Kraft Heinz: A Deep Dive into Its Business Model
Kraft Heinz is one of the most well-known names in the global food and beverage industry. Its history dates back to the formation of the H.J. Heinz Company in 1869 and the Kraft Foods Company in 1903. Despite both companies’ long histories, they only merged relatively recently in 2015, at which time they became the Kraft Heinz Company. While its 2015 merger may have temporarily stunted growth, Kraft Heinz offers some valuable insights into how modern companies adapt to the effects of globalization.
The Kraft Heinz business model is examined here in great detail. This is not a surface reading. The article gets into the nitty-gritty of how Kraft Heinz—you know, the company that brought us my personal favorite, the 57 varieties of Heinz ketchup—actually works and makes money. (Or, as the case may be, these days, makes some quite impressive operating margins, if not a lot of actual profit in the net income line, a story I told in my previous post.) This is a for-profit business and not a non-profit. Last I looked, none of us pay our taxes in ketchup.
A Diverse Portfolio of Iconic Brands
A powerful brand portfolio lies at the core of the Kraft Heinz business model. The company has more than 200 brands in its fold, such as Kraft, Heinz, Oscar Mayer, Velveeta, Philadelphia, Capri Sun, Planters, and Jell-O. These products span a number of categories, including condiments and sauces, cheese and dairy, frozen and chilled meals, beverages, and snacks, that are very profitable.
Kraft Heinz has derived a competitive edge from the might of its brand equity. It enjoys a high penetration of its products in U.S. households. The products of Kraft Heinz enjoy a high penetration rate in North American households.
The company’s emphasis on leading in categories enables it to secure premium positions on store shelves and uphold robust connections with retailers around the world.
Geographic Footprint and Global Reach
Kraft Heinz, while based in Chicago and Pittsburgh, has a reach that extends to more than 40 countries across the world. Its operations can be most easily measured in three large segments of geography:
- United States: Kraft Heinz’s biggest market, making up more than 70% of its net sales. The U.S. business enjoys good brand recognition and consumer loyalty.
- International: This section encompasses Canada, Latin America, Europe, Asia Pacific, and the Middle East. The company makes 30% of its revenue from international business, which it sees as its most likely area for future growth.
- Emerging Markets: Although still a smaller segment of the business, Kraft Heinz is pouring money into new markets, including China, India, and Brazil. These growth areas offer Kraft Heinz the chance to shift its Amazing Growth Potential into overdrive. They’re doing that by looking at the consumption opportunities in these markets and taking advantage of them. They’re also looking at the long-term growth potential of these markets, with income levels rising and shifting consumption patterns.
Kraft Heinz tailors its product offerings to local tastes and capitalizes on its global supply chain to optimize the look and feel of its international footprint. The company also uses joint ventures and partnerships with others to help it walk the line between accelerating market entry and managing risk.
Revenue Streams and Profit Drivers
The business model of Kraft Heinz primarily generates revenue from the sale of packaged and ready-to-consume food and drinks. Inasmuch as Kraft Heinz is a global company with a pronounced presence in North America and Europe, its customer base spans the entirety of those regions. Some customer segments within those markets who enjoy the products of Kraft Heinz are:
The customers are three main categories: retailers, foodservice providers, and institutional customers. The revenue streams can be broken down like this:
- Sales at Retail: We are talking about not just products that are moved in bulk. Constantly, we hear about how much room there is for growth in e-commerce. But here is an interesting fact: In 2015, supermarkets, hypermarkets, and online grocery platforms sold nearly $23.6 billion worth of food and beverage products. This is more than what any other foodservice channel sold.
- Foodservice: Kraft Heinz provides bulk products to foodservice operations. The company has not consistently broken out its foodservice sales, although in part due to analyst queries and to highlight the potential in this area, during 2016 Kraft Heinz did report that its foodservice sales were up over 20% from the previous year.
- Licensing and Partnerships: The company earns royalties from licensed brands like Capri Sun and Kool-Aid and has formed strategic alliances with QSRs (quick service restaurants).
Kraft Heinz has concentrated on enhancing its operating profit margins through cost optimization and even more concentrated supply chain efficiencies. Zero-based budgeting (ZBB) is not a typical approach that a major food company follows to fund growth. But in 2018, Kraft Heinz started to use it to better understand spending drivers, align resources to priorities, and reduce unnecessary costs. With ZBB, we don’t simply build the previous year’s budget forward; instead, we start from zero and look critically at each line of the budget and the necessity of funding it. With better business planning (BBP), ZBB, and just plain better planning at the business unit level, Kraft Heinz is getting its Overhead under more Control.
