How Artificial Intelligence is helping Kraft Heinz to squeeze tomatoes, but not its profitability
The growth of private labels in the US and the rise of uncountable food start-ups are threating the status quo of the food industry. Traditional companies are under pressure to cut costs and to innovate faster. Kraft Heinz is relying on Artificial Intelligence to solve this puzzle by using the technology to improve processes and product development.
Consumer trends will challenge traditional Packaged Goods companies
Consumer trends are changing the Consumer Packaged Goods (CPG) industry and posing a greater threat to traditional food manufacturers. The growth of private labels1 and the rise of successful start-ups2 are pressuring leading food companies’ profitability and forcing faster innovation.
Private labels are gaining traction in the US. In 2017, private labels sales grew by 3.2% while branded products declined by 0.5%3. The US dollar share of private labels should reach 25% over the next decade3. Private labels benefit consumers and retailers. While consumers pay less (on Kroger, a private label 24 oz ketchup is sold by $1 while a 20 oz Heinz ketchup is sold by $2.794), retailers profit more (25% higher gross margins compared to manufacturer brands3).
While private labels pressure traditional brands’ prices, food start-ups are transforming the industry by offering disruptive products and reacting faster to changing consumer tastes. Chobani, for example, became the best-selling yogurt in the US only after 4 years in the market2. Now that VC companies and tech companies are investing in CPG2, the start-ups threat will undoubtedly continue.
Both trends are forcing traditional food companies to reduce prices while keeping a fast innovation pace. Cutting costs in raw materials and product development is not the solution anymore. The path to succeed in the future is about improving operational efficiency and innovating faster. Under this scenario, machine learning arises as key instrument to help big companies to thrive.
Kraft Heinz is responding to market pressure using machine learning
Kraft Heinz, the 5th largest food company in the world5, claims to be a very dynamic company which is committed to long-term growth6. Two recent decisions associated with AI confirm Kraft Heinz’s motivation to reignite growth and profitability (in 2017, net sales decreased by 0.96%7). The company is relying on AI to improve processes in the short-term and to improve product development in the long-term.
Regarding process improvement, Kraft Heinz adopted AI to increase efficiency in manufacturing. The company has been implementing tools powered by AI to identify waste and inefficiencies in manufacturing and supply chains8. The technology enables the company to handle multiple variables to achieve optimization by quickly evaluating production and operation drivers that can indicate where inefficiencies lay. The company is also using a combination of AI and Robotic Process Automation to support administrative tasks such as contract creation, invoice matching and trade pay processes10. Kraft Heinz is heavily investing to transform automation levels from rule-based (“automations that do”) to adaptive, non-rule-based (“automations that learn”)10.
Regarding product development, Kraft Heinz has recently acquired Wellio, an AI food tech company based in San Francisco11. Wellio is an intelligence platform where consumers can plan and shop healthy meals. The platform is “human powered and AI assisted”, because it can learn the customers` tastes, meal restrictions, and eating habits to craft recommendations of recipes and shopping lists12. With this acquisition, Kraft Heinz will have access to a vast array of data and to insights of consumer preferences, which can be used for product development in the future.
Machine learning potential has not been fully explored yet
The pressure for cutting cost while continuously innovating does not seem to be a temporary trend. Therefore, Kraft Heinz and other traditional CPG companies should not only invest in punctual AI solutions, but also embed the technology in their businesses and scale it to become part of the daily operations.
To improve bottom-line, Kraft Heinz can explore more facets of machine learning properties. One important machine-reengineered process is “predictive maintenance”. Machine learning can help humans identifying patterns in production data and help engineers anticipate and prevent problems. Some companies have achieved 50% of reduction in downtime and 25% increase in performance in one month after implementing new robotic manufacturing lines13.
To improve top-line, Kraft Heinz needs to ensure that the company is capturing consumer trends not only from the Wellio customer base, but also from a broader audience. “Marketing Monitoring”, another functionality of machine learning, can aid the company to be faster and more accurate in reading relevant information from social media and identifying consumer trends13.
It is important to highlight that future investments in AI will come at high costs. Kraft Heinz prides itself for its Zero-Based Budget, which can hinder large investments in new technologies if the related benefits are hard to be proven. The company may take calculated risks if the benefits of AI are expected to come in the long-term.
Open question: Can Amazon become the leading food company?
Taking into consideration that Amazon has its own food private label, an incredible amount of consumer data, and a solid supply chain infrastructure, how big is the risk that Amazon becomes the leading food company in the world?
