Navigating food inflation: Kraft Heinz's dilemma

Shares of Kraft Heinz (KHC) are down Wednesday morning after the company posted fourth-quarter revenue that missed expectations. It was the third straight quarter revenue fell short of estimates. The company's price increases were outweighed by a decline in sales volume.

Erin Lash, Director of Consumer Sector Equity Research at Morningstar, joins Yahoo Finance to discuss Kraft Heinz's performance and the ripple effects of consumers being impacted by inflation.

Lash explains some of the challenges Kraft Heinz faces: "There's a basket of commodities that is decreasing, but there are still inflationary headwinds that Kraft Heinz and others throughout the space continue to face. For Kraft Heinz, they specifically called out tomatoes, sweeteners, labor, as well as transportation, and so all of those are putting upward pressure on their cost structure throughout the next several quarters. That's not dissimilar from what we've heard from other consumer product companies."

For more expert insight and the latest market action, click here to watch this full episode of Yahoo Finance Live.

Editor's note: This article was written by Nicholas Jacobino

Video Transcript

RACHELLE AKUFFO: And Erin, we did see companies like Coca-Cola, while still seeing lower volumes, still seeing higher sales. Those price increases, their customers still loyal to the brand there at least for now. Why do you think we're not seeing that with some of Kraft Heinz's offerings?

ERIN LASH: So Kraft Heinz did have higher prices in the quarter on lower volumes, but the volumes offset the price increases. So there is still price-- and management is guiding for the fact that price is still going to be a positive contributor to their results going through this next year. Obviously, there's a basket of commodities that is decreasing. But there are still inflationary headwinds that Kraft Heinz and others throughout the space continue to face.

For Kraft Heinz, they specifically called out tomatoes, sweeteners, labor, as well as transportation. And so all of those are putting upward pressure on their cost structure throughout the next several quarters. And that's not dissimilar from what we've heard from other consumer product companies.

Kraft Heinz specifically called out the fact that their categories can be more susceptible to individuals, consumers that are on SNAP benefits. And that has an outsized impact. You think Kraft Mac and Cheese being one of those particular categories that might be more susceptible to trade down relative to others throughout the grocery store because of that exposure.

BRAD SMITH: What's the reality of-- if they lose market share in certain categories, as you see more of a trade down, especially if consumer is in a category where they are and have been under more pressure for an extended period of time, what is that pathway towards regaining that market share on the other side look like?

ERIN LASH: Yeah. That's a great question. And I think that that's one of the things that's been weighing on shares for firms throughout the sector over the past year or so. You know, what path will these firms take? Kraft Heinz has been very emphatic that they are going to continue to invest behind research and development, behind marketing across price tiers to keep consumers within their brand families, and that they're reluctant to chase short term market share gains by overly promoting.

That's not to say that they won't promote. We are seeing promotional levels return to pre-COVID depth and breadth in a number of categories. But because of the data and analytics that they've been investing in, Kraft Heinz touts the fact that the return that they're getting from that promotional spending has actually improved. So they're being much more surgical in terms of their use of promotions as opposed to being more broad-based and not getting the return from that. And so we expect that will continue.

But from our vantage point, continuing to invest behind product innovation not only keeps your products top of mind and in line with consumer trends, but also makes you a valued partner for retailers in terms of trying to assist retailers, in terms of driving traffic into their stores, and growing those basket sizes, which have come down across the board and really trying to be a good steward and a good partner for retailers in terms of-- and that, when taken together, should help them as it relates to stabilizing and/or improving their market share positions in time.