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. But for Jorge Paulo Lemann, 79, co-founder of the 3G Capital investment fund, the term now has a special meaning. His Black Friday took place on February 22, 2019. That day, on Wall Street, the title of the agri-food group Kraft Heinz, majority owned by 3G and Berkshire Hathaway, Warren Buffett’s fund, collapsed by 27 % in one sitting, letting billions of dollars go up in smoke.
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 Benedicta 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 turnover to announce an asset depreciation of $ 15.4 billion. Result: a net loss of 10.2 billion over the 2018 financial year. “The signal sent to the market was very negative, underlines Pierre Tegnér, analyst at Oddo BHF. It was like telling investors that things were not going as planned at all. ” The 3G method, which consists of slashing costs to boost profits, before reselling its stake for a nice profit, has thus shown its limits.
A hell of a slap for Jorge Paulo Lemann, not used to such disappointments. Until then, the man fascinated by his insolent success. It is true that the course of this Brazilian, 4e fortune of Switzerland and 35e world fortune with a jackpot of more than 22 billion francs, is not trivial. In his youth, the 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. Takeover of a bank that has become the Brazilian Goldman Sachs, foundation of the world’s number one beer company, AB InBev (Budweiser, Corona, etc.), creation in 2004 of 3G Capital with two of his Brazilian disciples, Carlos Sicupira and Marcel Telles.
Taken by munchies, the “three musketeers”, as they have been called, then increased their acquisitions: Burger King in 2010 for $ 4 billion. Heinz in 2013 for 23 billion with the support of the Berkshire Hataway fund. Two years later, Warren Buffett (88) also participated in the financing of the merger operation between Kraft and Heinz which propelled the new group into the world’s top 5 food groups. The only downside: in 2017, the grandpas raiders failed in their attempt to take control of Unilever.
Since it embarked on buyouts, 3G Capital has indeed shown that its profit maximization strategy has everything of a hurricane. Katrina. Thus, Heinz, at the time of the takeover, posted a profitability of 14%. It quickly rose to 21%, arousing the interest of all the major players in the sector in the process. But behind this performance hid a brutality that did damage. This is based on an American method of drastic cost reduction, the “zero-based budget”, or “ZBB” in English (see box below). From the outset, the buyer closed five factories and cut thousands of jobs, especially in North America.
“Upon arriving, Bernardo Hees, 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 retirement systems. It all happened during a seminar, where executives were summoned one after the other to discuss their future with the new boss. At the end of the meeting, 15 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 cited by the magazine Fortune, some executives had made themselves sick to the point of locking themselves in the toilets to vomit …
But for 3G, reducing costs is not limited to the use of the guillotine: moving to new premises, setting up an open space, questioning the house retirement plan, considered too generous. “The turnover of executives quickly dropped from 9 to 30%!” Says Randy Keuch.
Bernardo Hees, regularly classified by American economic sites as one of the most hated bosses in the United States, did not stop there. Individual monitoring of the use of photocopiers has been set up: a maximum of 200 copies per month and per employee and only one machine authorized for 100 employees. The number of business cards has also been capped at 100 per year …
The merger between Kraft and Heinz was a new opportunity for Jorge Paulo Lemann’s teams to apply the “ZBB”. “Six factories were shut down and there were 5,200 job cuts,” comments Francky Hivez, CGT delegate at the French plant in Seclin where Benedicta 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, ”explains Pierre Tegnér.
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 not considered good for health. They are turning to new, smaller, healthier brands, ”comments Dewey Warner, industry specialist at Euromonitor International in Chicago. At Kraft Heinz, the blows of the ax in research and development, studies, marketing, or the departure of the most experienced executives have not made it possible to keep up with these developments. However, they date back a few years. “We did release an organic mayonnaise last year, but four or five years behind the competition,” recognizes Francky Hivez, at Seclin.
Many challenges to overcome
Faced with the scale of the crisis, Kraft Heinz ended up separating from its boss, Bernardo Hees, replaced this summer by the former marketing director of AB InBev, Miguel Patricio. But the troubles are far from over. The stock remains down 30% year on year. In addition, underlines David de Matteis, of the OC & C firm, “in distribution, the Kraft Heinz group’s preferred channel is hypermarkets and supermarkets, losing momentum in the face of natural and organic brands such as Naturalia and Biocoop. “
Another sword of Damocles: the group is positioned in very price sensitive product categories. Suddenly, in its traditional stores, it is faced with increasingly fierce competition from private labels (private labels). “The pressure on margins will increase, the purchasing centers are pushing them to lower their prices,” said the consultant. Even with new balls, the tie-break promises to be very complicated for the former cador of the courts.
Costs, “it’s like fingernails”
Zbb method To maximize the profits of its companies, 3G Capital applies a strategy essentially geared towards drastically reducing costs, which one of the fund’s partners, Marcel Telles, compares to fingernails: “You have to cut them constantly”, asserts- he does.
With his accomplices, Jorge Paulo Lemann thus brought up to date an American method of management of the 70s, the “zero base budget”, or “ZBB” in English. It is a question of building the budget every year from a blank sheet, without taking into account that of the previous year. Each expense is thus called into question according to the new priorities of the company. Severe. “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 went wrong.
* Journalist of “Capital”