Is Kraft Heinz Undervalued? Executives Hail the Company's Radical Transformation, Luring Cash-Strapped Customers

The company has undergone a dramatic transformation over the past three to four years. It can sometimes be difficult for investors to recognize this. We've had the pandemic and high inflation. There are external wars. "I think we've rebuilt it from the ground up," Carlos Abrams Rivera told Barclays 17 last week. He took over as CEO in January.^{The e}Annual Global Consumer Staples Conference.

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He said that because of such dramatic changes, it is hard to believe how far we have come. "Our stock is undervalued today," he continued.

Andre Maciel, global chief financial officer, echoed this sentiment. He noted that the company's performance has been "very strong over the last five years." Supply chain efficiencies, or efficiencies in general, are very strong. The balance sheet looks excellent. The upgrade has been done twice. [Better Business Bureau]. We're very pleased with how things are going. We're now generating a very good cash flow. This has allowed us to invest in the business to meet its needs. "We believe we've reached a sufficient level from a capital expenditure perspective, but that's primarily to support marketing."

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Both men expressed pride that this growth has not come at the expense of consumers. On the contrary, Kraft Heinz is working hard to help those struggling with inflation.

We are extremely careful and smart when it comes to rolling out these promotions.

Kraft Heinz is using promotions to boost sales without hurting consumers at a time when most competitors are still hesitant to offer deals on shelves.

Maciel, in an attempt to correct "misinterpretations," said Kraft Heinz uses these promotional tools with "great care and precision."

We have 30 to 40 billion U.S. retail sales that require promotional efforts. This may have been misinterpreted [during the most recent earnings call]. It's important to note that we're referring to 30 billion of the categories you want to deploy [promotions] in. "It's not 30 billion of sales," he explained.

He said his company is promoting in areas where it has sustainable capacity, is able to expand its consumer base and increase overall usage.

He said that, for example, in the company's $1.7 billion Mac & Cheese division, capacity was previously limited. But now, "there's a lot of available capacity, and that's where we see it makes sense to roll out these promotions." We've gone from declining revenue in the second quarter due to the sellouts to growing quarterly revenue to date, partly because of that.

Abrams Rivera said that when Kraft Heinz invests money in marketing, it has two main priorities.

First, we need to consider the return on these investments. We make internal investments to better manage our revenue growth. These are based on AI models that help us understand the best categories to invest in and the expected returns.

Then, from a consumer perspective, when are they looking for products that will benefit them outside of this season? If you consider back-to-school, holidays, or other times when consumers are looking for solutions, we can increase our base volume by incentivizing them to engage with brands.

He explained that Kraft Heinz is a disciplined company, but also pays attention to how consumers buy, so as not to sacrifice the company's gross margins.

Distribution and innovation complement each other to improve promotions

Kraft Heinz isn't just growing by engaging with cash-strapped consumers through promotions, which are often criticized for eroding loyalty and devaluing perceived value.

Maciel said: "We want to grow our business by focusing on meaningful marketing, innovation and renovation, not just promotional activities."

Abrams Rivera, for example, explained that Kraft Heinz ensures its products are "worth the price" by ensuring that all members of the family can enjoy them.

It's not good for the consumer to have to throw away half a product. "For us, the goal is to renovate brands to continue providing high-quality products that consumers want," he said.

Kraft Heinz is also innovating, offering benefits that consumers want and expanding distribution to where they shop.

Abrams-Rivera said the company enhanced Jell-O last year with a sugar-free option. “Even in this GLP-1 world, we’re seeing tremendous growth in desserts because we’re bringing real benefits to consumers that they didn’t expect to see in our category,” she said.

The company also innovated in terms of references in its Capri Sun and Oscar Mayer businesses to increase distribution through new channels.

He said, "Capri Sun was available in packets, but now we've brought the product into a 32-ounce bottle at a lower price per serving." The company also created smaller packages of Oscar Mayer to be sold by Dollar General and to give a wider audience the opportunity to try its brand.

The two men agreed that the company would continue to explore how innovations, renovations, marketing and distribution could grow its business, increasing the number of customers and volume.