By now, we know that two things are likely when it comes to a 3G/Warren Buffett investment pairing: First, there will be massive cost and personnel cuts; Second, Buffett and the partners of 3G will make lots of money. There is no reason to think otherwise with today’s blockbuster deal, the Buffett/3G-owned Heinz’s $40 billion purchase of Kraft, the $18 billion (sales) maker of mac & cheese and Jell-O.
The food industry has long been ripe for drastic consolidation. Yet on a conference call discussing the deal, the anointed CEO of Kraft Heinz, Bernardo Hees (currently the chief of Heinz), and his boss, 3G cofounder and managing partner Alex Behring, stuck to one unified story line in explaining the expected benefit of the deal. As Behring put it, “This transaction is all about growth.”
But growth of what, exactly? Here are some things that, based on past history, may not expand.
–Jobs. Some 7,000 jobs have been slashed at Heinz since the merger took place two years ago. Plants have been shuttered, the headquarters reduced from two buildings to one. Hees said on the call that he intended to keep both companies’ headquarters in place in Pittsburgh (Heinz) and Chicago (Kraft), but expect dramatic consolidation there and elsewhere.
–Revenues. Since 3G took charge, Heinz’s profits are way up, but sales have fallen from $11.7 billion in 2012, the year before the merger, to $10.9 billion last year. This is in part because of cost cuts, but it’s also because trends in the processed food industry show a shift away from big food and toward more health-conscious items.
–Suppliers and consultants (other than Accenture). Outsiders with a relationship to Kraft, look out. 3G is loyal primarily to one outside firm—Accenture—and uses zero-based budgeting. That means every penny of spending must be justified every single year. Suppliers can expect to be told to reduce their costs by 20% or more, or risk losing the business. As it says in a chapter heading of a book called “Double Your Profits,” a tome favored by the top executives at 3G, “When suppliers say no, hit them again and again.”
–The current executive team. At both Heinz and Burger King, 3G immediately initiated sweeping turnover at the top. At Heinz alone, 11 of the top 12 executives were replaced, many by 3G execs, many of them Brazilian, with experience in implementing its playbook. Burger King has experienced a similar realignment. Execs who hope to stay should be ready to appear—with no more than one piece of paper in hand—for a sitdown interview with Hees.
–Kraft’s relationship with McDonald’s (MCD). Because 3G also owns Burger King, the purchase of Heinz didn’t sit well with McDonald’s, which dropped Heinz as its ketchup supplier not long after the 3G merger went through. Kraft and McDonald’s recently announced a giant deal to roll out bagged coffee nationwide. Will that relationship take a hit too?
Read more from Coins2Day on the Kraft-Heinz deal:
Junk food: A winning strategy for the new Kraft Heinz?
Here’s what happens when 3G Capital buys your company