It all looked perfect on paper.
Between 2013 and 2015, 3G—the Brazilian private equity firm credited with “reinventing the consumer industry” by applying its deceptively simple “cost-cutting and deal-making” approach to Burger King and AB InBev—teamed up with Warren Buffett’s Berkshire Hathaway to acquire and unite packaged-goods giants Kraft and Heinz. The move brought classic brands like Velveeta, Kool-Aid, Oscar Meyer and Heinz Ketchup together in a mega-merger that promised to deliver for consumers and investors alike.
But something went very wrong along the way.
On Feb. 21, Kraft Heinz announced a $15.4 billion write-off amounting to almost a quarter of its total value while simultaneously confirming an SEC investigation into accounting and procurement practices. Stock prices dropped 30 percent in 24 hours.
Buffett acknowledged in subsequent media appearances that he and 3G had overvalued the properties. But industry experts believe a misunderstanding of today’s marketing landscape also played a significant role in facilitating the dramatic dive.
Michael Farmer, former Bain & Company director and author of the bestseller Madison Avenue Manslaughter, cited three key factors: a generational preference for healthier, locally sourced foods; the rise of ecommerce as consumers abandon supermarket aisles; and a new media mix that no longer ensures returns on big-budget TV campaigns.
Others, meanwhile, noted a perceived failure by 3G to invest in building brand equity. The firm slashed budgets, eliminated hundreds of marketing jobs and cut more than 10 ad agencies from Kraft’s roster before the Heinz merger. One former employee in Popeyes’ marketing department said the majority of that team left following 3G’s takeover. Still other industry observers thought 3G believed the brands in question to be so big that they would all but sell themselves.
“They didn’t pay attention to what was going on around them in the world,” said Farmer, calling 3G’s approach “naive.” Some of the key parties involved in the deal now seem to agree; 3G co-founder Jorge Paulo Lemann described himself as “a terrified dinosaur” at last year’s Milken Institute conference.
“There are no iconic brands in 2019,” added John Durham, CEO of consultancy Catalyst S+F and former executive at media agency Carat. “You can’t rest on your laurels, because you’ll get your ass kicked.”
The financial pendulum swings
Based on Adweek’s conversations with agency executives, marketers and analysts, many would like to use the Kraft Heinz write-off as a teachable moment to prove cost cutting alone is not a viable path to profitability.
One top holding-company executive said anxious CPG clients have expressed hope in recent weeks that 3G’s struggles might persuade their own bosses to resist pressure from activist investors and place more capital in their own brands.
“I compare it to the moment when Pepsi got all that blowback after the Kendall Jenner ad, and agency people pointed and said, ‘See, in-housing doesn’t work,’” noted Jay Pattisall, chief analyst at Forrester.
But Pattisall and his fellow industry observers see this event as a momentary distraction from CPG’s years-long “trimming the fat” narrative. As GroupM global president of business intelligence Brian Wieser put it, “The ongoing pursuit of efficiencies is just a natural course of being.”
3G’s “zero-based budgeting” philosophy, which requires companies to justify individual expenses anew each year, serves as a convenient scapegoat for those seeking vindication. But Kraft Heinz CMO and global brand officer Eduardo Luz said it’s an effective strategy that comes down to separating “core” and “non-core” expenses.
“What we call non-core is everything that we do that consumers and customers don’t care about,” he said, citing “fancy offices” and private jets for executive travel.
As evidence of the ideology at work, Luz pointed to the Super Bowl spot for Kraft Heinz’s frozen food brand Devour.