When you miscalculate the value of brands – a rare cautionary tale from Warren Buffett

Mar 27, 2024

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. The business did well, and by 1909 his brothers Charles, John, Fred and Norman had all joined, and the company was able to open its first manufacturing plant.  The big breakthrough was Kraft’s invention of a method for preserving cheese so that it wouldn’t spoil, patented in 1916.  Consumption of cheese in America doubled between 1918 and 1945, with Kraft’s company (and the need to transport food over long distances during the two world wars) getting the credit.

The company grew tremendously and launched many innovative brands.  Kraft’s brands passed through a variety of hands, including Dart Industries, the Philip Morris Companies, Nabisco and General Foods. The company bought up Danone’s biscuit business and, in a controversial cross-border acquisition, Cadbury.  The Cadbury deal was the linchpin that would allow Kraft to split itself in two, which it did in 2012.  The North American grocery business became Kraft Foods Group while the international snack and confection company was called Mondelez International, Inc.



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.  The recipe worked well with beer (the Budweiser Clydesdales are lucky they still have a job) and it worked with burgers.  Why not with condiments?

Initially, the playbook rolled out at Heinz according to plan.  Most of the top execs, including their CEO of 15 years were replaced. 350 of the 1,250 jobs at headquarters were cut, and 250 of the jobs elsewhere were slated to disappear.  I can attest to the cost-cutting – I was supposed to be involved in a leadership development program which was unceremoniously dropped.  Insiders told me about the wholesale abandonment of Heinz culture (which, following on the principles of its founder was famously patriarchal).

Then in 2015, the investors decided to bring Kraft and Heinz together to form Kraft-Heinz.  At the time, observers thought this might be a good idea.  Kraft’s split left it with little exposure to international markets and Heinz operated internationally.  Maybe a larger company could have more power with respect to both suppliers and retailers. Management of both would now be under one, presumably experienced, hand.  And the combined company owned tremendously well-regarded, even beloved brands.   In less than 5 months after the merger, Kraft Heinz reportedly laid off around 10% of total staff.

And it worked!  By February of 2017, Kraft-Heinz stock was up to $96, from somewhere in the $70’s when the merger was engineered.  The playbook was going exactly as planned.

There was just one little problem – with so much cost trimmed out of the combined company, the low-hanging fruit was gone.  The traditional 3G playbook had the answer, though – find another big, dumb, fat, happy company to acquire and grow your profits by applying the cost-cutting formula to it.



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.  “Frankly, someone who thinks they can buy us because they have a lot of money and thinks they can leverage up our company and then run it with an entirely different model, doesn’t make much sense to me. Our system is there to satisfy a few billion people in the world, not a few billionaires.”

Polman reportedly warned Warren Buffett and Jorge Lemann personally that there was no appetite for the offer at boardroom level and that investors were highly unlikely to be swayed.  In addition to the differences in philosophy of the two firms, the offer was highly leveraged, so that shareholders would effectively be using their own money to fund the purchase. Further, remaining bitterness over job losses in the Cadbury deal led to a massive concern that the UK government might get involved.

The bid was withdrawn less than 48 hours after it was made public.

David Aaker expressed the views of many that the failure of this bid could be a hopeful sign that perhaps other considerations than finance matter in corporate decision-making.



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.”

Um, ahem.

In May of 2023, investors won a lawsuit against the company to the tune of $450 million, saying that it had misled them.  In 2019, the company not only had to write down $15.4 billion in brand value for its Kraft and Oscar Mayer brands, but it also received a subpoena from the Securities and Exchange Commission and had to restate its financial statements from 2016.  Its stock price dropped from $56.20 in November of 2015 to $26.50 by August of 2019, causing about $36 billion in market capitalization to disappear.  Meanwhile, even worse, 3G (who presumably knew how bad things were getting) quietly unloaded over $1 billion in the company’s stock.

At the time, in 2019, I wrote an article for CNBC on the company’s plight.  In it, I said,

“Transforming a company, particularly one that is already struggling, isn’t easy. Warren Buffett said earlier this week on CNBC that he has confidence in the new Kraft Heinz CEO and, if any mistake was made, it was that Berkshire and 3G simply paid too much for the stock.

Kraft Heinz has one big advantage, and it is one that 3G seemed to have forgotten. More than anything else, Kraft Heinz needs to rekindle a passion for innovating to meet customer needs. Its iconic brands may be a tad tired, but they are still beloved by many. Leveraging that affection would be a great place to start.

But it is time to stop it with the nostalgia-as-business-strategy approach. Put your best minds on discovering the next generation of better-for-you-and-the-environment food. Reconsider convenience: Millennials might not open cans of tuna, but they could well buy fresh tuna salad. Use your incredible manufacturing prowess to go from huge volumes of standard stuff to greater variety of niche-oriented products. Digital can really help here. And stop using earplugs when listening to critics — they may be telling you something vitally important.”



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.” 

He decided to focus on the existing brands, in ways that were certainly a departure from traditional Kraft Heinz marketing. The surprising plays?  A Velveeta martini.   A condiment based on a Tweet about Taylor Swift’s “seemingly ranch” moment.  A “cold dog” – a hot dog flavored ice cream on a stick.  A partnership between Kraft Real Mayo and Juicy Couture to sell tracksuits with “smooth” on the bottom.  Its first-ever global advertising campaign around the theme of “irrational love” for the company’s products, featuring scenes suggested by real life.  A box of Mac and Cheese with John Legend’s face on it (after he went public to say this was his favorite food!)

More serious innovations were also in the works, to the point at which Fast Company named it to its list of the 2024 most innovative companies.  The company is getting into plant-based products with an alliance with NotCo. It debuted a product for restaurants called the Heinz Remix that lets customers design their own condiments and retrieves the information to be of use to restaurants and food designers.  It’s created a way to make grilled cheese sandwiches that are crisp come out of the microwave.  And the company is attempting to make its core products healthier.

Will all this be enough to overcome the headwinds of consumer price-sensitivity, a desire for healthier eating, the rise of store brands and the increased power of retailers?  The company is signaling yet another new approach attributed to declining sales with the 2024 appointment of Carlos Abrams-Rivera, a new CEO to replace Patricio (who will become Non-Executive Chair of the company’s board).   

Perhaps a return to its innovative roots will mark the company’s next chapter.