Returns On Capital At Kraft Heinz (NASDAQ:KHC) Have Stalled

In the ever-evolving landscape of consumer staples, kraft heinz (NASDAQ:KHC) has long been a stalwart, known for its iconic brands and steady performance. However, recent financial data reveals a concerning trend: the company's returns on capital employed (ROCE) have stagnated, raising questions about its future profitability and capital efficiency. Let's delve into the factors contributing to this stagnation and explore how Kraft Heinz is adapting its capital allocation strategy to address these challenges.



Factors Contributing to Stagnation in ROCE

1. Volume/Mix Declines: One of the primary factors contributing to the stagnation in Kraft Heinz's ROCE is the decline in sales volume. In the fourth quarter of 2023, the company reported a 7.1% decrease in net sales, including a negative 6.1 percentage point impact from a 53rd week in the prior year. This decline was driven by elasticity impacts from pricing actions and industry headwinds, particularly the reduction of Supplemental Nutrition Assistance Program (SNAP) benefits in the United States. The 0.7% decrease in organic net sales further underscores this trend.

2. Price Increases to Mitigate Input Costs: Kraft Heinz has focused on price increases to offset rising input costs, which has helped maintain gross profit margins. However, this strategy has come at the cost of sales volume. In 2023, the company reported a 280 basis points increase in gross profit margin to 33.5%, but this was accompanied by a 5.5 percentage point decline in volume/mix. This trade-off between price increases and volume declines has resulted in stagnant ROCE, as the company has not been able to generate sufficient returns to justify its capital investments.

Comparing to Industry Benchmarks

When compared to industry benchmarks, Kraft Heinz's performance appears to be lagging behind its peers. For instance, Mondelez, a competitor in the consumer staples sector, reported a PE ratio of 17.95 in 2025, indicating a higher valuation and potentially better returns on capital employed. Similarly, General Mills reported a PE ratio of 12.47, suggesting a more favorable market perception of its ability to generate returns on capital. In contrast, Kraft Heinz's PE ratio was not provided, but its stagnant ROCE and declining sales volume suggest that it may be underperforming relative to its peers.



Evolving Capital Allocation Strategy

In response to the decline in ROCE, Kraft Heinz has evolved its capital allocation strategy to focus on efficiency programs and strategic investments. The company has implemented an efficiency program powered by its tech-enabled Agile@Scale methodology, which has allowed it to unlock and reinvest dollars across the business to drive future growth. This program has resulted in a 280 basis points increase in gross profit margin to 33.5% and a 240 basis points increase in adjusted gross profit margin to 33.7%.

Additionally, Kraft Heinz has strengthened its balance sheet by ending the year 2023 at its target Net Leverage ratio of approximately 3.0x. This has allowed the company to execute against its new share repurchase program and maintain a competitive dividend. The company announced a $3.0 billion share repurchase program on November 27, 2023, demonstrating its commitment to returning value to shareholders.

Steps to Improve Capital Efficiency

1. Efficiency Programs: Kraft Heinz has implemented an efficiency program that has been effective in reducing costs and improving profitability. This program has allowed the company to reinvest dollars across the business to drive future growth.

2. Strategic Investments: The company has made strategic investments in its brands and people to support its growth strategy. These investments have resulted in a 3.4% increase in organic net sales in 2023.

3. Balance Sheet Strength: Kraft Heinz has strengthened its balance sheet, ending the year 2023 at its target Net Leverage ratio of approximately 3.0x. This has allowed the company to execute against its new share repurchase program and maintain a competitive dividend.

Conclusion

In conclusion, the stagnation in Kraft Heinz's ROCE over the past few years can be attributed to volume/mix declines due to pricing actions and industry headwinds, as well as a focus on price increases to mitigate rising input costs. These factors have resulted in a trade-off between price increases and volume declines, leading to stagnant ROCE. However, Kraft Heinz has taken several steps to improve its capital efficiency, including implementing an efficiency program, strengthening its balance sheet, and making strategic investments in its brands and people. These initiatives have resulted in improved margins, increased organic net sales, and a commitment to returning value to shareholders. As Kraft Heinz continues to adapt its capital allocation strategy, investors will be watching closely to see if these efforts translate into improved returns on capital employed.