$KHC Kraft Tests How Much Costs Can Be Cut as Tastes Change
At least they are waking up to the change from high carb, high sugar foods and processed meats changing to organic, low carb, and unprocessed fresh foods is happening. I still won't touch this stock.
https://www.nytimes.com/2019/02/22/business/d...heinz.html
The reputations of some of the world’s most powerful investors rest on a huge but humdrum challenge: getting consumers excited again about Kraft macaroni and cheese.
Kraft Heinz, the food giant that also makes Jell-O and Oscar Mayer meats, surprised Wall Street on Thursday when it announced poor earnings, a multibillion-dollar write-down and an accounting investigation by the Securities and Exchange Commission. Kraft’s shares plunged 28 percent on Friday, lopping more than $16 billion off the company’s stock market value.
3G Capital, the Brazilian investment firm that led the merger of Kraft and Heinz in 2015 and steers the combined company, has taken a big financial hit on its 22 percent stake in Kraft. Warren E. Buffett’s Berkshire Hathaway has an even bigger stake in Kraft and lost an estimated $4 billion on Friday.
The real pressure, though, is on 3G. Though little known on Main Street, 3G has enormous influence over some of America’s most famous brands.
Investors had bought into the idea that 3G’s stringent, cost-cutting approach to running companies would succeed over the long run. But Kraft’s problems suggest that unremittingly squeezing expenses can make it harder to stay competitive.
Kraft Heinz may soon need to spend more. Consumers are increasingly drawn to products they perceive to be healthier and fresher over processed products. Kraft Heinz will have to show that it can win them back with innovative new products and engaging marketing. And that could weigh on future profits.
“They did not anticipate this major change in consumer tastes, and they really focused their efforts instead on cost-cutting and doing acquisitions,” said David Kass, a professor at the University of Maryland’s Robert H. Smith School of Business.
Kraft is not the only company where 3G’s approach is being tested. The firm’s partners have leadership positions at Anheuser-Busch InBev, which makes Budweiser. Long before 3G’s investment in Kraft Heinz, its leaders were testing their cost-cutting strategies at the company that eventually became Anheuser-Busch InBev. The beer maker’s shares are down nearly 30 percent over the last 12 months.
Editors’ Picks
He Committed Murder. Then He Graduated From an Elite Law School. Would You Hire Him as Your Attorney?
Trump Sought a Loan During the 2016 Campaign. Deutsche Bank Said No.
‘A Pumping Conspiracy’: Why Workers Smuggled Breast Pumps Into Prison
3G also effectively controls Restaurant Brands International, whose brands include Burger King and Canada’s Tim Hortons.
Ken Goldman, an analyst at JPMorgan Chase, asked Kraft’s chief executive on Thursday night during an investor call whether the company’s belt-tightening had damaged its brands. “We still believe strongly that our model is working and has a lot of potential for the future,” Bernardo Hees, the chief executive, replied. On Friday, Mr. Goldman concluded in a research note, “It is reasonable to question the entire 3G strategy.”
The write-down Kraft announced on Thursday totaled $15.4 billion. In taking the hit, the company reduced the value on its balance sheet of certain operations in the United States and Canada and the Kraft and Oscar Mayer trademarks. The company also jarred investors by announcing that it would slash its dividend. And the S.E.C. inquiry could stir up doubts in investors’ minds about how Kraft records its costs.
The company booked $25 million of costs in the fourth quarter that should have been recorded in earlier periods. Kraft said it was taking steps to improve its controls and added that it was continuing to cooperate with regulators.
“In absolute terms, $25 million is not a big number, but it puts into question management’s credibility,” said Jon A. Baumunk, an accounting lecturer at San Diego State University’s Fowler College of Business.
Kraft’s troubles could be another headache for Mr. Buffett, who has drawn criticism as an important supporter of the firm over the years.
3G and Mr. Buffett merged Heinz with Kraft in a more than $45 billion deal that created the fifth-largest food and beverage company in the world. “The 3G people have done marvelous purchases,” Mr. Buffett said in 2015.
Subscribe to With Interest
Catch up and prep for the week ahead with this newsletter of the most important business insights, delivered Sundays.
SIGN UP
But Mr. Buffett and 3G have seemed like a strange pairing. Mr. Buffett has long bashed private equity investors and their business model. He also has fostered a reputation for allowing the businesses that Berkshire purchases to operate with little interference and has not pushed for big job cuts. That would seem to stand in contrast to 3G’s cost-cutting practices.
In his annual letter to Berkshire’s shareholders for 2015, Mr. Buffett defended 3G. He contended that like Berkshire, 3G wanted to hold businesses for the long term, which distinguished it from a typical private equity investor.
Over the coming quarters, Kraft will have to show that it can compete in a market in which consumers want products they think are healthy and do not appear to be mass-produced. Other companies have had some success on this front, Mr. Kass, the business professor, said, pointing to some of PepsiCo’s food products. “Pepsi has been realizing that growth is going to come from new products that are perceived to be healthier and nutritious,” he said.
And some analysts see evidence that suggests Kraft could still turn things around. It has had some success reviving interest in its Capri Sun and Oscar Mayer lines, said Christopher Growe, an analyst at Stifel who covers Kraft.
