If you’re pouring Heinz ketchup from a bottle, the stuff is so thick you have to wait. Heinz turned this potential source of consumer frustration to its advantage in a famous advertising campaign that called the ketchup “slooooow good.” Last week, the company behind the ketchup, Kraft Heinz, announced that it would be late filing the annual report that was due on Wednesday. This wait, however, is going to be much harder to spin.
Earlier in February, Kraft Heinz announced in its 2018 financial results that it was taking a mammoth writedown of $15.4 billion to its book value. That came as the result of goodwill impairment charges involving the Kraft and Oscar Mayer brands.
The hits didn’t stop there, either, in what The Wall Street Journal described as “an avalanche of bad news.” After missing its earnings estimates, the packaged food producer cut its quarterly dividend by roughly a third. The company also revealed it received a subpoena in October from the Securities and Exchange Commission (SEC) regarding its procurement accounting and internal controls.
The subpoena motivated Kraft Heinz to undertake its own internal investigation, which concluded that an increase of $25 million in the fourth quarter of 2018 to its costs of products sold was warranted. Additionally, the company said it is “implementing certain improvements to its internal controls to mitigate the likelihood of this occurring in the future and has taken other remedial measures.” On top of all that, the internal investigation is delaying the filing of Kraft Heinz’s annual report with the SEC.
At this point, it’s tempting to say “uh-oh, SpaghettiO,” but it turns out that’s a Campbell’s product.
In any case, Wall Street analysts took Kraft Heinz to task following the torrent of bombshells. Meanwhile, investors sold off the company’s stock. In the aftermath, the involvement of 3G Capital in the management of Kraft Heinz has come under scrutiny. The Brazilian private equity firm with a reputation for ruthless cost controls acquired Kraft in 2013 and immediately got to work pinching pennies. Two years later, 3G and Warren Buffett’s conglomerate Berkshire Hathaway engineered the merger with Heinz.
Conventional wisdom seems to be that 3G’s frugality came along at the exact worst time for Kraft Heinz. The thinking goes that the changing tastes of millennials should have pushed the company to plow capital into exploring new product lines and marketing strategies to compete with fresher, healthier alternatives popping up all over grocery store aisles. Instead, 3G was obsessing over trimming fiscal fat to the detriment of Kraft Heinz’s long-term well-being.
In that case, you could argue that Kraft Heinz fell victim to the poor timing of its private equity owners, which you might chalk up to bad luck. It’s fair to wonder, however, if the cost-cutting mindset that overtook Kraft Heinz bled over into its compliance efforts.
Investors will be waiting – patiently or not – for the results of the internal investigation on that and other fronts.