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In a widely expected move, Kraft Heinz (NASDAQ: KHC) said last week it would cut 2,500 jobs in North America. This follows a loss of 400 jobs at Kraft’s corporate headquarters in Northfield, Ill.
This is all part of 3G Capital’s plan to slash $1.5 billion in costs from the world’s fifth largest food company by 2017. 3G, a Brazilian private-equity firm, engineered the merger of Kraft Foods Group and H.J. Heinz earlier this year, in conjunction with Warren Buffett’s Berkshire Hathaway (NYSE: BRK-B).
We seen this strategy play out before at Anheuser-Busch InBev (NYSE: BUD), Restaurant Brands International (NYSE: QSR) – which is the combination of Burger King and Tim Horton’s – and at Heinz previously.
The 3G Way
It’s become known as the “3G way.”
When 3G takes over a company, often in partnership with Buffett, the game plan is the same: slash the payroll, enforce lower and austere budgets, and change the corporate culture. The message pounded through again and again is to treat the company’s money as if it were your own.
The strategy has been a successful one, too. Profits typically follow in short order after the changes have been made.
3G’s strategy with Kraft Heinz is no doubt pleasing Buffett. But I doubt the folksy billionaire is winning many fans among the many thousands of people laid off via the “3G way.”
Will It Work at Kraft Heinz?
The question is, will this strategy again work its magic at Kraft Heinz? It will be a tough fight. Revenues actually fell at both Kraft and Heinz in the latest quarter as Americans continue to turn away from processed foods.
But there are two factors working in 3G’s favor.
First, Kraft’s gross margin is well below the average for its peer food group and should be easy to lift through cost cutting.
Second, Kraft brands should get an international boost – where it has little presence currently – thanks to Heinz’s vast international supply chain. Heinz has a portfolio of iconic global brands that are No. 1 or No. 2 in more than 50 countries. About 25% of Heinz sales come from emerging markets.
Source: Euromonitor International
And under an agreement with Mondelez International (NASDAQ: MDLZ) – formerly part of Kraft – the company will regain the right to sell certain products overseas again several years down the road.
Given 3G’s track record, it is very likely 3G and Buffett will be winners again. What will be most interesting to me to see is whether 3G sticks to its game plan exactly.
Its normal pattern was pointed out to The Wall Street Journal by Edward Jones analyst Brian Yarbrough. He said that 3G has a history of putting its money behind brands that are performing well, but pulling money from brands that are not.
A number of Kraft brands such as Jell-O are underperforming. Will 3G simply abandon iconic brands such as Jell-O, Velveeta, Philadelphia cream cheese, Oscar Mayer and Planters nuts if they fail to perform as 3G expects?
It would not surprise me in the least. That would put more heat on Buffett, who has been increasingly criticized for killing off a piece of Americana.
But in this partnership, profits are all that matter.
The Future for Kraft Heinz
What does the future hold for Kraft Heinz?
After a short period of perhaps a year or two to get the culture change rolling at Kraft, expect more mergers and takeovers. Already activist investor Bill Ackman is suggesting that the newly merged company join together again with Mondelez.
And as I’ve mentioned before, both the beverage and snack foods businesses of PepsiCo (NYSE: PEP) are already on the insatiable 3G Capital’s radar screen.
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