Iconic American brands are under pressure. Some of our most beloved and well-known brands are facing uncertainty. There has been a Sotheby’s auction-like atmosphere surrounding the future of American main meal and snack food brands. Kellogg’s, a brand with a storied American history, is being sold off in two pieces: its snack food portfolio going to Mars for a reported $30 billion, while Kellogg’s main meal foods, cereals and such, are off to Italian confectioner, Ferrero, for a reported $3 billion.
And, now, according to The Wall Street Journal, Kraft Heinz, the troubled marriage sanctioned by Warren Buffett and Brazilian 3G Capital, is also seriously considering the break-up and sale of its main meal foods such as Oscar Mayer and Kraft-branded cheeses, Maxwell House coffee, and potentially Jell-O and Planters nuts. Reporting indicates that the specific brands to be sold have not yet been agreed upon. If this breakup with sale is true, the next phase of Kraft Heinz has been expected for ten years.
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Kraft Heinz is one of the most notable brand mismanagement case histories of the past decade. Kraft Heinz is now the poster child for how to destroy great American brands in the space of four years, spending the following six years attempting to make these weakened brands great again. The value destruction of the Kraft Heinz brand portfolio was already underway prior to the COVID-19 pandemic, so Wall Street and Kraft Heinz executives cannot blame the pandemic. The plague that swept through Kraft Heinz was a self-inflicted virus. Call it anorexia industriosa.
In 2015, 3G Capital (a Brazilian investment firm) merged Kraft and Heinz. The merged entity was designed to be the epitome of a shareholder’s El Dorado. The basis for these glorious dreams of golden shareholder returns was 3G Capital’s approach to financial management: zero-based budgeting. Rather than describe the intricacies of zero-based budgeting, all you need to know from a brand standpoint is this: money for brand-building, brand market research, innovation, and renovation is siphoned off, leaving brands to starve. The “cost savings” go to the shareholders. Shareholders are initially happy because the short-term gains are impressive, but these promised gains often fail to materialize, as seen with Kraft Heinz.
As the previous CEO and prominent 3G Capital figure, Benardo Hess said after admitting the 3G Capital approach had failed,“ We were overly optimistic on delivering savings that did not materialize.” This is one of those statements that should go down in brand infamy. No kidding. Your brands are dying because you thought starving them of resources was the best strategic approach. This is tantamount to the Vietnam-era saying, “We had to destroy the village to save it.”
Astute business press observers saw into the weaknesses of 3G Capital. In February 2017, Kraft Heinz, after nine quarters of downward results, made a takeover bid for Unilever. The bid was quickly and decisively rejected for several reasons.
At the time, a writer for The Economist identified Kraft Heinz as a “roll-up” business. That is, a firm that relies on “acquisitions and cost cuts to mask low growth.” Initial returns are always fabulous, but in the long term, this type of financial engineering does not create a happy ending for investors. These “roll-up” enterprises typically have a very high debt load and often find that the only way to produce the appearance of organic growth is by acquiring another business.
So much for zero-based budgeting and 3G Capital management skills.
One of the zero-based budgeting brand actions that can cause harm is failing to keep up with changing customer needs. While 3G Capital was funneling “savings” to shareholders, the Kraft Heinz brands were “losing favor” with customers who were increasingly interested in fresh foods and losing interest in processed foods. Failing to keep up with changing customer behaviors and tastes goes hand-in-hand with the mindset of “let’s continue to make what we know how to make rather than make what the customer wants.”
It did not take long for the debacle to arrive. Four years after the megamerger, without the cover of Unilever to mask poor performance, Kraft Heinz wrote down the value of the Kraft and Oscar Mayer brands by $15 billion. There are countries around the world with GDPs lower than $15 billion. So much for El Dorado. More likely El grand fiasco.
What makes this brand-value destruction even more unfortunate is that 3G Capital sold its entire stake in Kraft Heinz by the end of 2023. Just like Billy Joe and Bobby Sue in Steve Miller’s song, 3G Capital “… took the money and run.”
Now. Kraft Heinz is, in some instances, stultified. According to The Wall Street Journal, Kraft Heinz had already attempted to sell its “… underperforming brands like Oscar Mayer and Maxwell House, to no avail.” What is worse is that Kraft Heinz executives are looking for ways to satisfy its shareholders rather than save its brands and satisfy customers. The wordsmiths at The Wall Street Journal put it this way, Kraft Heinz continues ‘… its evaluation of strategic transactions to unlock value for shareholders.”
Of course, all food companies are facing changing attitudes and behaviors among food and beverage customers. Not only is there a vocal unease with over-processed foods, but trends such as economic and pricing issues, social concerns, and the increasing availability of weight-loss medications are also shifting how we perceive and consume foods and beverages. Healthy brands are better positioned to move forward. Healthy brands have spent the resources to generate actionable insights. Debilitated brands that have lost their luster and customer connections are vulnerable. You know there’s a potential problem when your website’s FAQ page features “Are Lunchables Safe to Eat?”
Either Kraft Heinz applies significant resources along with turnaround plans for its weakened brands, or Kraft Heinz finds a price that a buyer can appreciate. In either case, shareholders may not be pleased. It is seemingly doubtful that Kraft Heinz’s statement – “We’re intentionally and proactively managing our portfolio” – makes shareholders giddy.
Restaurant Brands International, home to Burger King, Popeye’s, Tim Horton’s, Firehouse Subs, and, now, Carrol’s Restaurant Group, is still part of 3G Capital’s portfolio. In the US, Burger King remains in turnaround mode. And, although Burger King has an earworm musical jingle, you cannot eat a jingle. Furthermore, Restaurant Brands International CEO (and longtime executive) José Cil has moved on to Panera Brands, owned by JAB Holding (Panera Bread, Caribou Coffee, and Einstein Bagels).
3G Capital also owns a significant stake in AB InBev, which is home to more than 400 beer brands globally, including Budweiser, Corona, Michelob, Stella Artois, Löwenbräu, and Beck’s. AB InBev is one of those Economist “roll up” brands built on multiple acquisitions.
The Kraft Heinz debacle is an example of the brand-destructiveness and mismanagement generated by financial engineering. Growing shareholder returns through financial finagling while failing to grow customer–perceived brand value leads to a weakened brand business.
Financial engineers with approaches such as zero-based budgeting do not unlock value; they exploit value for short-term benefit. Brands pay the price for these pecuniary, greedy actions. 3G Capital’s focus was on the bottom line. But, there cannot be sustainable growth of the bottom line unless leaders create quality growth of the top line. One thing is clear: you cannot cost manage your way to enduring profitable growth. Brands must focus on satisfying customer needs rather than catering solely to shareholder riches.
As destructive as financial engineering is to brand health, damaged brands can be revived. Brands can be revitalized. Brands are resilient. Good, solid, intuitive brand management can breathe life back into battered, belittled, beaten brands. Let us hope that Kraft Heinz finds an owner for its weakened brands with the resources and mindset to resuscitate these iconic American touchstones.
Contributed to Branding Strategy Insider by: Joan Kiddon, Partner, The Blake Project, Author of The Paradox Planet: Creating Brand Experiences For The Age Of I
At The Blake Project, we help clients worldwide, in all stages of development, define and articulate what makes them competitive and valuable at pivotal moments of change. Please email us to learn how we can help you compete differently.
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