This article is from Capital magazine
In the United States, “Black Friday” is the Friday in November which follows the Thanksgiving holiday and opens the sales period. It is so named because, in the 1960s, the buying frenzy that followed allowed traders in the red to bail out and again use black ink to keep their accounts. But, for Jorge Paulo Lemann, 79, the co-founder of the 3G Capital investment fund, the term Black Friday will no longer have the same meaning at all. His black Friday took place on February 22. That day, on Wall Street, the title of the food group Kraft Heinz, mainly held by 3G and Berkshire Hathaway, the fund of Warren Buffett, collapsed by 27% in the space of one session. Billions of dollars then went up in smoke. “In twenty years of monitoring the sector, I had never seen a drop of this magnitude,” said Pierre Tegnér, analyst at Oddo BHF.
The day before this spectacular gadget, the group, which manages a portfolio of more than 200 brands sold all over the world (from Heinz ketchups to Bénédicta mayonnaise, including Philadelphia cheese), had published catastrophic results. The big concerns of certain labels of Kraft and Oscar Mayer, a subsidiary specializing in processed meats, forced the juggernaut with 39,000 employees and $ 26.2 billion in sales to announce a depreciation of assets of $ 15.4 billion.
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The maneuver resulted in a net loss of 10.2 billion being recorded in 2018. “This is an accounting entry that does not consume cash, but the signal sent to the market has been very negative, continues Pierre Tegnér. It was like saying that management had made a mistake and that things were not going as planned at all. For years, 3G’s brigand methods of slashing costs to boost profits had fascinated investors. Today, everyone is wondering if the Brazilian fund has not gone too far …
A hell of a slap for Jorge Paulo Lemann, not used to such disappointments. Until then, the man had aroused admiration for his insolent success. It is true that the course of the Brazilian, 35th fortune in the world with a jackpot of 22.8 billion dollars according to “Forbes”, is not trivial. In his youth, this carioca was crowned five times Brazilian tennis champion. Selected for the Davis Cup national team twice, he also played on the grass at Wimbledon… In short, a real competitor. Once the rackets were put away, the Harvard graduate went into business with just as much gusto. Acquisition of a bank that has become the Brazilian Goldman Sachs, foundation of the world number 1 in beer, AB InBev (Budweiser, Corona, etc.), creation in 2004 of 3G Capital with two of his Brazilian disciples, Carlos Sicupira and Marcel Telles.
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Caught up in cravings, the “three musketeers” – as they have been nicknamed – then increased their acquisitions: Burger King, in 2010, for $ 4 billion; Heinz, in 2013, for 23 billion, with the support of the Berkshire Hathaway fund of the famous Warren Buffett (88 years old). In 2015, the billionaire also participated in the financing of the merger operation between Kraft and Heinz, which propelled the new group into the world’s top 5 agrifood groups. The only downside: two years later, the “grandpa raiders” failed in their attempt to take control of Unilever. Despite the huge sum offered (143 billion dollars!), The Dutch declined the offer. To avoid the worst?
Since it embarked on buyouts, 3G Capital has indeed shown that its strategy of maximizing profits has everything of a hurricane Katrina. The approach is essentially oriented towards the drastic reduction of costs, which one of the fund’s partners, Marcel Telles, compares to nails: “You have to cut them constantly,” he says. With his henchmen, Jorge Paulo Lemann brought up to date an American method of management from the 1970s, the “zero base budget”, or “ZBB” in English (pronounced “zedbibi”). It is about building a budget every year from a blank sheet of paper, without taking into account that of the previous year. Each expense is thus called into question according to the new priorities of the company. “In itself, the ZBB does not only have drawbacks, but it must be used with discernment”, comments Jérôme Caby, professor of finance at IAE Paris-Sorbonne.
With 3G Capital, this is clearly what is wrong. Take Heinz. At the time of the buyout, the Ketchup King’s profitability was 14%. It quickly rose to 21%, arousing the interest of all the major players in the sector with regard to the process. The trouble is that behind this performance hid a brutality worthy of Attila the Hun. From the outset, the buyer closed five factories and cut thousands of jobs, especially in North America. “Upon arriving, Bernardo Hees, the new CEO appointed by 3G, began by firing 90% of top management,” says Randy Keuch, former vice-president in charge of the group’s remuneration and pension systems. He has since been fired and will leave his post in early July. He will be replaced by the former marketing director of Anheuser-Busch Inbev, Miguel Patricio.
