CPG Week: Inside Kraft Heinz’s Breakup. Plus, Pepsi’s Energy Drink Plans

[00:00:05] Monica Watrous: Welcome to the CPG Week podcast by BevNET and Nosh. I'm Monica Watrous, here with my co-host, Brad Avery. Now here is the latest in food and beverage industry news. Kraft Heinz is officially splitting up. After nearly a decade as a combined entity, the global food company said it will be separating its business into two units to reduce complexity and increase focus. One unit, currently referred to as Global Taste Elevation Company, will comprise sauces, spreads, and seasonings. That business generated approximately $15.4 billion in net sales last year and includes brands such as Heinz, Philadelphia, and Kraft Mac and Cheese. The other, currently known as North American Grocery Company, will represent grocery staples. That business contributed $10.4 billion in net sales last year and includes Oscar Mayer, Kraft Singles, and Lunchables. The news follows months-long rumors, in addition to lagging sales and volume declines, that have been exacerbated by an increasingly challenging macroeconomic environment for all food makers. The transaction is subject to customary closing conditions and includes final board approval, among other regulatory requirements. The capital structure, board composition, company names, and brand allocations will be announced at a later date, according to Kraft Heinz.

[00:01:36] Brad Avery: It's the era of the big CPG breakup.

[00:01:40] Monica Watrous: Yeah, Taylor and Travis are getting engaged and Kraft and Heinz are saying adieu.

[00:01:46] Brad Avery: I mean, Kellogg before them, the big divestments we've seen from ConAgra and Del Monte situation, big CPG companies are finding it better to pare things down. And whether it's a conglomerate breaking up into multiple businesses, even smaller companies like Bolthouse Farms did a similar move a couple of years ago. This is a pretty big deal and it's a continued trend we've been seeing happen over and over. So there's something about the big top-heavy companies that they need to start dialing in and being able to give their full attention to one area.

[00:02:27] Monica Watrous: Well, I think what it all comes down to is focus. And we saw General Mills last year divest all of its yogurt business. We've seen Post recently sell its recently acquired pasta business. These companies realize that they can't compete in all of these categories. It's a lot of complexity in the business. And if they stay true to their core competencies, they have a better chance at winning in an increasingly competitive and challenged marketplace.

[00:02:53] Brad Avery: Well, we're also seeing the deck get shuffled a bit in beverage. And with PepsiCo, three years into its $550 million investment into next-gen energy drink maker Celsius, it's liking what it's seeing. The two companies have extended their long-term strategic alliance with PepsiCo, increasing its ownership stake to 11% via $585 million of newly-issued convertible 5% preferred stock. With that move, they'll also earn another seat on Celsius' board of directors. But, perhaps most importantly, control of Rockstar Energy is now falling to Celsius' team. After years of struggling to turn Rockstar's declining sales around, the task now falls on Celsius to recharge the brand that was once a rock-solid number 3 in the category after Monster and Red Bull, the place that Celsius now occupies. The announcement also gave us some clarity on the future of Alani News Distribution, the female-focused energy and protein brand that Celsius picked up in February for a cool $1.8 billion. Alani will be going on the Pepsi trucks, leaving independent DSD distributors once again in search of a high-velocity replacement. Now, it's interesting in light of the food breakups that we do see Pepsi aligning itself closer with an energy drink partner after they've been so ambitious and aggressive in trying to get a real foothold in this category. And moving Rockstar into the Celsius portfolio seems to make the most sense, given that their Mountain Dew energy products tend to just fall under the CSD arm. Why not hand this Brad Avery to the experts in the sector?

[00:04:29] Monica Watrous: Well, not everybody is happy with the strategic moves that PepsiCo is making. And one of them is an activist investor who holds $4 billion stake in the food and beverage company. Elliott Investment Management sent a letter on Tuesday morning to Pepsi's board of directors outlining a five-point plan to address, quote, poor operational results, sharp stock price underperformance, and a meaningfully discounted valuation. Now, if enacted, the firm said the changes could send Pepsi shares up at least 50% and restore organic growth revenue to mid-single digits. According to the letter, innovation under new acquired or launched brands has fallen short noting PepsiCo Beverages North America has approximately 70% more stockkeeping units or SKUs in the marketplace than Coca-Cola, but is generating roughly 15% less retail sales. On the food side, PepsiCo Foods North America could also be recalibrated, according to Elliott, The company's aggressive investment strategy has failed to generate the anticipated growth and subsequently compressed margins. Yet the answer isn't necessarily to spend less, but more strategically. Cutting operational costs and spending will free up capital for reinvestment in core brands and bolt-on acquisitions, according to the group.

[00:05:53] Brad Avery: Well, I'm sure there's a matter of perspective here from Elliott, which has $4 billion in PepsiCo and the company itself. But looking at the overall trends, Pepsi's dollar sales, when you just look at scanner data, have generally trailed behind Coke and KDP, which have both been growing at a lot faster rates. So I'm not sure for the exact causes behind that drag, but When I hear 70 percent more SKUs, but 15 percent less retail sales in Coke, I believe it, given what I've seen.

