Food conglomerate Kraft Heinz took a $15.4 billion write-down in two of its most powerful brands this week, a jarring warning that even the most iconic American names are vulnerable to shifts in consumer tastes.
The hit on the value of the Kraft and Oscar Mayer labels on Thursday highlights the struggles that packaged-food companies face as they try to keep up with evolving palates and the rise of smaller, organic and online competitors. Though Kraft Heinz boasts some of the most distinctly American products — Jell-O, Kool-Aid, Kraft Macaroni & Cheese — nostalgia isn’t enough to guarantee sales in the age of fresh-focused eating.
Consider Kraft Singles. The radiant orange slices have been the gooey glue of American lunches since the 1960s. The founder of Kraft Foods, James L. Kraft, created early versions of “process cheese” with hopes of making a sliced cheese with a longer shelf life. Kraft and researchers found a way to kill off the bacteria that spawns mold, but it took 15 more years of tinkering before their individually wrapped creation hit markets, the New York Times reported. The product was heralded for the ways it sidestepped the failings of other cheese: Slices didn’t dry out or curl up at the ends; they were beloved for their uniformity and convenience.
Now, the same factors that made Kraft Singles an American household staple are eroding its appeal for modern consumers, who prioritize fresh ingredients and have a vested interest in how their food is produced. A June report from Nielsen found that fresh categories are driving nearly half of all growth in brick-and-mortar groceries, with fresh and perishable foods generating more than $177 billion in sales. Conversely, the volume of packaged products sold in the center aisles of grocery stores fell 1.7 percent.
"Consumers are seeking craft, not Kraft,” said Matt Gould, editor at Dairy & Food Market Analyst. “People want a story, and they want something that’s natural. They’re afraid of preservatives.”
Recent years have seen a spike in the popularity of natural cheeses and a drop-off in processed ones. Processed-cheese sales fell an estimated 1.6 percent in 2018 — a fourth straight year of decline — according to a study from Euromonitor International. Over the past decade, the grocery store cheese section has evolved as Americans have developed a more advanced taste for cheese, Gould said.
That might explain why consumers have turned away from Kraft Singles, which officially are a “pasteurized process cheese food” because they don’t meet the Food and Drug Administration’s definition of cheese; to do that, they would have to be at least 51 percent real cheese.
Executives have tried to paint the product’s unnatural qualities as a virtue. Peter Cotter, general manager of cheese and dairy for Kraft Heinz, told Bloomberg in October that the “melt” factor of Kraft Singles is a unique asset, a byproduct of its artificial makeup.
"Honestly, you can’t get that in a natural cheese,” Cotter said. “It’s a unique product. The creamy smooth texture and melt of the cheese. The natural cheeses, they just don’t melt that way.”
Kraft Singles sales are flat, even though about 40 percent of U.S. households still buy them, Cotter told Bloomberg. And as shoppers have scaled back on processed cheese, so have restaurants. Last year, McDonald’s eliminated artificial preservatives from its own squares of American cheese (as well as its buns and Big Mac sauce) to show consumers it’s prioritizing clean ingredients. Chains like Panera Bread and Cracker Barrel have jettisoned classic grilled cheeses from their menus in favor of sandwiches with artisan cheeses like cheddar and Gouda.
“Customers are becoming more demanding around really knowing what’s in their food,” Chris Kempczinski, president of McDonald’s U.S. business, said as he explained the ingredient changes in a September conference call.
The bulk of Kraft Heinz’s products are suffering from the same shifts in consumer tastes and increased competition, and it’s showing in its business. The conglomerate, which counts Velveeta and Capri Sun among its bigger brands, reported losses of $12.6 billion in the fourth quarter, compared with a profit of $8 billion a year earlier. On Thursday, Kraft Heinz cut its dividend by 36 percent. Chief Financial Officer David Knopf said the company expected to “take a step backward in 2019” in a post-earnings conference call, and investors are bracing for the worst.
“We are not confident the company can build or maintain brand equity needed to compete in today’s consumer environment in a sustainable, compelling way,” Michael Lavery, an analyst with Piper Jaffray, said in light of Kraft Heinz’s write-down, according to Yahoo Finance.