Breakingviews - Corona Capital: Kraft Heinz, U.S. poverty

NEW YORK/LONDON/HONG KONG (Reuters Breakingviews) - Corona Capital is a column updated throughout the day by Breakingviews columnists around the world with short, sharp pandemic-related insights.

Various Heinz sauces of U.S. food company Kraft Heinz are offered at a supermarket of Swiss retail group Coop in Zumikon, Switzerland December 13, 2016. REUTERS/Arnd Wiegmann


- Big Food and lockdown

- Covid and poverty

WAIT AND SEE. Kraft Heinz is tweaking its recipe. The food maker is increasing its marketing budget by 30% after Covid-19 lockdowns boosted both at-home eating and sales, the company said on Tuesday. The cost-cutting ways of its major shareholder, 3G Capital, are not heading for the compost heap, though: Chief Executive Miguel Patricio plans to trim $2 billion of expenses by the end of 2024, mostly from its supply chain.

It’s part of the $39 billion company’s plan to reduce its net debt to 4 times EBITDA by the end of the year, from its current 4.2 times. Selling some assets should help – Patricio on Tuesday agreed to off-load big chunks of its cheese business to France’s Lactalis for $3.2 billion. Shares were up a tad more than 1% in early afternoon trading, leaving the stock still trailing the S&P 500 Index for the year. It’s a tepid response to relatively small changes – and Kraft investors have been burned before. (By Amanda Gomez)

GOOD NEWS, BAD NEWS. If only the coronavirus hadn’t happened. According to the U.S. Census Bureau on Tuesday, the official poverty rate continued its downward trend to 10.3% in 2019, the lowest since estimates were first published in 1959. Median household incomes were moving in the right direction, too, increasing 6.8% from 2018 to $68,703.

It’s hard to see a scenario where these gains won’t be reversed in 2020, thanks to the economic rout caused by the pandemic. According to a report prepared for the U.S. Congress in July, some 42 million people said they were not working for Covid-19-related reasons. Homelessness is expected to jump, too, as residents in states from California to Missouri sound the alarm on evictions.

Some states, like New York, have tried to extend eviction moratoriums. Others are receiving extra federal handouts to bolster unemployment checks. It’s unlikely to be enough to prevent some of those who finally benefited late in America’s long recovery from slipping back again. (By Lauren Silva Laughlin)

LIFE INDOORS. Camping-gear retailer Recreational Equipment decided to take a hike from its new Bellevue, Washington-based headquarters last month. It has now chosen to sell the 400,000 square-foot campus to Facebook for $390 million.

That’s despite the fact that Mark Zuckerberg’s social network is letting employees work from home until next July. But the $778 billion company is also betting on staff returning thereafter: It has been bulking up on office properties, including buying the original site of New York’s main post office.

Other companies are pushing for a speedier return. JPMorgan wants its traders back this month, and Chief Executive Jamie Dimon recently discussed how the bank’s productivity has decreased on Mondays and Fridays. That suggests working from home clearly has its limits.

So while REI pushes the value of living its life outdoors – and stay connected using the likes of Zuckerberg’s software – Facebook and JPMorgan may just be at the forefront of getting its workers’ noses back to the office grindstone. (By Lauren Silva Laughlin)

JIBE-HO! Carnival, is sailing close to the wind. Having roughly doubled from their April lows, shares in the Miami-based cruise company fell 7% on Tuesday after it disclosed a $2.9 billion loss in the third quarter as ships stayed confined to their ports. Still, the squall hasn’t dimmed the optimism of Chief Executive Arnold Donald, who hailed a return to sailing this month after a six-month suspension. Bookings for the second half of Carnival’s 2021 financial year are at the high-end of historical range, with nearly half of those who have cancelled bookings this year accepting future credit rather than a refund.

Does Carnival have enough financial fuel to reach its Shangri-La? With $8 billion in available cash, Donald can stay the course for another year or so, assuming targeted monthly expenses of $530 million. An additional $1 billion in planned equity finance should provide more fair wind. Shareholders better hope for calmer waters by then. (By Christopher Thompson)

WIN WIN. It’s rare for defendants and their accusers to claim victory in the same court case. But that is what happened in Britain on Tuesday when the High Court settled a fight over so-called business interruption insurance, which compensates companies that are forced to close because of fire or natural disaster. The judge sided with policyholders on the majority of the key issues.

Yet it wasn’t all bad news for insurers. The court rejected their claims that 21 types of policy wording in a representative sample did not cover pandemics but the judgement wasn’t a blanket ruling. This means that each policy claim now has to be tested against the relevant judgement. Shares in Hiscox were up nearly 17%, while UK insurer RSA, which expects to take a 104 million pound financial hit on today’s judgement, said it would resume dividends. Both sides seem to be winners for now, but that may change in time. (By Aimee Donnellan)

FULL BASKETS. Finally, some good news for retailers. Fast-fashion specialist H&M said on Tuesday that it’s on track to deliver a pre-tax profit of 2 billion Swedish crowns ($228 million) in the three months to the end of August, beating analysts’ expectations 10-fold. Customers even splurged in shops, buying more full-price items, while Chief Executive Helena Helmersson also boasted of “strong cost control”. The pleasant surprise lifted H&M’s shares 12% on Tuesday.

It’s not the only beneficiary from customers’ increased willingness to spend. Online grocery firm Ocado said on Tuesday that its sales soared 52% in the 13 weeks to the end of August, as customers were buying more than they were this time last year. Average orders per week were up nearly 10% to 345,000, while the average spend reached 141 pounds, above pre-coronavirus levels. Consumer spending appears to be fighting fit amid the pandemic. (By Aimee Donnellan)

FOOL’S GOLD. Harmony Gold Mining is getting shown up for doing the right things at the wrong time. Despite record bullion prices, the $4 billion South African group posted a $53 million full-year loss on Tuesday. Harmony’s hedging programme for the yellow metal and currencies, which dates back to 2016, worked against the company as gold prices skyrocketed to $1,950 per ounce. Losses on the positions amounted to about 1.8 billion rand ($108 million) in the 12 months to June 30.

To be fair, Harmony’s hedging programme paid out handsomely in 2017 and 2018: over its lifetime, including the recent hit, the net gain is still about 2.2 billion rand. And the strategy dampens the volatility of results for executives and investors. But with gold’s ascent looking more like a plateau than a peak, the question is whether continued caution is worth the price. (By Ed Cropley)

BODY AND MIND. The Asian Development Bank expects developing Asia’s aggregate GDP to contract 0.7% in 2020. Now that regional economies are beginning to emerge from their pandemic shutdowns, the ADB warns governments not to overlook side effects from the pandemic – deteriorating physical and mental well-being.

Residents in the region are ageing, and their health issues are multiplying, but they are also making more money. The bank estimates that so-called wellness industries in Asia – anything that improves physical or mental health such as spas or gyms – contribute to around 11% of output and are growing by one-tenth every year. Covid-19 will contribute to this trend. Hopefully it will have also awakened authorities to medical risks that get downplayed in some local cultures, in particular psychological ailments. Good health policy might be good business too. (By Jamie Lo)


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