Hormel announced they are buying the Planters, Cheese Balls & Corn Nuts brands from Kraft Heinz for $3.35 billion. While this deal had been rumored for some time, it’s helpful to understand why this makes sense and the different trajectories of these two CPG conglomerates.
The Struggles at Kraft Heinz
Prior to the merger of Kraft Foods and Heinz, Kraft was struggling as top-line sales were stagnant and growth was sought through acquisitions and price promotions. The Brazilian Investor, 3G, helped engineer the merger between Kraft and Heinz, but took a very short-sighted approach to the business. Already lacking an innovative culture, experiencing a commoditization of key product segments including growth in Private Label, and seeing a huge portfolio of brands seeping toward irrelevance among Generation Y & Z, 3G focused on further cost-cutting as opposed to investing in rebuilding the business. The merger between these two companies is a classic example of a tactic looking for a strategy. There was no portfolio segmentation, limited insights applied to consumer trends and how to connect with generational or dietary behavior changes, a reduction in marketing spend, and most importantly, a culture that became risk averse and focused on cost vs. a culture of innovation, creativity and expansion.
In this case, grocery scale could not save the company, and the resultant drop in the value of the company was swift and severe. Kraft Heinz stock fell from $89/share on January 1, 2017 to the current price of $35/share. In fact, Kraft Heinz (symbol: KHC) has been stagnant at around $32 – $35/share since February 1, 2019. Think about that. During a global pandemic, where some consumer goods have realized an incredible rebirth, and sales growth among hallmark brands have outpaced previous years due to quarantine & eat-at-home resurgence, KHC stock has flatlined. Investors are skeptical, and they should be, as what makes KHC meaningfully unique is extremely unclear.
The Growth of Hormel
Hormel is an opposite story. Known first and foremost as the maker of Spam, Hormel (symbol: HRL) has built and acquired a range of products that are helping them grow with changing consumer trends. Their acquisition of Applegate Farms in 2015 has helped them in both the trend toward protein products as well as natural/organic selections. Justin’s (organics, nut butters) has strengthened their nut butter portfolio, which is going to expand exponentially as they no-doubt launch a full line of Planter’s peanut & nut butter products behind their new brand. And as dietary lifestyle trends change away from carbohydrates (KHC) toward protein, snacking & plant-based protein (HRL), the product line at Hormel is well-positioned for future growth. While HRL has a wide range of smaller brands in their portfolio, and could use some segmentation and consolidation, they have invested and focused their growth behind the brands that drive the bulk of their sales.
More importantly, though, the culture at Hormel has been one of growth through investment and innovation, and even though 2020 growth didn’t hit their goals, that was largely due to the decline in foodservice. Grocery sales have been strong, and with the Planter’s acquisition, roughly 25% of Hormel’s sales will now be generated from non-meat products. HRL has been proactive at evaluating and revising their marketing spend to become more digital savvy while continuing to launch a robust new product pipeline behind their core brands. They also recognized their reliance on turkey-based product lines from Jennie-O had the potential to put them in a tough spot as pricing, operations & changing consumer trends presented a cloudy future. So, they smartly have diversified.
How have investors reacted to this growth strategy? On January 1, 2017, HRL traded at $36.30. Today, the stock is at $48/share. Compare that with KHC, and you’ll understand how investors see the pathway to success through the synergy of smart acquisition and portfolio segmentation, brand and innovation investment, and smart operational simplification.