The Kraft Heinz Company (KHC)

Executive Summary / Key Takeaways

• The Kraft Heinz Company is embarking on a significant strategic separation into two independent, publicly traded entities – Global Taste Elevation Co. and North American Grocery Co. – by the second half of 2026, aiming for enhanced focus and capital allocation.
• Recent financial performance in Q3 2025 showed a modest top-line recovery, yet organic net sales declined year-over-year due to persistent unfavorable volume/mix, reflecting a challenging macroeconomic environment and worsening consumer sentiment.
• The company is committed to "playing offense with discipline," prioritizing substantial investments in its Brand Growth System, R&D, and marketing to drive long-term brand superiority and profitable growth, despite current promotional challenges.
• Despite a significant $9.3 billion non-cash impairment charge in Q2 2025, Kraft Heinz maintains robust cash flow generation and a clear commitment to achieving investment-grade credit ratings for both post-separation companies.
• Key investment considerations include the successful execution of the complex spin-off, the ability to revitalize core North American brands amidst intense competition, and the effective management of ongoing inflationary pressures and evolving consumer preferences.

A Legacy Refocused: Kraft Heinz's Transformative Journey

The Kraft Heinz Company, a global food and beverage powerhouse founded in 1869, stands at a pivotal juncture in its storied history. Formed in July 2015 through the merger of Kraft Foods and H.J. Heinz, the company initially pursued a strategy focused on cost efficiencies. This approach, however, proved unsustainable, culminating in a substantial $15.4 billion write-down in 2019 related to its Kraft and Oscar Mayer labels, a stark acknowledgment of missed opportunities in brand investment and evolving consumer tastes. This period marked a critical turning point, prompting a strategic pivot towards "playing offense with discipline" and a renewed emphasis on brand superiority, innovation, and targeted investments.

At the heart of Kraft Heinz's revitalized strategy is its proprietary Brand Growth System (BGS). This repeatable global model is not a single technology but a data-driven framework designed to identify growth opportunities within its extensive portfolio. The BGS systematically guides efforts to enhance brand superiority through improvements in product formulation, packaging, brand resonance, value proposition, and execution. Initially piloted across 10% of its brands in 2024, the company is aggressively scaling the BGS to encompass 40% of its business by the end of 2025, with a disproportionate focus on its North America "ACCELERATE" platforms. This systematic approach, coupled with analytical tools for optimizing marketing return on investment, represents Kraft Heinz's core technological differentiator in driving sustainable brand health.

Beyond process innovation, Kraft Heinz is also investing in product technology and R&D. The company has committed to removing Food, Drug & Cosmetic (FD&C) colors from its U.S. product portfolio by the end of 2027 and will immediately cease launching new products with these artificial colors. This initiative, impacting a subset of products primarily within the Hydration and Desserts platforms, reflects a response to evolving consumer preferences for cleaner labels. While R&D spending stood at 0.6% of net sales in 2024, the company aims to close the gap to 1% of net sales, signaling a strategic intent to bolster its innovation pipeline. These efforts are crucial for developing healthier offerings, particularly as "healthier food items continue to outpace traditional categories in growth" and regulatory pressures, such as the "Make Our Children Healthy Again" (MAHA) initiative, may impose tighter restrictions on processed foods.

Competitive Landscape and Strategic Positioning

Kraft Heinz operates within a highly competitive global food and beverage industry, contending with diversified giants like Nestle , snack powerhouses such as Mondelez (MDLZ), and beverage and snack leader PepsiCo . Kraft Heinz's competitive advantage historically stems from its strong portfolio of iconic brands (e.g., Heinz, Kraft), its cost leadership in production, and extensive distribution networks. These strengths allow it to offer value-priced, everyday essentials, appealing to a broad consumer base.

