When you miscalculate the value of brands – a rare cautionary tale from Warren BuffettRITA MCGRATH | THOUGHT SPARKS
Introduction
Some things in strategy are thought to be eternally valuable. Among them? Big global brands with years of mass-market advertising and great name recognition behind them. But as investors 3G and Warren Buffett have learned, advantages can erode without investment. Exhibit A: Kraft-Heinz.
Processed from the start
James L. Kraft grew up in a Canadian farming community, the second of 11 children. He moved to Buffalo, New York in either 1902 or 1903 (sources are inconsistent) where he invested in a cheese company, only to be “pushed out” of the business by his partners after departing to run the Chicago branch. Stranded there with only $65 to his name, he leased a horse and wagon and went into business purchasing cheese and re-selling it to local merchants
RITA MCGRATH | THOUGHT SPARKS
Dealing for dollars
Meanwhile, Brazil’s 3G Capital, a private equity firm, together with Warren Buffett’s Berkshire Hathaway bought H. J. Heinz in 2013. Their playbook is a familiar one – find a big, profitable, slow-moving company, attack every potential inefficiency and cost with ruthlessness, and when that reaches its limits, acquire either another big company with costs to cut or put together a bunch of smaller companies to increase market share and marketing muscle.
RITA MCGRATH | THOUGHT SPARKS
Unilever opts out
The investors decided to target Unilever, valuing the larger company at an 18% premium over its stock price. Paul Polman, the CEO of Unilever at the time, was appalled. As he said to Professor Mike Useem of the Wharton School, “I couldn’t think of two more opposite philosophies coming together here” if the takeover succeeded.
RITA MCGRATH | THOUGHT SPARKS
RITA
Which brings us to the rolling disaster that was 2019 for Kraft Heinz.
Without a lot new to talk about, Kraft Heinz investors started to lose faith in the company’s direction. By the summer, that $90 share price was below $80. They slid to $60 in the first half of 2018, then to $50, halving the company’s market capitalization in a few short years. At the time, company officials said that they were going to eliminate redundancies and find over a billion dollars in savings, but that “this was not merely a cost cutting exercise.”
RITA
Innovation at the center of the turnaround playbook
Unsurprisingly, the CEO presiding over all this, Bernardo Hees, left, to be replaced by former Anheuser-Busch AmBev executive Miguel Patricio. Patricio announced a sharp departure from cost-cutting to reinvigorate the brands with a “culture of creativity.”
As he said in an interview, “I accepted the job because the company needed a big, big transformation, and I love that.”
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