Pack Up the Peanuts: Party's Over for Kraft
It is nothing new for Kraft Foods Group to undergo an ownership change. Since 1980, the company -- which got its start in 1903 when James Lewis Kraft rented a horse and wagon to bring cheese from wholesalers to small stores in Chicago -- has been going through about one merger, spinoff or initial public offering every three years.
I will wager, though, that this particular ownership change, with Kraft Foods merging with H.J. Heinz in a deal arranged by Jorge Paulo Lemann’s 3G Capital and Warren Buffett’s Berkshire Hathaway, will be more dramatic and traumatic (for Kraft Foods employees, not necessarily customers or shareholders) than all the rest combined.
That’s certainly how things worked at Heinz, which even after seven years of trimming under pressure from activist investor Nelson Peltz was totally unprepared for the thrift onslaught that ensued after 3G, a New York-based private-equity firm with roots in Brazil, and Berkshire took over in 2013. New Chief Executive Officer Bernardo Hees cut about a third of the staff at Heinz’s Pittsburgh headquarters, including 11 of the company’s top 12 executives. And that was just the start. In a Fortune article published a few months after the takeover, Jennifer Reingold described an internal document she had gotten her hands on:
“Monthly tracking of printer use by employee(s) should be implemented,” with a limit of 200 copies per month, it says, and there is to be only one printer per 100 full-time employees. Executives at the director level and above are allowed only 100 business cards per year. “Mini-refrigerators,” it reads, “are not permitted,” and “pre-payment for services is not allowed without prior approval from the CFO.”
It was the same story at Burger King after 3G and Hees took over there in 2010, Devin Leonard reported last year in Bloomberg Businessweek:
The Burger King corporate jet was promptly sold. The 3G guys did away with the comfy offices that top executives and their secretaries had enjoyed, which people at Burger King called Mahogany Row. Executives now sit in a Spartan open-plan office. 3G discovered that the company’s Europe, Middle East, and Africa division had been throwing an annual $1 million bash at a chateau beside an Italian lake. The party is over.
Some cuts appeared to be less about finding big savings than creating an oppressive cheapness. Employees were instructed to use Skype to make long-distance calls instead of running up a cell phone bill. They were urged to scan documents and e-mail them rather than use FedEx. They were ordered to turn in their personal printers and use large communal ones.
Well, I have to use a large communal printer, too (as does Devin). A lot of 3G’s cost-cutting moves seem like common sense. They also seem to deliver returns to shareholders. Anheuser Busch Inbev, another 3G-controlled operation, has a total return of more than 600 percent since the merger that created it in November 2008. Back in Brazil, 3G's founders (Lemann, Marcel Hermann Telles and Carlos Alberto Sicupra) had decades of successful experience with takeovers before starting operations in New York in 2004. And while they do lots of cutting, they don’t cut and run -- as Anheuser Busch Inbev shows, they tend to hold on to their investments for years and years and years. That’s one reason Buffett, who has been critical of other private-equity operators, has been willing to invest alongside 3G.
What 3G isn’t out to do is build new, exciting, world-changing businesses. It is still a private-equity firm, after all. “Innovations that create value are useful,” goes one Lemann maxim, “but copying what works well is more practical.” That’s from a fascinating Bloomberg BusinessWeek profile by Alex Cuadros in 2013. This passage, about Lemann’s hiring practices back in Brazil, is also instructive:
Resumes didn’t matter much. Candidates had to go through a gauntlet of interviews with 8 or 10 partners who had an acronym for the profile they were looking for: PSD, for poor, smart, deep desire to get rich.
When these guys take over a business, they do whatever they possibly can to reduce expenses, increase efficiency and raise profits. If they succeed they get rich, and maybe move on to 3G’s next acquisition. The businesses they leave behind often feel significantly diminished as institutions. But they were usually troubled before 3G took over. Kraft, for example, is struggling with changing consumer tastes and a lack of international presence, among other things. I don’t know if 3G knows how to fix all those problems. What it definitely knows how to do, though, is cut costs.
(Corrects year of Bloomberg Businessweek profile in ninth paragraph.)
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