However, Kraft Heinz faces significant competitive disadvantages, particularly in innovation speed and adaptability to rapidly changing consumer preferences. Its historical R&D investment of 0.6% of net sales in 2024 lags significantly behind peers like Nestle (1.9%), Danone (DANOY) (1.6%), and General Mills (GIS) (1.3%), potentially hindering its ability to develop new products that capture growth in health-conscious segments. Competitors like Nestle (NSRGY) are more aggressively pursuing innovation in health and wellness, while PepsiCo (PEP) excels in product adaptability and marketing agility, particularly in functional beverages and low-sugar options. This disparity in R&D investment and innovation pace makes Kraft Heinz vulnerable to market share erosion in high-growth categories.

The company's strategic decision to separate into two entities is a direct response to the complexities of managing a vast portfolio across diverse categories and geographies, a challenge that has historically led to "underperformance caused by prioritizing cost cuts over innovation." This move aims to create more focused businesses that can better allocate resources and respond to competitive dynamics. For instance, the Global Taste Elevation Co. will leverage the strong global presence of brands like Heinz, while the North American Grocery Co. will focus on revitalizing staples like Oscar Mayer and Lunchables, which have faced increased competition from private label alternatives and shifting consumer tastes towards healthier options.

Financial Performance and Operational Details

Kraft Heinz's financial performance in the third quarter of 2025 reflected a mixed picture, showing a modest year-over-year recovery in top-line performance compared to the first half of the year. Net sales for the three months ended September 27, 2025, decreased 2.3% to $6.20 billion, including a 0.2 percentage point favorable impact from foreign currency. Organic Net Sales saw a 2.5% decline, primarily driven by an unfavorable volume/mix of 3.5 percentage points, which more than offset a 1 percentage point increase from higher pricing. For the nine months ended September 27, 2025, net sales decreased 3.5% to $18.60 billion, with Organic Net Sales down 3.1% due to a 3.9 percentage point unfavorable volume/mix, partially offset by 0.8 percentage points from pricing.

Operating income for the third quarter dramatically increased 1114.9% to $1 billion, largely due to non-cash impairment losses being $1.40 billion lower than the prior year. However, Adjusted Operating Income decreased 16.9% to $1.10 billion, primarily due to inflationary pressures in commodity and manufacturing costs, unfavorable volume/mix, and increased advertising expenses. Net income for the quarter rose 311.4% to $613 million. Diluted EPS increased 316.7% to $0.52, while Adjusted EPS decreased 18.7% to $0.61.

A significant event in Q2 2025 was a $9.3 billion non-cash impairment charge, comprising $6.7 billion in goodwill and $2.6 billion in indefinite-lived intangible assets. This impairment was triggered by a sustained decline in the company's stock price and the market's perceived risk regarding its ability to achieve future cash flow projections, exacerbated by macroeconomic uncertainty.

Despite these challenges, cash flow generation remains a strength. Net cash provided by operating activities for the nine months ended September 27, 2025, increased to $3.10 billion from $2.80 billion in the prior year, driven by favorable changes in working capital, particularly inventory and accounts payable. The company maintains a healthy liquidity position with $2.10 billion in cash and cash equivalents and an undrawn $4 billion revolving credit facility. Long-term debt stood at $21.20 billion as of September 27, 2025. Kraft Heinz returned $2.7 billion to stockholders in 2024 through share buybacks and dividends, and a share repurchase program with approximately $1.50 billion remaining authorization is in place.

Segment Performance

North America experienced a 3.8% decline in Organic Net Sales for Q3 2025, primarily due to unfavorable volume/mix in categories like coffee, cold cuts, frozen snacks, and certain condiments. Segment Adjusted Operating Income decreased 17.8%, impacted by inflationary pressures, unfavorable volume/mix, and increased advertising expenses. The company notes customer inventory pullbacks in response to worsening consumer sentiment.

In International Developed Markets, Organic Net Sales decreased 1.4% in Q3 2025, largely due to unfavorable volume/mix from industry slowdowns in UK meals and pricing elasticity in New Zealand. Despite this, the company is holding its market share in the UK amidst consumer challenges.

Emerging Markets proved to be a bright spot, with Organic Net Sales increasing 4.7% in Q3 2025, driven by higher pricing and favorable volume/mix, particularly from Taste Elevation products in Latin America. The Heinz brand in emerging markets grew 13% year-to-date. Excluding Indonesia, the segment grew 9.2% in Q3 2025. Indonesia, a $0.5 billion business, is currently a drag due to a significant decline in consumer sentiment and distribution network adjustments, with recovery anticipated in the second half of 2026.

