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Kraft Heinz to sell part of its cheese business for $3.2 billion



Kraft Heinz Co. (Kraft Heinz Co.) KHC has given up a significant portion of its cheese business by 0.31%, which marks a challenge for food companies as the coronavirus pandemic has driven unprecedented demand and its complex operations.

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Kraft Heinz said on Tuesday that it had reached a deal to sell its North American and international American natural cheese business and a blend of other cheese brands to French Groupe Lactalis SA for $3.2 billion.

“The Wall Street Journal”

; first reported that the deal will be carried out early on Tuesday. The makers of Heinz Ketchup and Oscar Mayer’s deli meats said the deal is part of its plan to simplify the business and focus on the brands most likely to resonate with contemporary consumers.

Nina Barton, Kraft Heinz’s chief growth officer, said in a virtual meeting with investors on Tuesday: “We are away from consumers.” “We are rebuilding the connection.”

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During the coronavirus pandemic, sales of groceries, including packaged foods, have surged because consumers have stocked food and moved to mainly eat at home. However, even if the sales of some established companies have increased, they have lost market share because they cannot keep up with unexpected demand. The sudden need for more cleaning supplies, protective equipment and delivery trucks cut their profit margins.

When the pandemic hit, Kraft Heinz had just begun a comprehensive reform of its portfolio of dozens of brands. As Kraft Heinz struggled to produce enough macaroni and cheese to meet demand, competitors gradually seized the market, such as General Mills Inc.’s Progresso soup and Betty Crocker baking mix. Since the company’s merger in 2015, the epidemic has strengthened the obvious theme of the challenge Kraft Heinz faces: bigger is not always better.

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Nestlé SA, Unilever PLC and other large food producers have also undergone major divestitures in recent years to better focus on operations.

Since the merger, Kraft Heinz has been struggling to go against consumers, who prefer more fashionable or healthier-looking foods and lower-priced store brands. The pressure to resume sales has weakened its ability to increase profitability. Since the beginning of the merger, the company’s market value has evaporated by more than half, which makes it reflect this. Today, the company’s market value is approximately US$40 billion, which is only much higher than its debt burden of nearly US$30 billion. The company said that part of the proceeds from the sale to Lactalis will be dedicated to debt reduction.

Kraft Heinz said at its investor meeting that it plans to cut costs by $2 billion within five years and restore the strategy that inspired the company five years ago. The total savings this year is between 350 million and 400 million US dollars.

Kraft Heinz shares edged up 0.3% on Tuesday to $31.97.

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Lactalis is a global dairy company headquartered in France with a relatively close shareholding in the United States. It produces Brie, Ricotta and other cheeses in the United States and sells them under brands including President.

The company entered the U.S. market about 40 years ago and has been expanding vigorously. In 2017, it acquired Stonyfield organic yogurt from Danone SA for US$875 million.

During the coronavirus pandemic, when the demand for major groceries is higher than ever, increasing the Kraft cheese business will further increase the company’s influence.

The products sold will include Kraft shredded paper and cheese cubes, as well as the American Cracker Barrel brand, Breakstone cheese and sour cream, and other assets. Kraft Heinz will keep Philadelphia Cream Cheese, Velveeta, Cheez Whiz and Kraft singles in the United States. It will retain its macaroni and cheese business globally.

Kraft Heinz (Kraft Heinz) brand sales in the past year is about 1.8 billion US dollars in sales, accounting for about 7% of the company’s annual revenue.

In 2018, Kraft Heinz agreed to sell its Canadian natural cheese business to Parmalat for more than $1 billion.

At the same time as the sale to Lactalis, Kraft Heinz reorganized its business on six new platforms, which are said to be more focused on consumer needs, such as more convenient meals and snacks, rather than 55 different groceries category. Executives said that this new approach will help the company become more agile and innovate more effectively.

In the years following the merger, Kraft Heinz cut costs to generate net savings of approximately $1.7 billion. Its sales growth and market share are affected.

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This has caused some of its biggest brands to lose value. Since February 2019, Kraft Heinz has written down its brand value by approximately US$20 billion.

Kraft Heinz CEO Miguel Patricio said that the company is partly owned by the Brazilian investment company 3G Capital, which has focused too much on cutting costs, and under its previous leadership Made a short-sighted decision. He said in an interview: “We are changing this way of thinking.”

Last year, Mr. Patricio took over Kraft Heinz. Prior to that, he served as chief marketing officer at Anheuser-Busch InBev SA, another company that invested in 3G partners.

Mr. Patricio said that Kraft Heinz will be more strategic in cutting costs, and will invest more of his savings in brand marketing instead of diversifying all benefits as in the past. Pass on to profit.

“Do we need to reduce profits to develop the brand? The answer is no,” he said.

Royal Bank of Canada Capital Markets LLC is Kraft Heinz’s financial advisor, and Paul, Weiss, Rifkind, Wharton and Garrison are its legal advisors. Perella Weinberg Partners is Lactalis’s financial advisor and Dentons is its legal advisor.

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