It was a seemingly unstoppable merger.

Two of American’s most trusted, most well-known, and most well-liked brands were merging together – Kraft and Heinz.

Add to that the fact that Warren Buffett’s company, Berkshire Hathaway, was the one brokering the deal, and it seemed to be a match made in heaven.

Like all of Berkshire Hathaway’s companies, the goal for Kraft Heinz was not to disrupt the market or to be big and bold; the goal was simply “don’t lose the investors money.”

Management sought to accomplish this goal by finding the cost-cutting benefits of the partnership and using those to increase profits for investors.

There have been aggressive cost-cutting layoffs since the merger, which has only made things worse for the company.

The company stopped investing in innovation and instead, sought to deliver their classic products cheaper and more efficiently.

This strategy backfired.

Their costs were cut big-time. Unfortunately, so were their profits.

 

Innovative Food Companies

Meanwhile, several stocks who have been climbing took the opposite approach of Kraft Heinz. 

Beyond Meat, a company that sells meatless products to upper middle-class consumers has been growing rapidly.

They have been identified as one of the most innovative companies in the food space – showing the fact that customers want variety. They want new, unique food items and are willing to pay top dollar for healthier options than Kraft Mac & Cheese.

Other food giants have noticed this.

General Mills bought Annie’s Organic Mac & Cheese in 2014

Hershey acquired Skinny Pop in 2017

And ConAgra bought Pinnacle, the owner of Smart Balance in 2018.

None of these companies have tanked in the same way that the much larger and more powerful Kraft Heinz has.

So why did those companies succeed where Kraft Heinz is currently failing?

 

Why Innovative Companies Win

According to CNN business, companies that invest heavily in research and development made more than a 25% return over the past year – nearly double that of the S&P 500.

The index was created by Joseph Mezrich, the head of quantitative investment strategy at Instinet. It looked at companies in the Russell 1000 and weighted them by how much spending they do on research and development as a percentage of their total value compared to similar companies in their respective industries.

Mezrich found that this isn’t just a recent trend.

More innovative companies have beaten the market average for the past 40 years.

There could be many reasons for this – beyond just revenue from new products that are created.

In a cost-cutting culture like Kraft Heinz, people will be less creative, less motivated, and less excited about their jobs. Not to mention they will be in greater fear of losing them.

In a company like Beyond Meat, however, the culture of innovation to bring their meatless formula to more and more meat-full industries leads to fun and excitement amongst their team members.

In the larger food companies mentioned above, their willingness to continually invest in new products and markets shows that they are willing and able to adapt to the market.

This difference in attitude reverberates throughout an organization – telling one group to fear change and another to embrace it.

Here are three actions you can take to build an innovative culture and keep your company thriving:

 

1. Invest in Research, Don’t Buy Stock

A company has to constantly make decisions about whether to buy back or stock or invest in research. That’s a tough decision.

Buying back stock is simple, easy, and effective.

You get a short term gain for your investors and you don’t have to deal with the complicated nature of creating new products.

That’s what Kraft Heinz did.

This strategy may work in the short term, but it is clearly not optimal in the long term.

Yes, investing in research and development at your company is risky. The chances of losing money on an investment is high.

But if you follow simple practices like firing bullets before cannonballs, talking to your customers, and running experiments, you mitigate that risk and receive added benefits.

These practices create a dialogue between you and your customers that you can’t get by simply paying your investors to buy back stock.

The best practices of innovation are not just about throwing stuff at the wall and seeing what sticks.

They are about getting out there and talking to your customers to understand what they like and don’t like about your products – and what that means for the future of your company.

 

2. Listen to Your Customers

One of the reasons why companies don’t get out of the building and talk to customers in this way is because they think they are too big to do so.

They don’t want to hurt their brand. So they play it more conservatively.

This is how small companies can ultimately defeat larger ones.

Because Beyond Meat is small and acts small, they have the ability to take riskier bets and, yes, show humility and empathy for their customers.

Kraft Heinz has the ability to do that as well, but they need to act like they are smaller than they are in order to do it.

This is a big advantage that a company like Procter & Gamble executes brilliantly. They are one of the biggest companies in the world. But when they launch a new product, they act small.

See this story on Febreze to learn how they do it.

Acting small also allows you to adapt to the inevitable changes in the marketplace.

 

3. Be Ready to Adapt

In 2015, when Kraft and Heinz merged, their goal was clear – cut costs and use their merger to find efficiencies.

Because these companies were so huge they are only starting to see the benefits of those cost-cutting decisions now. And it may be too little too late.

Over the last four years, consumer tastes have changed.

People don’t want regular ketchup and yellow mustard to put on hotdogs.

They don’t want single slices of American cheese.

They don’t want regular mac & cheese.

Instead, they want organic mac & cheese.

They want meatless burgers, specialty cheeses, and craft condiments.

That is why other large food companies have invested in smaller specialty brands that are in line with what consumers want.

But while those companies were investing in those specialty brands, Kraft Heinz was working on cheaply delivering classic brands that fewer and fewer people wanted.

It doesn’t matter how low the cost, or how efficiently you deliver your product if it’s a product that nobody wants in the first place.

 

Conclusion

As Jim Collins wrote in Good to Great, “Big does not equal great.”

Ultimately, what matters most in any business is whether or not people want to buy your products.

In the case of Kraft Heinz, despite their size, fewer and fewer people want to buy what they are selling.

Yet, the company has been unable to respond to the new consumer trends because they have been so focused on delivering food that is losing popularity  more quickly and more efficiently.

To avoid that fate, invest your money in a culture of innovation and research. Think big, but act small. And be ready to adapt.

You never know how consumer tastes will change – and what the consequences of that change will be.

So be nimble, listen to customers, and be ready to take action.