philadelphia cream cheese, Capri Sun, Ore-Ida, and Cool Whip will form two new companies: one focused on sauces, spreads, and seasonings, plus Kraft Mac and Cheese, and the other a mix of “grocery staples,” including Oscar Mayer, Kraft Singles, and Lunchables.

Private equity cost-cutting set Kraft Heinz back as consumer preferences shifted away from its highly processed portfolio. Greater scale could not offset the challenge of managing hundreds of brands with fewer staff. Nonetheless, Kraft Heinz still dominates many sections of the grocery store, and this split-up won’t challenge that.  

Since merging, Kraft Heinz has lost 60% of its stock value. Experts blame 3G Capital’s ruthless cost-cutting strategy, which slashed internal investment precisely when Kraft Heinz needed to update its products, many of which are staples of a bygone era. More consumers want healthier, less processed foods, which is bad news for brands like Jell-O and Kool-Aid. The year before the merger, Kraft alone spent $149 million on research and development. After the first wave of cuts, the combined Kraft Heinz spent just $93 million by 2017.  “My personal philosophy is you can’t save your way to success,” says Hank Cardello, a former food industry executive now executive-in-residence at Georgetown Business School. “They haven’t put a lot of emphasis on keeping their brands current.”

Kraft Heinz also laid off 3,100 white collar and plant-level employees. Erin Lash, director of consumer equity research at Morningstar, says cost-cutting led to some “execution issues which impaired their relationships with their retail partners,” like grocery stores, though these improved during the pandemic.

Kraft Heinz is not the first big food company to split up. In 2023, Kellogg broke up into a snack business and a smaller, slower-growing cereal business, both of which have since been acquired by Mars and Ferrero Rocher, respectively. Keurig Dr Pepper announced it will acquire Dutch beverage giant JDE Peet’s, only to re-split into a coffee company and a soda company.

Large food companies design split-ups to maintain (or, in the case of Keurig, expand) their dominant market shares in specific product categories. Because spun-off companies often become acquisition targets, spin-offs rarely decrease overall industry concentration; rather, they shift assets around. These deals often serve to separate higher-performing brands from struggling ones to improve the stock value of one surviving company.

However, Kraft Heinz’s split does not clearly create one “good” company and one “bad” company, puzzling investors. While the sauces and seasonings company looks stronger overall, both companies will still need to make changes to improve growth or attract a buyer. Even Warren Buffett, an architect of the Kraft Heinz merger, told CNBC that “it certainly didn’t turn out to be a brilliant idea to put them together, but I don’t think taking it apart will fix it.”

Despite Kraft Heinz’s struggles, it still claims a lot of shelf space in the grocery store. In 2021, Kraft Heinz sold 72% of all dry mac and cheese mixes, more than 60% of all ketchup, 30% of all mayonnaise, 25% of all cheese, 19% of all bacon, and 10% of all processed meat (with higher shares in deli meats). And while demand for healthier, so-called “better-for-you” products has hurt Kraft Heinz, Errol Schweizer, former VP of grocery for Whole Foods, thinks that this competitive threat is often overstated relative to large food corporations’ persistent market power.

“‘Better-for-you’ market share is growing, but it’s such a small percentage of overall packaged food,” Schweizer says. “There is plenty of organic, grass-fed packaged cheese and free-range, all-natural packaged sandwich meats and organic condiments, but still after all these years, Kraft Heinz dominates these categories.” According to Grand View Research, in 2023, better-for-you snacks made up $47 billion of the $692 billion global snack market, just 6.8%. Further, the main growth pathway for upstart food companies is to seek an acquisition by one of the top players.

 It is hard to knock out the top food companies because many grocery stores rely on dependable sales from big brands plus additional income in the form of slotting fees, marketing payments, and other types of trade spending. “They are still deploying an enormous amount of trade spend and ad spend every day. Retailers have to be very careful when they’re messing with something like this big a brand in these kinds of categories,” Schweizer notes. “How much of the blue box can you really take out in a store, without damaging your credibility with customers, let alone the financials?”

The new Kraft Heinz companies will each maintain leading positions in their respective categories. The benefits of specialization could help each company put more resources into brand development or acquisitions, which could expand their market shares.

Some critics accused Kraft Heinz of abusing its market power to raise prices and increase profit margins during the pandemic. Kraft Heinz’s gross profit margins hit an all-time high in the first quarter of 2021, though they quickly fell back to pre-pandemic levels in subsequent quarters. In the fourth quarter of 2022, Kraft Heinz raised prices 15% and exceeded earnings expectations even though it sold nearly 5% fewer goods by volume.

Over the long term, this pricing over volume strategy could hurt big food companies, as consumers turn to cheaper store-label brands to make ends meet. Private-label products are growing faster than name-brand. However, their market share has only grown from 17% of grocery sales in 2014 to 19% of grocery sales in 2023.