There was good news for Kraft Heinz’s media agencies—and perhaps bad news for its creative shops—in the announcement of the food company’s fourth quarter results Thursday.
In what is becoming a familiar pattern in consumer goods marketing, Kraft said it plans to significantly increase its spend on working media, while seeking efficiencies elsewhere—including cutting its agency roster by almost half.
The changes are part of a turnaround plan for the struggling business, which reported sales of $6.54 billion in the quarter, down 5.1% from the year before. CEO Miguel Patricio described 2019 as “disappointing” and “very difficult,” but insisted the turnaround plan he’s been working on since taking over last year would start to take hold this year.
Part of that plan includes simplifying its portfolio—seeking innovation in those areas where it has greater chances of success—and putting significantly greater marketing weight behind its already popular brands.
“In 2020 we will be redirecting dollars disproportionately towards support of our flagship brands,” he said during the Thursday (Feb. 13) analyst call. “We are also finding efficiencies in normal working models, such as fewer research dollars necessary for the more concentrated innovation pipeline, as well as cutting the number of agencies we employ in half,” he said.
“As a result we plan to increase working media—what consumers actually see—by 30% in 2020 with even greater increases behind the brands that are the biggest drivers of our profitability.” A slide in the presentation showed the creative and design agency count moving from 36 to 19 in 2020.
The moves mirror strategies undertaken by the likes of P&G and Unilever in recent years—both of which have reduced their agency count.
Last April, Unilever CEO Alan Jope said that the CPG giant has been able to spend €300m more on “working media” and “point-of-sale” in the previous 24 months by reducing “things like advertising, production and agency fees, things that the consumer doesn’t see.”
And P&G’s top marketer, Marc Pritchard, has cut much deeper—claiming to have slashed $1 billion from agency costs in the last five years. Pritchard was not only cutting agency fees, but also cleaning up wasteful spending in digital media.
Costs have been under the microscope across most large consumer goods businesses in recent years as old brands fell behind fast-moving consumer tastes and upstart brands moved quickly to respond to those trends—often taking advantage of direct to consumer distribution models. But rather than build new brands, the trend among these companies has been toward simply cutting costs to improve margins and satisfy investors.
A year ago, Kraft Heinz made business news headlines around the world for having to endure a $15 billion write-down. The write-down was largely attributed to over-zealous cost cutting by the infamous Brazilian private equity firm 3G, which, along with Warren Buffett, merged Kraft with Heinz in 2015.
But now there are signs that food marketers—including Kraft—appear willing to start spending on their brands again.
According to Bloomberg, Mondelez International Inc. CEO Dirk Van de Put told the Economic Club of Chicago recently that 3G’s “obsession” with cutting costs to improve margins had “taken hold of the industry.”
“The combination of this margin obsession with consumers who are becoming less and less interested in traditional brands and products has turned out to be a very dangerous mix,” Van de Put said. “It has led to big brands all over the world losing market share against smaller insurgent brands.”
In an interview with the Wall Street Journal ahead of the Q4 results, Patricio said: “You need to nurture brands, take care of them, to keep them meaningful after 150 years.”
Mondelez, Hershey, Unilever and Kellogg are all reportedly increasing their marketing spend. “That’s how we connect with consumers and keep our brands relevant,” Hershey CEO Michele Buck said in an interview with WSJ.
And while Kraft Heinz isn’t necessarily increasing its spend on marketing—”This is still a 3G company, after all,” wrote wrote Tara Lachapelle for Bloomberg—there are signs that it is becoming interested in tending to its brands once again in order to grow its bottom line.
