Kraft Heinz is facing a wave of negative press after the company admitted it had to reconsider its earnings reports.
The company recently admitted in a Securities and Exchange Commission filing that some of its employees fabricated transactions surrounding procurement and suppliers, which will cause Kraft to resubmit its financial results for 2016 and 2017 and reevaluate its 2018 numbers.
In February, the company said it received a subpoena from the SEC and was conducting an internal investigation, which revealed improper procedures.
The company said it would restate full-year and quarterly results for 2016 and 2017 and the first three quarters of 2018. It has yet to file its 2018 annual report. And the delay in the filing of the annual report means it will be late announcing its first-quarter results.
The company said it did not believe the amount of the restatement was “quantitatively material” to its finances. Still, the restatements will total about $208 million.
Kraft Heinz, which is facing an investigation into its procurement practices by the U.S. Securities and Exchange Commission, said it had received an additional subpoena on March 1 pertaining to the write-down of some of its brands. The company said it is cooperating with regulators. It has missed a handful of financial reporting deadlines, and Kraft Heinz couldn’t say Monday when the reports, including the full-year financial report for 2018, would be filed.
On Monday, shares in Kraft Heinz shares rose 1%, but were down 24% this year.
The news doesn’t bode well for a company struggling to appeal to consumers with shifting tastes and preferences, and it also highlights a potentially toxic workplace environment.
CNBC reported that the news “raises a new set of questions. These are about the company’s internal controls and the culture of a high-profile Fortune 500 company.”
Kraft Heinz told reporters that no senior executives were implicated in the misconduct, but anonymous sources told CNBC that about 12 employees have been reprimanded.
“Obviously, financial restatements are not supposed to happen, and while it is helpful from the company’s perspective that no senior managers were implicated, any financial restatement attributed to employee misconduct raises questions about financial incentives within the company,” said David Sterling, former chair of the litigation department at law firm Baker Botts.
For a number of former employees, executives and suppliers, the issue puts a spotlight on the company’s bonus structure that is heavily tied to making annual targets. At Kraft Heinz, the risk of that incentive structure is amplified by rapid-fire promotions of often inexperienced employees, they said.
Kraft has been facing increased scrutiny over rumors surrounding the SEC subpoenas. The company also made headlines when it announced that its chief executive, Bernardo Hees, is stepping down effective June 30.
The series of negative headlines surrounding Kraft Heinz’ struggles all point to an growing problem for a company that hopes to refocus on innovation after years of slashing costs.
The Wall Street Journal reported:
Kraft Heinz’s private-equity backers, 3G Capital, have also faced new questions over the cost-cutting approach that they wielded at Kraft Heinz and other companies to increase profits. 3G helped broker the merger of Kraft and Heinz, and worked to deliver profit by slashing the combined company’s workforce, curbing expenses and pushing suppliers to give more favorable terms. It also cut research and marketing spending at a time when many of Kraft Heinz’s signature packaged-food brands were losing favor with customers. Sales dropped as a result.
Kraft Heinz has since beefed up its sales force and marketing efforts with retailers. It is also looking to sell underperforming brands such as its Ore-Ida french fries and Maxwell House coffee divisions, according to people familiar with the matter.
However, Kraft Heinz will have to continue its marketing efforts without the company’s chief marketing officer, Eduardo Luz. On Monday, he announced that he is stepping down at the end of May.
Outgoing CEO Hees announced Luz’s departure in an internal email to employees this past Tuesday.
A Kraft Heinz spokesperson confirmed Luz’s departure, telling CNBC “Eduardo Luz has decided to leave Kraft Heinz at the end of May. We thank him for his many contributions over the past six years and we wish him continued success.”
Adam Butler, currently president of beverages, snacks and desserts at Kraft Heinz, will serve as CMO on an interim basis. He started with Kraft Foods more than a decade ago, prior to its acquisition by Heinz.
In his memo, Hees credited Luz (above) with helping to restore top-line growth while overseeing the grocery division, including driving the growth of the Heinz brand, whose sales rose 26% during the past six years, per Nielsen, reported CNBC.
Luz bowing out at the end of the month means that Kraft Heinz is losing yet another leader who could’ve reinvigorated those brand building and innovation initiatives. The news not only compounds on recently announced departures, like that of Hees, but also that of Michelle St. Jacques, a decorated marketer who left her role as Kraft Heinz SVP and global head of brands and capabilities to be CMO of MillerCoors in January.
While Kraft Heinz has faced flak for failing to strategically market some of its brands, Luz helped to create some splashy efforts in recent months. During the government shutdown earlier this year, he led a campaign to open a pop-up grocery store in Washington, D.C., that provided furloughed and unpaid federal workers with free food. The effort drove serious earned media coverage and a sales boost, Luz previously told Adweek.
Despite the negative media coverage surrounding Kraft restating its financial results and two of its executives departing, Warren Buffet, one of the company’s main investors, said he remained confident in its path forward.
In an interview Monday with CNBC, Buffett said he had been briefed earlier about the restatement issues.
“The company has my confidence,” Buffett said. “If we had just bought Heinz, it would have been a better investment.”
Tags: Kraft Heinz