NEW YORK • Kraft Heinz might need a new recipe.
The American packaged food giant, known for its iconic ketchup, cheese and hot dog brands, reported a troika of bad news last week - a net loss of US$12.6 billion (S$17 billion), a US$15.4 billion write-down on assets and a regulatory subpoena - that sent its shares plummeting 27 per cent to a record low on Friday, a plunge that wiped out more than US$16 billion in market value.
Created in a 2015 merger, orchestrated by investment guru Warren Buffett and private equity firm 3G Capital, Kraft Heinz is facing the downside of austerity as a strategy for boosting profits.
A scathing article in The Wall Street Journal said the company's "experiment in radical cost-cutting has failed" and "management has few good options".
Kraft Heinz's famous zero-based budgeting approach to cost-cutting requires every expense to be justified in each period, pushing managers to drastically cut spending.
But that philosophy can lead to the elimination of investments needed to drive profit and sales growth, and it can be undermined by a market downturn.
The food industry has for several months faced a rise in logistic costs, and ingredients and materials.
Kraft's strategy worked for two years, allowing it to generate profit margins that were the envy of its rivals. But growth in sales stalled in the first quarter of 2017, and six consecutive quarters of poor performance led to an asset write-down of US$15.4 billion on two of its flagship brands, Kraft and the Oscar Mayer meat products.
Kraft has built its reputation on products such as ready-to-eat macaroni and cheese, while Oscar Mayer is known for deli meats and hot dogs, and Heinz for its ketchup and other condiments.
But consumer tastes have been changing, with rising concerns about health issues and a growing shift from processed foods to fresh produce.
Meerschaert Capital Markets' Mr Gregory Volokhine said: "All they have done is lower costs as competing companies like Danone and Nestle invest in products that are more in line with current public demand."
Many companies in the food industry have responded to the changing trends: McDonald's, the world leader in fast food, in 2016 stopped selling chicken treated with antibiotics, and now offers hamburgers made with fresh beef.
Mr Volokhine said Kraft Heinz seems to have "applied recipes that worked for a time, but the problem was no longer in the expenses but in products that became obsolete".
The company also flagged to investors a subpoena it received last year from the US Securities and Exchange Commission related to its procurement practices.
Kraft Heinz said that as a result of an investigation with the help of an outside lawyer, it recorded a US$25 million "increase to costs of products sold".
Following that bad news, the pressure will be even higher to do a deal.
The company is considering dropping failed brands, a step that would pave the way for a merger, which could achieve more savings and boost profits.
Kraft Heinz approached Unilever, which makes Lipton tea and Dove soap, in 2017 but withdrew its US$143 billion offer after news of its talks with the Anglo-Dutch giant became public.
If the "Bank of Buffett" is still open, Kraft Heinz may be able to get a transformative deal done.
But with its shares plummeting to a record low and big questions emerging about the strategy, pulling off a big acquisition - something that's already been tough - may be even harder from here.
AGENCE FRANCE-PRESSE, BLOOMBERG