Kraft Heinz considering Ore-Ida sale, report says

(source)

Dive Brief:

  • Kraft Heinz hired Evercore Partners to prepare a potential sale of its Ore-Ida frozen potato brand, according to a report from CNBC. 
  • The brand, which the report said may be worth $1.5 billion to $2 billion, could raise money to help pay down debt and restructure Kraft Heinz’s business.
  • According to the report, Kraft Heinz may be willing to consider a sale of its entire frozen division, which also includes frozen meals such as Devour and Smart Ones. 

Dive Insight:

After a catastrophic earnings report in February — with a $12.6 billion net loss, a $15.4 billion write down of its Kraft and Oscar Mayer brands and its stock plummeting by as much as 28% — the rumor mill has been hopping. News stories have laid out several potential divestitures for the CPG behemoth, including its Breakstone’s brand and Maxwell House coffee.

The frenzied M&A talk makes sense, considering the company needs to make big changes in order to right its financial position. And considering the large problems Kraft Heinz faces, it makes sense that large legacy brands may be on the chopping block.

Among CPG frozen potato brands, Ore-Ida is the clear market leader. According to figures compiled by Statista, last year more than 106 million Americans used Ore-Ida potato products, which include french fries, tater tots, hash browns and mashed potatoes. Ore-Ida had nearly twice the number of consumers as its closest competitor, which was private label potato products.

Ore-Ida, founded in 1952, gained fame by inventing tater tots as a way to repurpose scraps left over from slicing french fries. It was acquired by H.J. Heinz in 1965, and has been a freezer section staple ever since.

While Ore-Ida is one of the older brands in Kraft Heinz’s portfolio, it has been performing well for the company. There were some supply and distribution issues last summer, according to earnings reports. 

In a transcript of the earnings call last August, Paulo Luiz Araújo Basílio, the company’s U.S. commercial business president, said he expected sales of the frozen potato brand to increase as Kraft Heinz regained production capacity. In Kraft Heinz’s most recent earnings report, the capacity rebound in Ore-Ida helped the company’s products overall post a 3.9% increase in volume/mix in the U.S. during the quarter.

So why divest a brand that is popular and consistently growing? It may have the most to do with Kraft Heinz’s particular situation. While sell-offs are a trend for food companies that are facing trouble, most other companies are trying to refocus on their core and rid themselves of brands that have proven to be distractions — like Campbell Soup’s recent sale agreement for its perpetually problematic Bolthouse Farms brand. Other companies are divesting segments that don’t seem to fit with the rest of their offerings, such as Danone’s sale agreement for organic salad brand Earthbound Farm.

The issues that brought Kraft Heinz’s most recent financial problems go deeper than any one brand. And it can be argued that a frozen potato brand truly is a core component of a company that is anchored by ketchup.

The reason Kraft Heinz may want to divest Ore-Ida is that frozen potatoes are hot. The global market increased 6% in 2017 to $106 billion, according to a report published by IndexBox and written by Refrigerated and Frozen Foods.

This success isn’t just a one-year phenomenon. In 2016, Conagra spun off its potato division, Lamb Weston. Since the split, Lamb Weston has seen enviable growth, with sales up 7% in its most recent earnings report.

The sources for the CNBC report about Ore-Ida told the business network that Lamb Weston, which currently makes frozen potatoes primarily for foodservice, is a potential suitor for Ore-Ida. This acquisition would turn Lamb Weston into a potato powerhouse, and provide Kraft Heinz with a large chunk of the funding it needs for a turnaround.

CNBC reported that Kraft Heinz also may sell all of its frozen brands, including Ore-Ida, if the price is right. The report did not estimate what this sale might be worth, but considering the value of Ore-Ida, it’s easily a multi-billion dollar proposition. With Ore-Ida as a starting point, it could be easy for Kraft Heinz to broaden the conversation with a potential acquirer to include the wider array of foods. 

Despite talks of a potential sale, the company may decide to focus on reviving and reinvigorating the brand. In July, Miguel Patricio, a former AB InBev exec with a marketing background, will become Kraft Heinz’s new CEO. He told CNBC he plans to focus his attention on organic growth, brand building and making the company more consumer focused. In an interview with The Wall Street Journal, Patricio said he isn’t working to sell brands, and currently only has plans to grow. 

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