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It all happened at a seminar in San Francisco, where executives were called in one after another to discuss their future with the new boss. At the end of the meeting, fifteen minutes watch in hand, their fate was sealed. Three years earlier, the same method had been used to skim the management of Burger King. According to a witness quoted by the magazine “Fortune”, executives had to go to the toilet on the day of the meeting to vomit, sick with anxiety … Beyond his cynicism, this kind of practice is not likely to prepare for the future: flight of experienced executives, demotivation of the remaining troops, halt to innovation by pruning spending in research and studies …
Because for 3G, reducing costs is obviously not limited to the use of the guillotine. “In Pittsburgh, we had a very nice headquarters with individual offices. It was abandoned for another building where people worked in open space. The turnover quickly fell from 9 to 30%! », Says Randy Keuch. In his eyes, the worst measure was the questioning of the house retirement plan, considered too generous. “Bernardo considered that it was a disease that had to be eradicated, he wanted me to take care of it,” he breathes. The objective was to reduce pensions by half, without warning the employees who were to discover this cut once they left the group… “It was totally illegal”, still scolds Randy Keuch. Finally, the management sent a letter to all the people more or less close to the age of departure, that is to say 400 employees. They had thirty days to make up their minds: either to leave the company immediately under the old plan, or to stay, but with, at best, the prospect of a much less advantageous revised system.
Bernardo Hees, regularly classified by American economic sites as one of the most hated bosses in the United States, did not stop there. The group’s three private planes were quickly sold. “It was not however luxury, Heinz is an agricultural company and these planes made it possible to land on private runways, even in remote places”, defends the former vice-president. Micromanagement has also emerged with, for example, individual monitoring of the use of photocopiers: a maximum of 200 copies per month and per employee, and only one machine authorized for 100 employees. The number of business cards has been capped at 100 per year …
The 2015 merger between Kraft and Heinz was another opportunity for Jorge Paulo Lemann’s teams to apply the “ZBB”. “Six factories were shut down and there were 5,200 job cuts, a good part of which was in general services,” comments Francky Hivez, CGT delegate at the French plant in Seclin where Bénédicta mayonnaise is manufactured. Once again, the results were astonishing: the hunt for duplicates and the search for synergies made it possible to generate $ 1.5 billion in profits fairly quickly. “On the other hand, the growth in turnover was not there. Between 2015 and 2018, it was 3 to 4% on average for companies in the sector, but Kraft Heinz was well below ”, underlines Pierre Tegnér, at Oddo BHF.
Danone, Unilever and Nestlé also practice cost reductions. But with a more measured degree of violence and, above all, by reinvesting to develop their brand portfolio and adapt to market changes. “Today, consumers have less confidence in large manufacturers whose processed products are considered harmful to health. They are turning to new, smaller, healthier brands, ”comments Dewey Warner, industry specialist at Euromonitor International in Chicago. Because of the clear cuts, the Kraft Heinz group has innovated at least. “We did release an organic mayonnaise last year, but four or five years behind the competition,” recognizes Francky Hivez, at Seclin. Last year, the 3G Capital co-founder himself admitted his mistakes at a symposium at the Milken Institute in California. “I have long lived in a comfortable world of old, high volume brands. We bought them thinking that they would last forever, it was enough to concentrate on the efficiency of our management… And then, suddenly, we are disrupted ”, admitted the slender boss, visibly little fan of“ junk food ” .
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What if, for him, the trouble was just beginning? “In distribution, the Kraft Heinz group’s preferred channel are hypermarkets and supermarkets, but they are losing ground in the face of natural and organic brands such as, in France, Naturalia or Biocoop”, underlines David de Matteis. , consultant specializing in the sector at OC & C. Another sword of Damocles: Kraft Heinz is positioned in very price sensitive product categories. Thus, in mass distribution, it is faced with increasingly fierce competition from private labels (private labels). “The pressure on the margins will increase, the purchasing centers are already pushing them to lower their prices”, estimates David de Matteis … Even with new balls, the tie-break promises to be very complicated for the former cador courts.
Kraft Heinz, fourth largest food group in the world
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