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Kraft Heinz ( KHC ) split may not revive brands, analysts say

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MAHA movement and organic trend threaten Kraft Heinz ( KHC )

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Kraft Heinz ( KHC ) struggles with consumer perception of

processed

foods - sources

By Jessica DiNapoli

NEW YORK, Sept 11 (Reuters) - Kraft Heinz's ( KHC )

announcement this month that it would split was a belated

acknowledgment that the Velveeta cheese and Heinz ketchup maker

had missed consumers' years-long shift away from processed

foods, a trend that is now accelerating under a new push from

the federal government and states including California.

But, its plan to carve itself into two companies -- one

focused on faster-growing sauces and condiments, one on

groceries -- may not be enough to revive its brands, according

to former employees, consultants and Wall Street analysts.

The rise of the "Make America Healthy Again" (MAHA) movement led

by U.S. Health Secretary Robert F. Kennedy Jr., who blames

artificial ingredients for chronic childhood diseases like

diabetes and obesity, poses a new threat for the company that

makes products including Oscar Mayer hotdogs, Kraft Singles and

Jell-O desserts.

Former employees said Kraft Heinz ( KHC ) executives missed

opportunities to appeal to the new demand for fewer

preservatives and artificial ingredients, such as ketchup

without high-fructose corn syrup and they were also unconvinced

the costly and possibly risky effort to change an iconic brand

would boost sales.

Kraft Heinz ( KHC ) is focused on providing nutritious and

affordable food, and has reduced its use of sugar, overhauled

over 1,000 recipes and committed to removing synthetic dyes from

its U.S. brands, a spokesperson said.

MAHA, GLPs, HIGH PRICES CHALLENGE FOOD COMPANIES

The MAHA Commission, a panel convened by President Donald Trump,

released a report on Tuesday that called for the government to

review chemical additives in packaged products and define

ultra-processed foods. Adding to the pressure, legislators in

California, the largest U.S. state by population, are voting on

a bill that would regulate ultra-processed foods as soon as this

month.

Nicholas Fereday, an independent food industry analyst, said

the prospects for Kraft Heinz ( KHC ) after a split are still bleak.

"The very fact they're splitting up doesn't change any of it

and explain how they're going to inject energy, excitement and

clarity" into the company, he said.

But its rising competition including sauce and pasta

brand Rao's Homemade is adapting more quickly to consumer

tastes, food industry experts said, snapping up market share

from its top products like Kraft mac & cheese, known for its

blue box featuring orange-hued macaroni.

U.S. food companies have struggled to increase sales in

recent years as consumers switch to products touting natural

ingredients, balk at higher prices and buy less due to new

appetite-suppressing GLP-1 drugs. But, Kraft Heinz ( KHC ) has been

among the worst performers, analysts have said.

Its shares are down nearly 14% year to date, while the Dow

Jones U.S. food product makers index, covering its competitors,

has fallen about 6.5% in the same time period. Its organic net

sales have declined for the last seven quarters, according to

financial statements and investor press releases.

WOULD CANE SUGAR IN HEINZ KETCHUP GROW SALES?

Two former Kraft Heinz employees, who requested anonymity

because they were not authorized to speak to the press on behalf

of the company, said it knew for years it was facing a seismic

shift in customer preference, as offerings at natural food

grocery stores like Amazon.com's ( AMZN ) Whole Foods and

Sprouts rose in popularity.

But one of the employees, a marketing executive who left the

company over a year ago, said "management wanted us to prove we

would grow sales by changing ingredients" and was reactive to

trends rather than proactive. Kraft Heinz ( KHC ) looked at replacing

high-fructose corn syrup in Heinz ketchup with cane sugar, but

"it was killed due to cost," the former exec said.

Kraft did not comment when asked about replacing high

fructose corn syrup in ketchup.

Heinz ketchup's market share has slipped over the last four

years, though it still holds more than two-thirds of the

category in the United States, according to market research firm

Euromonitor.

The company offers a Simply Heinz ketchup without

high-fructose corn syrup for a cost of nearly 50% more than the

original, and in 2019 acquired condiment maker Primal Kitchen,

which also pledges to avoid artificial ingredients. The company

spokesperson said that the last quarter, its Simply Heinz brand

grew 17% and Primal Kitchen grew 24%.

High-fructose corn syrup has become more controversial,

although medical experts say people should reduce sugar intake

overall, and that there is no significant health difference

between the additive and cane sugar.

A May report from the MAHA commission said significant

consumption of high-fructose corn syrup may contribute to

chronic diseases like obesity, citing a 2021 study by

researchers from Shanghai University of Traditional Chinese

Medicine linking it to non-alcoholic fatty liver disease.

In response to California's bill on ultra-processed food, a

spokesperson for the U.S. Department of Health and Human

Services said Kennedy encourages states to promote healthy

practices and enhance consumer transparency in food labeling.

Other U.S. states including Missouri, North Carolina and

Pennsylvania have considered passing similar laws, further

adding to scrutiny of Kraft Heinz's ( KHC ) products.

The former employees said that Kraft Heinz's ( KHC ) moves to remove

artificial ingredients from its products did little to change

consumers' perception of them as unhealthy and processed.

Taking the dyes out of Kraft macaroni and cheese in 2016,

for example, only stemmed some sales declines, a former brand

manager said, and it is still seeing its market share fall,

according to market research firm Numerator.

Bill Johnson, CEO of H.J. Heinz until 2013, when it was taken

private by Warren Buffett's Berkshire Hathaway and Brazil-based

3G Capital, said companies like Kraft Heinz ( KHC ) haven't given

consumers a reason to believe their products are better than

they were.

"What the big companies (like Kraft Heinz ( KHC )) haven't done is

innovated," he said.