S&P Global has cut Kraft Heinz’s credit rating to one notch above junk status, citing concerns over the packaged food giant’s profitability amid “significant” competition from other manufacturers.
S&P’s move to downgrade Kraft to the lowest investment grade — BBB-/A-3 — from BBB/A-2 brings it into line with both Fitch and Moody’s.
“We reassessed the business risk because of reduced pricing power, competition, and our forecast that the company will be unable to meaningfully grow adjusted EBITDA,” S&P said in a news release.
The credit rating agency said Kraft Heinz’s weak adjusted EBITDA in the second half of 2018 is indicative of several large brands, including Kraft, Oscar Mayer, Planters, and Maxwell House, that “still have high margins but are either out of favor with consumers, or face significant competition from other manufacturers’ offerings or store brands, which are increasingly important to retailers.”
“Hurdles include the reduced loyalty of consumers who are increasingly willing to try new, innovative brands (including store brands that have improved quality) and embrace nontraditional (vegetarian, flexitarian) or healthier diets (for example, increased interest in plant-based, non-meat products),” S&P added.
S&P revised its outlook for Kraft Heinz from negative to stable, reflecting its assumption that “another meaningful EBITDA drop will not occur over the next two years.”
But according to the Financial Times, the rating downgrade potentially further complicates the company’s “efforts to reverse flagging sales growth and draw a line under problems with its accounting practices.”
Kraft Heinz disclosed in February that the U.S. Securities and Exchange Commission was investigating its accounting and controls. The disclosure came as it reported “a disastrous set of fourth-quarter results that saw the company take a $15 billion writedown and cut its dividend by one-third, prompt[ing] a sharp sell-off in the stock,” the FT noted.
S&P said it could further lower Kraft Heinz’s rating if “profitability weakens significantly due to increased competition or a renewed shift in consumer demand away from the company’s products to on-trend brands or private label offerings.”