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Kraft Heinz and its investors taste the woes of the food industry



THIS WAS supposed to be the quarter when Kraft Heinz showed a new model of success to the big struggling US food companies. A merger in 2015 had joined two of the world's most iconic food manufacturers. Supported by 3G Capital, a private equity firm, the new group has cut costs at a rate that thrilled rivals and tarnished investors. After a failed bid in 2017 for Unilever, an Anglo-Dutch giant, Kraft Heinz wanted to prove that he could not only reduce fat, but also boost sales by himself. Bernardo Hees, the boss of the company, highlighted the new products, including Heinz Mayochup and something called Just Crack an Egg. The company was on track for "sustainable and profitable growth," he said in November. Unfortunately, this was not the case.

On February 21, Kraft Heinz announced an outright $ 15 billion write-down, a dividend cut of over 30% and an investigation into its acquisition by the Securities and Exchange Commission (SECOND). Earnings calls are often a sleepy business. This one was a nightmare. A part of 3GLongtime critics now giggle with satisfaction. Others fear 3G tarnishes American treasures such as Kraft Macaroni and Cheese and Warren Buffett, who has teamed up with 3G to combine Heinz and Kraft and last year lost nearly $ 3 billion on the deal. Yet the decline of Kraft Heinz may seem dramatic, 3GThe impact of the problems of the food industry goes far beyond.

While its founders are Brazilian, 3GThe repurchase company is based in Manhattan. (Its most famous founder, Jorge Paulo Lemann, lives in Switzerland.) Unlike many large private equity firms, 3GThe main investors are not pension funds, but family offices and individuals, including its partners. It does not have a broad portfolio, but only two companies: Kraft Heinz and Restaurant Brands International (RBI). Blackstone, a private equity firm based a few blocks away, employs nearly 2,500 people. 3GThe New York office has fewer than two dozen. Again 3GIndustry leaders have shaken the consumer sector, as few investors in history.

All buyout companies thirst for bargains, but 3G is particularly arid. Before you start 3G, the company's founders embarked on a beer-buying frenzy that culminated in 2016 with the purchase by Anheuser-Busch InBev of SAB Miller for more than 100 billion dollars. A B InBev, in which 3GThe partners have a significant share of production and brew more than one beer out of four in the world. Kraft Heinz's holdings include Kraft Cheese, Heinz Ketchup, Jell-O, Philadelphia Cream Cheese and Oscar Mayer. RBI includes Burger King, Popeyes, a fried chicken restaurant and Tim Hortons, a popular Canadian chain.

The path 3G manages businesses is as notable as his appetite for buying them. In a practice known as zero-based budgeting, managers need to justify their spending each year again. The idea is to widen margins continuously. They are managers chosen for their talent and work ethic rather than for their experience. Daniel Schwartz, a 3G partner, becomes the general manager of Burger King at age 32. Mr. Hees, 3 years oldg partner who spent more than 10 years working for a Latin American railway, became the head of Kraft Heinz at 45 years old. David Knopf, its CFO, took office in 2017 at age 29.

AT 3GDetractors, all this seems a little crazy. The company's strategy can be defined as: buy a large company, reduce costs, repeat. This is not quite right. RBI has invested in Burger King marketing and has won awards for its commercials. A B InBev is working to increase sales, including offering more expensive beers and deploying best practices across its vast territory.

But the purchase of large companies and cost reduction remain 3GThe specialty of The risks of this strategy have become clear. RBI struggled to integrate franchisees at Tim Hortons. A B Last year, InBev announced a halving of its dividend.

Nowhere has 3GThe approach was more tumultuous than at Kraft Heinz. The US food industry seemed to be the ideal target, with soft firms and powerful brands. Rare is the American who did not miss Kool-Aid or swallowed an Oscar Mayer hot dog drowned in Heinz Ketchup. 3G felt that the marks were strong enough to withstand large cuts. It turns out that it was not the case.

It was not the same thing for A B InBev, which, despite catastrophic results in America, is hardly competing with beer store brands, is rarely sold online and is facing strong growth abroad. In comparison, Kraft Heinz's business is concentrated in America, where the food industry is running in circles. Brands may be familiar, but that does not make them popular. Small businesses offer healthier options, taking advantage of cheap digital marketing and agile contract manufacturers. According to Nielsen, a research firm, the 20,000 smallest players in the packaged goods sector account for about half of the industry's growth.

At the same time, the rise of online commerce and discounted European grocery stores has put pressure on food retailers, who in turn are putting pressure on food companies. Walmart-run stores are using important data to launch their own increasingly sophisticated and low-cost private label products, while pushing companies to lower their prices.

Things have started well for Kraft Heinz. Its operating profit margin went from 15% in 2014 to 24% in 2017. The first big decline was recorded that year when Paul Polman, then boss of Unilever, pushed back the 143 billion dollars invested by the society. (Unilever has judiciously devoted increasing attention not to food, but to beauty and household products.) Without his megadeal, Mr. Hees focused on the fundamental work of increasing sales by investing more in advertising. , product innovations and the sales force of Kraft Heinz. who ate in the profits.

Equally striking is the company's new $ 15 billion depreciation, which recognizes that the value of the big brands has declined. Mr. Buffett says he misjudged the value of Kraft's products (see article). "The management team started this merger on the assumption that it could reduce the expense of maintaining brands, let alone help them grow," said Robert Moskow of Credit Suisse Bank. "The world has changed, retailers and consumers have changed."

Pristine if 3GThe approach may seem, few food companies offer a successful alternative. Companies have tried to evolve by buying small businesses, often at high prices and with mixed results. For example, Campbell Soup bought Bolthouse Farms, a fruity drink maker, in 2012, but is now trying to sell it. Last year, she bought Snyder's-Lance, a company specializing in pretzels and popcorn, to bolster her snack business. Its level of debt has increased accordingly. In fact, purchases made at Campbell, ConAgra and General Mills have made these companies more profitable than Kraft Heinz, according to Sanford C. Bernstein, a research firm.

Kraft Heinz now wants to contract to grow: it is planning divestments over the next 18 months to improve its balance sheet and make other big contracts. But the SECONDThe subpoena suggests that some internal processes may fade away as managers struggle to achieve ambitious goals. The idea that big deals will save American food companies seems more and more questionable. In 2014, before Heinz bought Kraft, combined gross operating profits of companies rose to about $ 6.5 billion. Kraft Heinz now expects its earnings for 2019 to be about the same.


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