The Kraft Heinz Company KHC is keen on transforming its business to unleash its full potential. The consumer products company is focused on effective pricing strategies to counter inflationary headwinds.
Let’s discuss this in detail.
Focus on Transformation Bodes Well
Kraft Heinz is committed to accelerating its profit and enhancing the long-term shareholders’ value. As part of its transformation phase, management unveiled AGILE@SCALE in February 2022. The strategy helps it improve its agile expertise and capabilities via partnerships with technology giants and cutting-edge innovators.
Management is on track to build its innovation pipeline aided by the Agile Innovation Engine. Strength in Kraft Heinz’s AGILE@SCALE and strategic partnerships are generating solutions throughout the value chain to drive growth and efficiency. As part of the AGILE@SCALE strategy, management is building digital-first solutions to fuel gross efficiencies.
Kraft Heinz is benefiting from strength in its three key pillars — Foodservice, Emerging Markets and U.S. Retail Grow platforms. In the Foodservice business, management prioritizes higher margin spaces and undertakes customer-friendly innovations to drive growth. Kraft Heinz’s data-driven and repeatable go-to-market model has been yielding across emerging markets. Strength in the Heinz brand bodes well in such markets.
Pricing Actions Protect Margins
Kraft Heinz is undertaking strategic pricing initiatives to improve its performance. In fact, robust pricing strategies have been shielding margin performance amid inflation. In the third quarter of 2023, the company’s organic net sales increased 1.7% on favorable pricing to the tune of 7.1 percentage points — stemming from higher list prices to counter escalated input costs. Adjusted gross margin expanded 396 basis points (bps) to 34%, driven by pricing actions undertaken to offset inflation, solid gross supply chain efficiencies and a favorable mix in North America. The continuation of this trend is likely to keep contributing to the company’s margin.
Is All Rosy for Kraft Heinz?
Kraft Heinz continues to battle an inflationary environment, although the inflation continues to moderate. In its lastearnings call management highlighted that it is seeing persistent inflation in areas like labor, tomatoes and sugar. The company is also incurring high SG&A costs across marketing, R&D and technology. Although such investments are likely to contribute to long-term growth, they might put pressure on profits in the near term.
All said, the company’s well-knitted transformation efforts and pricing actions are likely to keep narrating its growth story.
Other Food Stocks Battling Cost Woes
Players like Sysco Corporation SYY, Flowers Foods, Inc. FLO and Lamb Weston Holdings, Inc. LW have also been grappling with inflationary headwinds.
Sysco has been encountering product cost inflation for a while now. In the first quarter of fiscal 2024, SYY witnessed overall product cost inflation of 1.7%, measured by the estimated change in product costs, mainly in the frozen, canned and dry categories. During the quarter, Sysco’s adjusted operating expenses escalated 2.9% year over year. The persistence of these trends is a concern.
Flowers Foods is battling hurdles due to cost inflation. In the third quarter of fiscal 2023, FLO battled input cost inflation, reduced production volumes, higher product returns and elevated labor and maintenance costs. Volatility in commodity costs remains an aspect to be watched for Flowers Foods.
Although Lamb Weston’s gross margin increased year over year, it was hurt to some extent by increased costs per pound in the second quarter of fiscal 2024. Escalated costs per pound reflect mid-single-digit cost inflation for key inputs like raw potatoes, grains, starches and labor. In its lastearnings call LW highlighted that it expects fiscal third-quarter gross margin to be under pressure by escalated manufacturing costs, reflecting lower fixed cost coverage and other cost inefficiencies.
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Sysco Corporation (SYY) : Free Stock Analysis Report
Flowers Foods, Inc. (FLO) : Free Stock Analysis Report
Kraft Heinz Company (KHC) : Free Stock Analysis Report
Lamb Weston (LW) : Free Stock Analysis Report
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