Kraft Heinz to cut creative and design agency relationships but increase media spend

Kraft Heinz plans to slash the number of design and creative agencies it plans to work with by half this year, while increasing media spend by 30%, CEO Miguel Patricio said during a recent earnings conference call. According to a presentation slide shown during the call, Kraft Heinz said the number of agencies will be reduced from 36 to 19. The company, however, did not name the agencies.

To balance the "slight decrease" in marketing and "big increase" in media for 2020, Kraft Heinz is also going to be reducing the amount of new products in or the amount of innovation in 2020 by 50%. It looks to concentrate on  "innovation that can really make a difference".

"We are not expecting a decrease in net sales of the innovation next year, but we are going to cut everything that is not accretive, that is cannibalistic, a lot of line extensions that we did in the past," Patricio said. He explained that doing so helps the company focus on what really matters and puts its energy and budget "behind innovation that moves the needle".

"But also the other consequence is that we put more money on product development. We put more money behind agency or agency fees because we have less development and even marketing research. And putting all these savings on these lines together, we have put it back in media, which allow us literally to sweat the budget and increase media by 30% overall," he added.

On top of the 30%, because we have less innovation, we are concentrating more in the bigger brands that have more momentum, better margin and that we have to grow.

The plan to redeploy media “inefficiencies” in agency fees, production, research, product development came last year, when Patricio said the company can do a much better job on the investment in core brands. Stressing the need to better balance spending and marketing as well as innovations versus core brand support, he previously said the way to do so its not just about cutting costs, but also about becoming more efficient. This include focusing investments on core brands instead of diluting them among a lot of small ones.

For the fourth quarter of its 2019 financial year (Q4 2019) ended 28 December 2019, Kraft Heinz witnessed a 5.1% dip in net sales to US$6.5 billion compared to the same period last year. More specifically, net sales for the rest of the world dropped 10.1% to US$708 million.

Patricio said its 2019 results were "disappointing" but nonetheless, it has taken critical actions over the past six months to reestablish visibility and control over the business. "And we remain convinced Kraft Heinz has the potential to achieve best-in-class financial performance as we begin transforming our capabilities and making necessary investments in our brands based on deep consumer insights. Our turnaround will take time, but we expect to make significant progress in 2020, laying a strong foundation for future growth," he added.

According to Patricio, 2020 is a year of stabilisation rather than "a year of playing of offence". "It's a year that we want to continue stabilising the bottom line of the company," he added. He added during the call that 2020 will be the first full year of what it expects will be a three-stage turnaround, a turnaround characterised by laying the foundation for the future growth, fueling its flagship brands and accelerating growth platforms and then hitting its stride on both the top and bottom lines.

Last year, Patricio said the company will focus on developing nine “transformational projects”. Five projects of them are focused on top line, two are focused on operational efficiencies, and two are focused on organisational effectiveness. Meanwhile, it is also working to revamp its product development process to be faster and more consumer-centric with new products.

(Read also: Kraft Heinz to restate financial statements after procurement misconduct)