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Sources
1 Nielsen. “Private label brands are hungry for more of the global food pie”, 06 March 2018, https://www.nielsen.com/id/en/insights/news/2018/private-label-brands-are-hungry-for-more-of-the-global-food-pie.html, accessed November 2018
2 CB Insights. “Disrupting The CPG Industry: How Brands Can Adapt To The Future Of Packaged Goods”, 23 October 2018, https://app-cbinsights-com.prd2.ezproxy-prod.hbs.edu/research/disrupting-cpg-strategies-future-trends/, accessed November 2018
3 CB Insights. “Private Labels Rising: How Retailer’s Own Products Are Taking Off And Transforming The CPG Industry”, 17 September 2018, https://app-cbinsights-com.prd2.ezproxy-prod.hbs.edu/research/disrupting-cpg-strategies-future-trends/, accessed November 2018
4 Kroger, “On-line Store/ search for ketchup” https://www.kroger.com/search?query=ketchup, accessed November 2018.
5 Kraft Heinz, “A Global Power House” http://www.kraftheinzcompany.com/company.html, accessed November 2018.
6 Kraft Heinz, “Careers and Culture” http://www.kraftheinzcompany.com/careers-our-culture.html, accessed November 2018.
7 Kraft Heinz, 2017 Annual Report. p. 54
8 Angus Lotten. “Kraft Heinz CIO Spends on AI, Robots to Cut Costs”, The Wall Street Journal, 3 October 2017, https://blogs.wsj.com/cio/2017/10/03/kraft-heinz-cio-spends-on-ai-robots-to-cut-costs/, accessed November 2018
9 Alex Hickey. “Kraft Heinz CIO Spends on AI, Robots to Cut Costs”, The Wall Street Journal, 3 October 2017, https://blogs.wsj.com/cio/2017/10/03/kraft-heinz-cio-spends-on-ai-robots-to-cut-costs/, accessed November 2018
10 Francesco Tinto, CIO Kraft Heinz. “Driving Digital Innovation through Robotics”, CIO Review, https://robotics.cioreview.com/cioviewpoint/driving-digital-innovation-through-robotics-nid-26423-cid-75.html, accessed November 2018
11 Mary Ellen Shoup. “Kraft Heinz launches new innovation hub, acquires food tech firm”, The Wall Street Journal, 6 November 2018, https://www.foodnavigator-usa.com/Article/2018/11/06/Kraft-Heinz-VC-fund-takes-shapes-with-acquisition-of-AI-firm-wellio#, accessed November 2018
12 Wellio, “Technology” http://www.getwellio.com/technology/, accessed November 2018.
13 J. Wilson, S. Sachdev, and A. Alter. How companies are using machine learning to get faster and more efficient. Harvard Business Review Digital Articles (May 3, 2016).
I think among all CPG/Retailer players in the market (including Kraft Heinz, topic of the article), Amazon is better positioned to take the lead in food companies in the world. As pointed out, data management is becoming increasingly important in driving performance and, Amazon has information of many difference facets of the customers and interacts with them a lot more than other COG/Retailers. Millennials seems not care a lot about brands [1], specially the traditional ones, and thus traditional big CPG will indeed need to think outside the box and make big bets to retain customer loyalty and not to lose them to the most convenient and intelligently presented private label around.
[1] https://www.forbes.com/sites/forbescommunicationscouncil/2017/12/06/millennials-and-the-reverse-branding-trend/#6f3777e64896
If Kraft Heinz is smart, I think they can continue to grow even as private label becomes a larger percentage of total CPG spend. As you suggest, Kraft needs to innovate internally or acquire compelling CPG start-ups, and leverage its enormous scale and distribution capabilities to generate strong returns. I think Kraft should view its existing staples (ketchup, mustard, etc.) as annuities given the long-term threat from private label, and use their significant cash flow to invest in (or acquire) products in innovating categories, which their machine learning platforms can help them identify. If they don’t move quickly, they will continue to lose share to private label and Amazon.
You mention that Amazon, using its incredible amount of consumer data, and a solid supply chain infrastructure, could become the leading food company in the world. It’s possible, but I don’t believe it’s their ambition. I believe though that Amazon can effectively try to become a leading food BRAND, not MANUFACTURER. Amazon’s goal is to “sell you everything” and they will increasingly use AI to understand your behavior and recommend foods they distribute, but jumping into manufacturing would be too far a step ahead for them. But maybe I’m wrong!
Although Amazon can definitely be a threat in the future, I think that it has played its bet on food by acquiring Whole Foods last year. Considering the size of the deal, and the work to be done in terms of integration with Amazon, push for amazon fresh, etc. I think that Kraft Heinz should be more worried at startups disrupting specific high-value categories (e.g Just with its plant-based mayo: https://www.justforall.com/en-us/products/consumer/mayo). One way to defend against this type of disruptive competitors in terms of speed of development is to have a corporate venture fund from which Kraft can invest in companies doing interesting innovations and potential buy them in the future (way of diversifying R&D and speeding up innovation process). As a matter of fact, Kraft announced a month ago the launch of a $100M corporate venture fund to invest in tech companies doing interesting stuff in the food space: http://ir.kraftheinzcompany.com/news-releases/news-release-details/kraft-heinz-announces-launch-100-million-venture-capital-fund