[00:06:28] Monica Watrous: Pepsi has slipped down the ranks in recent years, and Dr. Pepper notably surpassed Pepsi as the second most popular soda by market share in 2023.

[00:06:39] Brad Avery: And now on the point of PepsiCo having more SKUs, they also recently announced that they'll be cutting a number of SKUs from the Mountain Dew brand, from Gatorade, and elsewhere in their portfolio. I believe Bubbly is also shedding a few flavors that are underperforming. If you'll remember, several years ago, around the time of the pandemic, Coke made a big push to eliminate what it called zombie brands, which were just out there moving along but not doing anything exciting or growing and perhaps Pepsi is starting to take a look at its portfolio and whittle it down and connecting it back investing in fast-growing Celsius and Alani New and moving Rockstar which is one of those brands that has a lot of SKUs that's in decline Under that umbrella, it makes perfect sense if you're trying to recharge it. They spent a billion dollars to acquire Rockstar several years ago. And so it's a brand worth trying to continue to make work.

[00:07:38] Monica Watrous: Of course, we'll continue to follow any new developments.

[00:07:42] Brad Avery: Well, moving on, Daily Greens may be a red-hot category in e-commerce, but now Huel is looking to see if it can replicate that magic in retail with its new RTD line. The de-powderized version of green drinks are launching in three flavors in 12-ounce cans this month, each made with a blend of vitamins, minerals, and adaptogens bearing the Huel Daily Greens name. Sprouts, Target, and Lifetime Fitness are a few of the retailers confirmed to be taking the line in, And of course it will also be sold online, direct-to-consumer, and via Amazon. Tyler Noyes, head of US sales for the England-based Huel, told us ahead of the launch that he believes, quote, "...consumers have been inundated with borderline unlimited powders to incorporate into their days and their diet, thus leaving the white space for a more convenient RTD format." Huel is best known for its meal replacements, and the company's Powder Dealer Greens have also meant big business. The canned version is going to play a big part in their strategy moving forward, with the line expected to pull its own weight and also help boost awareness for its powders. So, killing two birds with one stone, in a way, building the overall brand equity, and getting into a fast-growing segment.

[00:08:56] Monica Watrous: I've seen several different interpretations of this greens segment that I believe was popularized by AG1 or formerly known as Athletic Greens. Greens is a brand that's seeing a lot of success by translating the greens powder into a gummy format. And when I was at Newtopia, I saw a product that was kind of like a pouched smoothie. called salad and it was supposed to be a more flavor friendly alternative to greens powders. Well, I think the big question remains if Soylent gets into this business, the product would be called Soylent Green. On a lighter note, to honor the revival of Hulu's adult animated series, King of the Hill, Spiceology is launching a beer-infused barbecue rub. But I think the propane and propane accessories are sold separately. Did you watch the series? I watched it in its initial run, but I haven't seen the revival.

[00:09:56] Brad Avery: I was skeptical of the revival at first, but I did watch the new season, and honestly, it nailed it. It felt like the show. But more importantly, it got some good CPG jokes in there.

[00:10:08] Brad Avery: Is this beer? Uh, it's near beer. No alcohol, according to the ATF, if you trust them. Probably has napalm in it, like Doritos. Oh. Mmm. It's good.

[00:10:24] Brad Avery: Travis Kelsey, the Kansas City Chiefs tight end, is now an investor and partner in Recover 180, an organic sports drink brand co-founded by Lance Collins.

[00:10:34] Monica Watrous: You mean he still had enough money to invest in that business after buying that ring? Have you seen that rock? I also wanted to give a quick shout out to Alex and Steve Michelson, the founders of Leisure Hydration, who were at Newtopia now and told me that they'd listen to this show. So we love to hear it and we appreciate the engagement and listenership and also just a great product. I'm a big fan of Leisure.

[00:11:05] Brad Avery: It's a fun brand to see grow. I know earlier this year they announced some national distribution. We were following them when they were still called Leisure Project and, you know, very early days. So it's great seeing the brand evolve and, you know, grow into what it is now. And I'm glad to hear that they are listening. So, hey, guys, reach out, say hi.

[00:11:24] Monica Watrous: And send some cans, would you? Here are some other notable bits of news from the week. Now touting over $60 million in annual retail dollar sales, clear protein hydration producer Protein 2.0 has welcomed in Chris Prunetta as the company's new CEO, alongside several other executive appointments. Nestle has named board member Philippe Navratil its new chief executive officer, replacing ousted leader Laurent Frex. who was dismissed following an investigation of an undisclosed romantic relationship with a direct subordinate violating the company's code of conduct. And finally, one of Japan's best known business leaders and the head of Suntory Holdings has resigned after a police investigation into the purchase of supplements that may have violated the country's strict drug laws. For these stories and more, become an insider at BevNET and Nosh. If you're enjoying the show, please subscribe on your listening platform of choice. That wraps up this edition of CPG Week by BevNET and Nosh. Thank you to our audio engineer, Joshua Pratt, our director is Mike Schneider, and our designer is Aaron Willette. If you enjoyed the podcast, please subscribe on your listening platform of choice, and we will see you next time.