Thought For Food

On 17th September 2017 by good2us

3G capital, an American/Brazilian multi-billion-dollar investment firm, has gobbled up many a consumer firm, slashed costs, then bought an even bigger one. In February 2017 Kraft Heinz, backed by 3G Capital, it bit off more than it could chew with a bid of $143bn for, a maker of food and personal products.

Kraft Heinz’ s management appeared to have badly misjudged the depth of Unilever’s attachment to its culture and its pursuit of long-term, “sustainable” growth. Unilever’s outright rejection meant that 3G and Warren Buffett, who was expected to help in funding a deal, faced the prospect of going hostile against a revered firm.

Despite the rare setback it doesn’t indicate the end of its model. More deals are likely. And Kraft Heinz is already changing how Unilever and other rivals operate.

Big consumer companies, once among the world’s most stable, now face some big challenges. Consumers increasingly want products they see as healthier and more natural or “authentic”. They face online competition and in middle-income markets, increasing competition from local players. In Brazil, Botica Comercial Farmacêutica has nearly 30% of the perfume market, reckons the investment bank RBC Capital, and in India Ghari Industries sells more than 17% of detergent.

Food companies especially are facing a changing market. The volume of products sold by big American food firms has dropped even as they have cut prices. Revenue forecasts have been cut and the Swiss food giant Nestlé has abandoned an overly ambitious sales target that has been missed for four years in a row.

3G’s approach is very straightforward: slash costs and merge. Its best-known strategy, “zero-based budgeting”, requires managers to justify their expenses from scratch every year. Having applied this the method to one company, it buys another similar company and merges them. A large number of big brewers were merged to form Anheuser-Busch InBev;. In 2016 it bought the firm’s next closest rival, SABMiller.

Zero-based budgeting sounds like a good way to deal with the inertia that can build up with an approach. But it comes with a cost when repeated indefinitely as it risks continuously draining a huge amount of energy from the organization, while delivering less in the short time and compromising the long term.

3G’s approach is considered ‘clear-eyed’ by its admirers and ‘ruthless’ by others. It has made thousands of workers at the firms it owns redundant. Kraft Heinz closed seven factories in North America, boosting its profits. However, sales have fallen in four of the six quarters since the two companies combined, Ammunition for critics who say that slashing costs limits growth.

Its admirers see this as recognising reality 3G encourages its managers to have an “ownership mentality”. Managers have financial rewards linked to the company’s performance. Kraft Heinz looks after promising brands, such as Heinz mustard. but allows ailing ones to wither. Unilever, by contrast, continues to support its declining spreads business, arguing that it still produces cash.

heinzDespite a huge cultural gap it doesn’t mean lessons can’t be learned from 3G. Unilever is one of many companies that have learnt from Kraft Heinz. The Anglo-Dutch giant introduced some zero-based budgeting in 2016, for example for its spending on marketing. Kellogg, General Mills and Campbell Soup, all American food makers, are among those that have made similar announcements. In January Mr Polman said he planned to require managers to invest more in the company, to boost the “owner’s mentality” among his staff.

Unilever has also announced a wide-ranging review of its business as it looks for ways to “accelerate delivery of value”

3G’s approach sounds very like a short-term strategy to plump up the sacrificial lamb. The deep cutting of costs that can easily result in the loss of technical and engineering expertise results in a hollow beehive seeking what looks like short-term gain. Then the growth stagnates.

Kraft Heinz has flat growth that Unilever and even P&G has exceeded.

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