Marketing and Brand Strategy
The Kraft Heinz business model is heavily influenced by marketing. The company invests heavily in both traditional and digital advertising to foster brand loyalty and attract new consumers. Some of its marketing tactics are:
Memorable Campaigns: Kraft Heinz has produced ad campaigns that stick with consumers. When Kraft conjured ads for Kraft Mac & Cheese, they became a kind of storytelling that reverberated through America when it wasn’t reverberating through our hollowed-out, cheese-like macaroni. And Heinz? Let’s not even get started.
The company is using data analytics, AI, and programmatic advertising to a greater extent than ever before to personalize its marketing. The most direct application of this is on social media platforms like Instagram, YouTube, and TikTok, where it is crucial to engage and connect with younger audiences.
Creativity and Renewal: Kraft Heinz constantly brings out new stock-keeping units, offers of limited duration, and reworked products to match the fickle tastes of consumers, who are now demanding more food from plants, organic provisions, and lower sodium.
The firm’s marketing approach is not solely about connecting with consumers; it also focuses on accelerating retail growth and enhancing performance in the product category.
Supply Chain and Operational Efficiency
A key part of the Kraft Heinz business model is its emphasis on operational excellence. The company has over 80 manufacturing facilities around the world and has invested significantly in automating them, optimizing procurement, and refining logistics.
Kraft Heinz has a supply chain that is simple and not bogged down with too many places to store inventory or too many steps for moving products from place to place. What Kraft Heinz has is a series of integrated planning systems that allow it to work best in demand-verse and, typically, in the most agile manner possible. It also does a better job than many of its rivals in using third-party logistics and other supply chain partners to achieve a nearly frictionless route to the consumer.
Strategic Acquisitions and Divestitures
Kraft Heinz engages in M&A as a way to strategically refine its portfolio and gain entry into new markets. Its acquisition of Primal Kitchen in 2018, for example, allowed it to grow into the high-demand, better-for-you condiment market.
Enabled the company to access the burgeoning health-aware consumer segment. Meanwhile, Kraft Heinz has shed non-essential assets, like its natural cheese operations, which it sold to Lactalis in 2021, to concentrate on higher-margin business categories.
The disciplined methodology of portfolio management keeps the Kraft Heinz business model aligned with long-term consumer trends and financial performance metrics.
Sustainability and Corporate Responsibility
Contemporary customers and investors want much more than monetary payoffs; they expect corporate social responsibility. The Kraft Heinz Co. has made sustainability a cornerstone of its business model. In fact, it has committed to three key components of what it terms “the 3 P’s of sustainability”:
- People (meaning the company’s investment in its employees and in communities).
- Planet (covering a wide swath of commitments to environmental and ecological concerns).
- Profit (which the company regards as a vital component enabling it to fulfill the first two objectives).
- Ensuring that 100% of its packaging is recyclable, reusable, or compostable by 2025.
- By 2025, reduce greenhouse gas emissions by 15%.
- Achieve emission reductions in all building subsectors.
- Obtaining 100% of its eggs from hens not kept in cages.
The initiatives not only boost brand reputation but also lead to long-lasting cost efficiencies by cutting waste and slashing energy use.
Challenges and Strategic Outlook
Kraft Heinz‘s business model has a few problems, of which consumer tastes that are moving in another direction is the biggest. But it’s not the only one. Competition from private labels and new entrants (think of the middle aisles of your favorite Target) is pretty ferocious. And then there’s Kraft Heinz‘s own supply chain, which lately has been as jammed as the McClunky Minecraft mod in the meme-arena. But Kraft Heinz is responding with a pretty hefty dose of agility, and to good effect.
- Speeding up its foray into the digital world
- Investing directly in consumer channels.
- Positioned for high-growth categories such as plant-based and functional foods.
Kraft Heinz’s transformation plan, unveiled in 2020, aims to refocus the business on core platforms, improve operational efficiency, and reinvest savings into innovation and brand building.
Final Thoughts
The business model of Kraft Heinz shows how an old-line company can move forward through managing its brands; it is a strong case for managing brands in a diversified global company. The Kraft Heinz case study also illustrates how to mix the right amount of tradition and innovation, two ingredients that are as much a part of the Kraft Heinz business model as the company’s famous ketchup.
Kraft Heinz is working to satisfy our fast-changing market. We focus on brand equity, of course. But we also put tremendous effort into something a lot of people don’t think about (until it fails): supply chain efficiency. If we ensure our supply chain is as efficient as it can possibly be, then we can utilize the resources and the efficiencies we achieve there to fund things that make our brands better. That’s number one. Number two is digital engagement.
Kraft Heinz is known for being part of a digital transformation, which is true. But what I can say with confidence is that we do a whole lot of things better than we used to do them before we engaged with this digital transformation.
