Baloney! Boy, Cost, Cut, Buy
The 3G Capital approach is to buy a company and cut costs until there is nothing left to cut. To continue to earn profit, 3G Capital has to buy another company to make the initial investment look profitable. So, it should not be a surprise that 3G Capital took a sledgehammer to Kraft Heinz, closing factories and tossing out workers. As The Wall Street Journal comments, the cost-cutting is over. Kraft Heinz managed to wring out $2 billion in savings, leaving the company with the highest margins in the food business. The problem is: now what?
3G Capital is not a brand-building company. It is a cost-cutting system, viewing actions through a lens of efficiency but not marketing effectiveness. For example, 3G Capital modernized, roboticized, and automated a new Kraft factory to make processed meats: primarily baloney, but also ham, and turkey. This factory is considered to be a marvel of modern engineering. However, there is a marketing problem: Americans are cutting back eating processed meats. Just because the factory is efficient will not make up for the fact that processed meats is a dwindling category. The Wall Street Journal points out, sales of cold cuts are slipping, and along with this slippage is Oscar Mayer’s market share. It will only more efficiently provide products that consumers do not want.
This is the second bout of marketing myopia for Kraft Heinz. Last year, under the guise of brand building, investment poured into making a better Oscar Mayer wiener. Unfortunately, Americans do not eat hot dogs on a regular basis any more: it is a food for the Fourth of July and Labor Day.
The Wall Street Journal made one thing clear: even Kraft Heinz executives realize that there is nothing left to cut. Cost cutting can yield short-term profits. Now what? Not a single analyst or observer interviewed for The Wall Street Journal story believes that 3G Capital knows how to generate organic growth. For Kraft Heinz to survive, the over-arching opinion is that an acquisition is the only way to see continued growth in profit. “Buy, cost cut, buy” is the 3G Capital modus operandi. This is not about brand building. It is about financial finagling.
“No,” says, the CEO of 3G Capital, Bernardo Hees: “we know how to invest in brands.” He emphatically denies that 3G Capital knows only how to strip brands rather than support brands. One of the critical first steps in building a brand is understanding “where we are now”. If 3G Capital loved brands, the team would have seen that the food world has changed. Processed foods, especially processed meats with unpronounceable ingredients are no longer on the top of the shopping list. According to The Wall Street Journal, the manufacturing process macerates deboned meats (previously injected with flavorings and preservatives), grinds these meats into “a paste-like goo (batter), which is fed into a chilled vacuum-sealed tumbler. The tumbler massages the meat and cures it in fewer than eight hours.” It does not take a genius or a lot of market research to know that these products are no longer desired. The world has moved on, but only if you care to look at customers. 3G Capital is making one of the worst brand mistakes you can make: manufacturing what you know how to manufacture, instead of manufacturing what you know customers will want. This is investing in manufacturing efficiency. This is not investing in brand effectiveness.
The 3G Capital playbook is only about purchasing and paring. AB InBev is a great example. But so is Restaurant Brands International, owner of Burger King, Tim Horton’s and Popeye’s. Everyone is cooing about the great numbers coming out of Burger King. But, as Financial Times reports, those great numbers are based solely on discounts; even Burger King admits this. Discounting is now its central strategy. Without the discounts, Discounts attract deal loyal customers who do not care for the brand; they care for the deal. These are fickle customers who are not the loyal base needed for enduring profitable growth. Price deals debase brands. This is not brand building.
Right now, everyone is waiting for the next purchase because no one believes in the brand building acumen at 3G Capital. The statement that 3G Capital knows how to invest in brands, well, that is just a lot of baloney.