Outlook, Guidance, and Strategic Initiatives

Kraft Heinz has updated its 2025 outlook to reflect Q3 results and the expected continuation of challenging macro trends. The company anticipates Q4 revenue to be weaker than Q3, facing a headwind of 100-120 basis points from inventory phasing as customers adjust stock levels. While market share is expected to improve, the industry is projected to worsen. Overall, the company expects to see improving top-line trends throughout 2025 while preserving profitability.

The strategic separation into Global Taste Elevation Co. and North American Grocery Co. is a cornerstone of the future outlook, expected to be completed in the second half of 2026. This move is designed to foster greater strategic and operational focus, enabling customized capital allocation and accelerated profitable growth for each entity. Current CEO Carlos Abrams-Rivera will lead the North American Grocery Co., while a search is underway for the CEO of Global Taste Elevation Co. Both companies are targeted to achieve investment-grade ratings and maintain net debt at or close to 3x.

Kraft Heinz is committed to disciplined investments, planning approximately $950 million in capital expenditures for 2025, focused on maintenance, technology, and growth initiatives. Marketing as a percentage of net sales is expected to reach 4.8% by the end of 2025, the highest in nearly a decade, with a long-term target of 5%. This includes a planned increase of $60 million to $80 million in brand media marketing in 2025, funded by shifting from non-working to working dollars. The company also anticipates 5% COGS inflation in 2025 (before tariffs), with incremental pressures in Meat and Coffee. Tariffs are expected to have a 100 basis point impact in 2025, with an annualized impact of approximately 180 basis points carrying into 2026.

Risks and Challenges

Several risks could impact Kraft Heinz's investment thesis. The proposed separation, while strategic, is complex and subject to customary conditions, including regulatory approvals and favorable tax opinions. Delays or failure to complete the separation, along with significant associated costs and potential management distraction, could adversely affect the business. The newly independent companies will also be smaller and less diversified, potentially increasing their vulnerability to market conditions.

Goodwill and indefinite-lived intangible assets remain a significant risk, as evidenced by the Q2 2025 impairment. Reporting units like Elevation, HDM, Western Europe, MCCS, and Canada, with less than 5% fair value over carrying amount, and brands like Kraft (less than 2% excess fair value), face a heightened risk of future impairments if assumptions, estimates, or market factors change.

Ongoing macroeconomic pressures, including worsening consumer sentiment and persistent inflation, continue to influence buying behavior and impact profitability. The company is also under examination by the IRS for income taxes from 2018-2022, with proposed adjustments totaling approximately $810 million in potential U.S. federal income tax liability, plus penalties. While Kraft Heinz intends to vigorously contest these positions, the ultimate outcome is uncertain and could materially affect financial results. Furthermore, commodity price volatility, environmental legal proceedings, and the long-term implications of GLP-1 weight-loss drugs on consumer demand for certain food categories present additional considerations.

Conclusion

The Kraft Heinz Company is in the midst of a profound transformation, strategically unbundling its vast portfolio to unlock value through enhanced focus and disciplined investment. The planned separation into Global Taste Elevation Co. and North American Grocery Co. represents a bold move to address past challenges and better align resources with distinct market opportunities. While recent financial performance reflects the headwinds of a challenging macroeconomic environment and shifting consumer preferences, the company's commitment to its Brand Growth System, increased R&D, and targeted marketing investments lays a foundation for future brand superiority and profitable growth.

For investors, the success of this strategic unbundling, coupled with the effective revitalization of core brands and the ability to navigate ongoing inflationary pressures and competitive dynamics, will be paramount. The company's strong cash flow generation and commitment to maintaining investment-grade ratings for both new entities provide a degree of financial stability. However, the inherent risks associated with such a complex separation and the need for sustained innovation in a rapidly evolving consumer landscape underscore the importance of closely monitoring execution and the realization of anticipated benefits as Kraft Heinz charts its dual path forward.