Kraft Heinz the $8 billion brand write-down

Group No: 2 , Team 1

Case Brief: Kraft Heinz was created through the 2015 merger of two major
food companies. However, in February 2019, when announcing its 2018 earnings,
the company reported an $8 billion write-down of its intangible brand assets.
This occurred after years of declining performance and shifting market dynamics.
As a result, the share price dropped by 27%, wiping out $16 billion in market
value. This happened despite a 2.4% increase in organic net sales and a reversal
of declining sales for some product lines. The company’s portfolio includes over
200 brands across 125 categories. Within two years of the merger, Kraft Heinz
cut 20% of its workforce, reduced advertising spending by 39%, and slashed R&D
spending by 22% from 2014. Meanwhile, consumer preferences shifted towards
healthier, natural foods, and the growing power of large retail chains weakened
Kraft Heinz’s bargaining position, putting further pressure on its margins.

1. As of March 2019, would you rate Kraft Heinz’s stock a Buy, Hold, or
sell? Why?
As of March 2019, I would rate Kraft Heinz’s stock a Sell due to several
concerning factors. The $15.4 billion write-down, particularly the $8 billion hit to
key brands like Kraft and Oscar Mayer, highlights the serious decline in the
company’s core assets and raises red flags about long-term brand relevance.
While initially boosting margins, Kraft Heinz’s aggressive cost-cutting strategy
has damaged brand strength and stifled innovation, leaving the company ill-
prepared for future growth. With $31 billion in long-term debt and a leverage
ratio of 4.4x EBITDA, the company is heavily burdened, limiting its ability to
invest in revitalizing its brands. Additionally, consumer preferences have shifted
toward healthier, fresher options, which legacy brands like Kraft and Oscar Mayer
struggle to meet. The rise of powerful retailers like Walmart and Costco and their
private-label brands has further weakened Kraft Heinz’s position, reducing its
pricing power and shelf space. Adding to the uncertainty, the company is under
investigation by the SEC for accounting issues, casting doubt on management’s
credibility. Given these challenges—declining brand value, strategic missteps,
high debt, and poor market sentiment—the stock appears risky, with limited
upside. Without a clear turnaround strategy focused on growth and innovation,
selling the stock seems to be the most prudent decision.

2. How do you interpret the $8 billion brand write-down? What factors

led to the asset devaluation? Does this signal the end of 'Big Food"
brands? Why or why not? Could you justify the write-down at this point
in time? Why or why not?
The $8 billion brand write-down at Kraft Heinz needs to be viewed in the
broader context of socio-economic shifts in its key markets. On one side, the U.S.
market for packaged goods was slowing down, with growth at only 1.9%
compared to 5% globally. On the other hand, consumer preferences were shifting
rapidly towards fresher, organic, and healthier products, leaving traditional
processed brands like Kraft and Oscar Mayer lagging behind.
When analyzing Kraft Heinz’s brand performance using the Consumer-Based
Brand Equity Pyramid, it’s clear that these brands

still score high on Identity (Salience),

Meaning (Imagery), and Feelings. This is evident from the strong brand
awareness and nostalgia associated with them. However, e-brands fall short on
performance, judgment, and resonance, especially according to modern
standards. For younger consumers, these brands carry the baggage of being
seen as artificial and unhealthy, which clashes with contemporary expectations
for clean, natural ingredients.
Another key factor contributing to the devaluation was the pushback from large
retailers. With increasing competition in the grocery sector, retailers found it
more profitable to promote their own private-label products, which resonated
with consumers due to their lower prices. This shift in retail dynamics and
declining sales promotions from Kraft Heinz further eroded the brand’s market
position.
Given the company’s current efforts to reinvent these brands, focusing on health
and natural ingredients, the write-down is justified as a realistic revaluation
based on their present market standing. The write-down doesn’t necessarily
signal the end of “Big Food” brands, but it highlights that they must adapt to
survive. Legacy alone isn’t enough; these brands must align with current
consumer values to remain relevant.

