3G and Kraft Heinz switch up the recipe
Four years ago, Kraft Heinz shocked the market with an audacious and ultimately unsuccessful takeover bid for rival Unilever. Today, it’s overhauling operations from within instead.
There has been a “big change in direction”, chief executive Miguel Patricio told DD’s James Fontanella-Khan and the FT’s Judith Evans. Crucially, he says, the company’s key investor, the Brazilian-US group 3G Capital — which manages the money of its founding partners and their high-net worth friends including Roger Federer and Colombia’s Santo Domingo family — is on board.
New York-based 3G is better known for big acquisitions followed by ruthless cost-cutting to boost margins, having built its reputation with the assembly of the world’s largest brewer Anheuser-Busch InBev and Burger King owner Restaurant Brands International.
This time, however, 3G plans to reinvigorate old Kraft Heinz brands and develop more “natural” and sustainable products in a bid to attract a generation of consumers that have flocked to healthier and more climate-conscious alternatives such as Blackstone-backed Oatly and Los Angeles-based Beyond Meat.
The “most growth and value” will come from “putting the consumer at the heart of everything we do,” said João Castro-Neves, a partner at 3G and board member at the food company.
“We don’t rule out transformational deals, but they are the culmination of many different variables converging at once.”
It’s a tall order for a company about which Credit Suisse analysts wrote in 2018: “Organic growth is not Kraft Heinz’ expertise.”
Kraft Heinz had a miserable time in the years after its foiled $143bn Unilever takeover attempt in 2017, including a $15.4bn impairment charge, a dividend cut and an accounting probe by the US Securities and Exchange Commission.
Warren Buffett, who bought Kraft with 3G in 2015 to merge with Heinz, stepped down from its board in 2018.
3G brought in Patricio, a veteran at AB InBev, the following year. He still sticks to the investment group’s zero-based budgeting approach where every business expense has to be justified afresh in every accounting period, but he is also spending more on marketing and research and development.
It has sold parts of its cheese as well as its peanut brands, which helped raise $6.6bn to help pay down a debt burden that was about $31bn when Patricio took over. But part of that money will also be invested to expand the business.
There is some evidence that it is working. Sales rose 6 per cent for Kraft Heinz in 2020, compared with a 2.2 per cent drop a year earlier; the debt burden is at its lowest level since the merger; and employee turnover — a huge problem in the past — has come down.
The pandemic has helped, providing Kraft Heinz with an unexpected boost as consumers in lockdown have turned to nostalgic pantry staples including its ubiquitous mac and cheese.
But the turnround is far from over, and Kraft Heinz’s share price is still down more than half since 3G and Buffett’s Berkshire Hathaway engineered the merger in 2015.
Catch up on the story here. Meanwhile, it’s worth remembering that 3G itself, which is sitting on about $10bn of funds, still needs a mega-deal.