To free up money to invest in new products that address the country's growing demand for healthier food, recently combined Kraft Heinz (KHC) - Get Report is wasting no time slicing off the fat from its business model.
Kraft Heinz, which completed its merger on July 2 and is being led by noted cost-slasher Bernardo Hees of 3G Capital, announced on Wednesday that it will close seven manufacturing plants in the U.S. and Canada. The move will result in about 2,600 layoffs, consistent with plans shared in August to give pink slips to 2,500 people -- including about one third of the employees at Kraft's headquarters in Northfield, Ill.
According to Kraft Heinz, the facility closures will occur in a staged process over the next 12 to 24 months, and production in these locations will shift to other existing factories in North America.
Prior to the closures, the Kraft side of Kraft Heinz had 35 manufacturing plants throughout the U.S. and Canada. "Our decision to consolidate manufacturing across the Kraft Heinz North American network is a critical step in our plan to eliminate excess capacity and reduce operational redundancies for the new combined company," said Kraft Heinz spokesman Michael Mullen, who added, "this will make Kraft Heinz more globally competitive and accelerate the company's future growth."
Mullen did not respond to a request for more specifics on how the maneuvers would make Kraft Heinz more competitive and help to accelerate future growth. But what they surely do is move the company closer to its goal of eradicating $1.5 billion in costs by 2017.
Kraft Heinz's actions likely set the stage for several things. First, prices on products that an increasing number of health-conscious U.S. consumers are shunning, such as Kraft American cheese and Oscar Meyer deli meats, will likely become cheaper as cost savings are reinvested. By lowering prices, Kraft Heinz can drive more volume from the customers that are continuing to consume these products.
Cost savings will also likely be put toward developing healthier packaged food products as Kraft Heinz tries to better compete with the likes of better-for-you food manufacturers such as Hain Celestial (HAIN) - Get Report and Whitewave (WWAV) .
Given the lackluster sales trends at the Kraft and Heinz divisions, something definitely needed to be done by 3G Capital to jump-start growth.
Second quarter net revenue fell 4.9% year-over-year at the Kraft division. Excluding the impact of currency fluctuations, organic revenue dropped 3.3%. The company pinned the blame on lower demand for ready-to-drink products such as Capri Sun.
The picture wasn't much better at the Heinz division. Net sales for the ketchup maker declined 4.1%, largely because of a 9.4% hit from currency volatility. Heinz's sales volume rose just 1.7% as the company said major U.S. retailers had invested in more inventory in early 2014 ahead of changes at the company.
Kraft Heinz will report its third quarter results on Nov. 5.
The cost cuts may also help 3G Capital to attract investors to a company battling with sluggish sales. Shares of Kraft Heinz are up 3.9% since they first began trading on July 6, compared to the
1.6% rise over the same period.