“There is hope here,” he said.
At least they are waking up to the change from high carb, high sugar foods and processed meats changing to organic, low carb, and unprocessed fresh foods is happening. I still won't touch this stock.
https://www.nytimes.com/2019/02/22/business/d...heinz.html
The reputations of some of the world’s most powerful investors rest on a huge but humdrum challenge: getting consumers excited again about Kraft macaroni and cheese.
Kraft Heinz, the food giant that also makes Jell-O and Oscar Mayer meats, surprised Wall Street on Thursday when it announced poor earnings, a multibillion-dollar write-down and an accounting investigation by the Securities and Exchange Commission. Kraft’s shares plunged 28 percent on Friday, lopping more than $16 billion off the company’s stock market value.
3G Capital, the Brazilian investment firm that led the merger of Kraft and Heinz in 2015 and steers the combined company, has taken a big financial hit on its 22 percent stake in Kraft. Warren E. Buffett’s Berkshire Hathaway has an even bigger stake in Kraft and lost an estimated $4 billion on Friday.
The real pressure, though, is on 3G. Though little known on Main Street, 3G has enormous influence over some of America’s most famous brands.
Investors had bought into the idea that 3G’s stringent, cost-cutting approach to running companies would succeed over the long run. But Kraft’s problems suggest that unremittingly squeezing expenses can make it harder to stay competitive.
Kraft Heinz may soon need to spend more. Consumers are increasingly drawn to products they perceive to be healthier and fresher over processed products. Kraft Heinz will have to show that it can win them back with innovative new products and engaging marketing. And that could weigh on future profits.
“They did not anticipate this major change in consumer tastes, and they really focused their efforts instead on cost-cutting and doing acquisitions,” said David Kass, a professor at the University of Maryland’s Robert H. Smith School of Business.
Kraft is not the only company where 3G’s approach is being tested. The firm’s partners have leadership positions at Anheuser-Busch InBev, which makes Budweiser. Long before 3G’s investment in Kraft Heinz, its leaders were testing their cost-cutting strategies at the company that eventually became Anheuser-Busch InBev. The beer maker’s shares are down nearly 30 percent over the last 12 months.
Editors’ Picks
He Committed Murder. Then He Graduated From an Elite Law School. Would You Hire Him as Your Attorney?
Trump Sought a Loan During the 2016 Campaign. Deutsche Bank Said No.
‘A Pumping Conspiracy’: Why Workers Smuggled Breast Pumps Into Prison
3G also effectively controls Restaurant Brands International, whose brands include Burger King and Canada’s Tim Hortons.
Ken Goldman, an analyst at JPMorgan Chase, asked Kraft’s chief executive on Thursday night during an investor call whether the company’s belt-tightening had damaged its brands. “We still believe strongly that our model is working and has a lot of potential for the future,” Bernardo Hees, the chief executive, replied. On Friday, Mr. Goldman concluded in a research note, “It is reasonable to question the entire 3G strategy.”
The write-down Kraft announced on Thursday totaled $15.4 billion. In taking the hit, the company reduced the value on its balance sheet of certain operations in the United States and Canada and the Kraft and Oscar Mayer trademarks. The company also jarred investors by announcing that it would slash its dividend. And the S.E.C. inquiry could stir up doubts in investors’ minds about how Kraft records its costs.
The company booked $25 million of costs in the fourth quarter that should have been recorded in earlier periods. Kraft said it was taking steps to improve its controls and added that it was continuing to cooperate with regulators.
“In absolute terms, $25 million is not a big number, but it puts into question management’s credibility,” said Jon A. Baumunk, an accounting lecturer at San Diego State University’s Fowler College of Business.
Kraft’s troubles could be another headache for Mr. Buffett, who has drawn criticism as an important supporter of the firm over the years.
3G and Mr. Buffett merged Heinz with Kraft in a more than $45 billion deal that created the fifth-largest food and beverage company in the world. “The 3G people have done marvelous purchases,” Mr. Buffett said in 2015.
Subscribe to With Interest
Catch up and prep for the week ahead with this newsletter of the most important business insights, delivered Sundays.
SIGN UP
But Mr. Buffett and 3G have seemed like a strange pairing. Mr. Buffett has long bashed private equity investors and their business model. He also has fostered a reputation for allowing the businesses that Berkshire purchases to operate with little interference and has not pushed for big job cuts. That would seem to stand in contrast to 3G’s cost-cutting practices.
In his annual letter to Berkshire’s shareholders for 2015, Mr. Buffett defended 3G. He contended that like Berkshire, 3G wanted to hold businesses for the long term, which distinguished it from a typical private equity investor.
Over the coming quarters, Kraft will have to show that it can compete in a market in which consumers want products they think are healthy and do not appear to be mass-produced. Other companies have had some success on this front, Mr. Kass, the business professor, said, pointing to some of PepsiCo’s food products. “Pepsi has been realizing that growth is going to come from new products that are perceived to be healthier and nutritious,” he said.
And some analysts see evidence that suggests Kraft could still turn things around. It has had some success reviving interest in its Capri Sun and Oscar Mayer lines, said Christopher Growe, an analyst at Stifel who covers Kraft.
“There is hope here,” he said.
1