3.How would you qualitatively and quantitatively assess Kraft Heinz’s

current level of Brand Equity?
Quantitative and Qualitative Assessment of Kraft Heinz’s Brand Equity
1. Sales Performance and Market Position:
 Q4 2018 showed organic growth of 2.4%, but this was largely driven by
short-term promotions, which are not sustainable brand strength.
 The U.S. packaged food market grew by just 1.9% in 2018, compared to
5% globally. Kraft Heinz could not capitalize on this limited growth, with
many categories remaining flat or declining.
Brand-Specific Sales:
  Kraft: Processed cheese, a key product under the Kraft brand, saw volume
declines of 1.6% in 2018, marking four straight years of declining volumes.
 Oscar Mayer: Despite a modest 4% global growth in 2018, the brand’s
overall value dropped by 50% due to previous years of weak performance.
2. Brand Value Write-Downs:

Kraft Oscar Mayer

Pre-Impairment Value: $15.9 billion. Pre-Impairment Value: $6.5 billion.
Post-Impairment Value: $11.8 billion. Post-Impairment Value: $3.2 billion.
Impairment Charge: $4.1 billion (26% Impairment Charge: $3.3 billion (50%
reduction). reduction).

3. Advertising and R&D Spend:

Advertising Cuts R&D Cuts

2016: $700 million. 2016: $120 million.
2018: $584 million (a 16.6% 2018: $109 million (a 9.2% reduction).
reduction).

These spending cuts were significant, especially compared to competitors who

typically invest 3.5% to 5.5% of sales in advertising and 1% in R&D. Kraft Heinz’s
reduced investment weakened brand visibility, innovation, and long-term
competitiveness.
4. Retailer Dynamics and Private Labels: Large retailers like Walmart and
Kroger accounted for 48% of Kraft Heinz’s U.S. sales, while in Europe, its five
largest retailers accounted for 31% of sales. With Kraft Heinz losing leverage due
to pricing conflicts and reduced trade promotions, retailers increasingly
promoted their private-label products. This shift reduced shelf space and
promotional opportunities for Kraft Heinz.
5. Goodwill and Intangible Asset Impairment: The company’s total goodwill
and intangible assets were previously valued at $95 billion, including $59 billion
to $62 billion for Kraft Foods’ brands alone. The $15.4 billion total write-down,
including the $8.4 billion specifically related to brand devaluation, shows a
significant drop in perceived brand equity.

Qualitative Insights:
Brand Awareness and Nostalgia: Kraft and Oscar Mayer still enjoy high
recognition and nostalgic value among older consumers. However, they struggle
to appeal to younger generations due to negative associations with processed
and unhealthy foods.
Perceived Quality and Healthiness: Both brands are increasingly viewed as
outdated and unhealthy, which is a critical issue given the current consumer
demand for organic, natural, and transparent food products.
Differentiation: These legacy brands lack differentiation in today’s market,
which is dominated by smaller, health-focused brands that better align with
current trends.
Quantitatively, the numbers tell a clear story: a 26% drop in Kraft’s brand value
and a 50% drop for Oscar Mayer, declining sales volumes, and reduced
investment in advertising and R&D signal a decline in brand equity. Qualitatively,
the brands are losing relevance as they fail to meet modern consumer
expectations. The significant financial write-downs and shrinking market share
indicate that Kraft Heinz’s brand equity is under severe pressure and requires
urgent attention and strategic repositioning to regain strength.

4. How well or poorly has Kraft Heinz strategically managed its brands?
How would you assess their brand management resources and
capabilities? Do they have what they need to steward their brand
portfolio going forward?
Kraft Heinz has strategically managed its brands with mixed success. The
company operates in an industry with a high potential for returns on tangible
assets but has faced constant disruptions from emerging startups, shifting retail
dynamics, and evolving consumer preferences. Consumers are increasingly
drawn to fresher, naturally produced organic goods. Kraft Heinz invested in
product innovation to address these disruptions, launching initiatives like
Springboard Brands to foster and accelerate breakthrough innovations. The
company also effectively utilized brand storytelling across owned, earned, and
paid media channels, optimizing resources for paid media campaigns to engage
consumers.
While these efforts have helped maintain its brand reputation, Kraft Heinz needs
improvement in some areas. The company must emphasize aligning its portfolio
with changing consumer demands for fresher, more natural products. Expanding
offerings in baby care and introducing trans-fat-free items would be strategic
moves. Additionally, maintaining flexibility in their portfolio to adapt to market
trends and shifting consumer preferences quickly is crucial for long-term success.

5. What are the likely outcomes of Kraft Heinz's recent

changes to its brand management strategies? Do you expect them
to move the needle?
Kraft Heinz’s brand effectiveness can be assessed using three Brand Equity
multipliers:
1. Program Quality Multiplier: The brand is strong in delivering clear, relevant
messaging. Campaigns like kraftrecipe.com and the Wienermobile have been
successful in engaging consumers. These initiatives show that they can still
connect with their audience when Kraft Heinz invests in creativity.
2. Customer Impact Multiplier: The company has achieved a good ROI on
media spend, thanks to a more data-driven approach. However, they have
missed opportunities to clearly convey product innovations that align with
changing consumer expectations, particularly around health and wellness.
3. Market Value Multiplier: Despite efforts, sales continue to decline. The shift
to data-driven analytics and targeted marketing is positive. Still, there are
challenges in maintaining the emotional connection tied to family ideals and
nostalgia, which are key to their legacy brands.
Overall, the recent focus on data-driven strategies is promising and could yield
significant benefits if executed well. However, Kraft Heinz must be cautious not
to rely too heavily on data alone. Their brands' emotional and nostalgic elements
are difficult to measure but crucial to their identity. Balancing data with an
understanding of these intangible brand values will be key to driving meaningful
growth.

6. If you were Kraft Heinz’s CMO, what would your priorities be for the
remainder of 2019 and 2020? and Why?
If I were Kraft Heinz’s CMO, my top priorities for the remainder of 2019 and 2020
would be:
1. Push healthier versions of key products like Kraft Mac & Cheese and Oscar
Mayer, emphasizing cleaner ingredients and transparency.
2. Increase ad spending to 2016 levels, focusing on communicating product
improvements and targeting younger consumers through digital channels.
3. Work closely with major retailers like Walmart and Kroger to regain shelf
space and increase in-store promotions, countering the growth of private-
label brands.
4. campaigns that blend brand nostalgia with health-focused updates,
repositioning Kraft and Oscar Mayer as modern classics.
5. Strengthen online presence with targeted ads, influencer marketing, and
better e-commerce strategies to reach 80% of shoppers researching
products online.
6. The global rise in income and evolving lifestyles has spurred growth in the
baby food market. KHC's comprehensive range of baby food and instant
formula items positions it to tap into this growth with a focused approach.
7. Global health consciousness has led to a surge in demand for nutritious
items and those free of trans-fats. One strategic avenue for the company's
continued leadership in the industry could involve expanding into the baby
food market.

8. The global rise in

income and evolving
 lifestyles has spurred
growth in the baby food
9. market. KHC's
comprehensive range of
baby food and instant
formula items positions
it
10. to tap into this growth
with a focused ap
11.The global rise in
income and evolving
lifestyles has spurred
growth in the baby food
12. market. KHC's
comprehensive range of
baby food and instant
formula items positions
it
13. to tap into this growth
with a focused
approach.
14. ● Global health
consciousness has led to
a surge in demand for
nutritious items and
those
15. free of trans-fats. One
strategic avenue for the
company's continued
leadership in the
16. industry could involve
expanding into the baby
f
17.The global rise in
income and evolving
 lifestyles has spurred
growth in the baby food
18. market. KHC's
comprehensive range of
baby food and instant
formula items positions
it
19. to tap into this growth
with a focused
approach.
20. ● Global health
consciousness has led to
a surge in demand for
nutritious items and
those
21. free of trans-fats. One
strategic avenue for the
 company's continued
leadership in the
22. industry could involve
expanding into the baby
food market.
23.The global rise in
income and evolving
lifestyles has spurred
growth in the baby food
24. market. KHC's
comprehensive range of
baby food and instant
formula items positions
it
25. to tap into this growth
with a focused
approach.
26. ● Global health
consciousness has led to
a surge in demand for
nutritious items and
those
27. free of trans-fats. One
strategic avenue for the
company's continued
leadership in the
28. industry could involve
expanding into the baby
food market.
29.The global rise in
income and evolving
lifestyles has spurred
growth in the baby food
30. market. KHC's
comprehensive range of
 baby food and instant
formula items positions
it
31. to tap into this growth
with a focused
approach.
32. ● Global health
consciousness has led to
a surge in demand for
nutritious items and
those
33. free of trans-fats. One
strategic avenue for the
company's continued
leadership in the
34. industry could involve
expanding into the baby
food mark