Heinz, Kraft and Warren Buffett

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Pushkin.

It's July grilling season in America.

Hot dogs, hamburgers, ketchup, mustard.

Today on the show, sizzling on the grill, we have a tale of Warren Buffett, condiments, and private equity.

And I've brought a six-pack of non-alcoholic Budweiser.

This is Unhedged, the Markets and Finance Podcast from the Financial Times and Pushkin.

I am Rob Armstrong.

I'm coming to you from a tropical and sweaty New York City.

I am joined by the editor of the Lex column, John Foley, who is always cooler than the other side of the pillow.

Rob, Unhedged is the Egyptian cotton sheet of the financial podcast world, and it is a pleasure to slip into it.

What's the news, John?

What are we talking about today?

What brings us here?

So, Rob, we're talking about Kraft Heinz, which seems to be thinking about breaking itself up into at least two parts, which is fascinating for those of us who have been following companies and M ⁇ A for many, many, many years, because Kraft Heinz only got together about a decade ago through a merger of Kraft and Heinz.

and it's one of the more dramatic and convoluted corporate structuring and restructuring stories that I've covered in my time.

It's amazing.

I love this tale.

And so let's get in the unhedged time machine and head back to 2013

when Heinz,

which was then

a successful, well-known, if somewhat stodgy, packaged food company, is purchased by a private equity firm called 3G Capital in cooperation with Warren Buffett.

Now everybody knows who Warren Buffett is.

Tell us a little bit about 3G.

So 3G is a private equity firm founded by some Brazilian financiers that had this idea that you could ruthlessly cut costs at big, mostly consumer-facing companies using a thing called zero-based budgeting,

which was a financial fad that picked up in the 70s and was championed by Jimmy Carter.

So Jimmy Carter thought that it would be good to use zero-based budgeting, which is where you basically make every department every year justify every cost from scratch.

It was not a success for Jimmy Carter.

No.

It was not.

He tried to be Doge before Doge.

Well, and it never took off.

It's not dissimilar from what Elon Musk and Doge were trying to do.

So they tried to inflict that upon various companies, actually.

Heinz, they did it for Burger King.

Most famously for beer.

This was their first big success, right?

Again, I don't want to harp on how long we've been doing this, John.

But when we were young men and beer-drinking young men, you and I remember a world in which there were a lot of beer companies.

And now there are not a lot of beer companies.

And that is because of 3G, which rolled up like half of the world's beer companies into the monstrosity we now know as A.B.

InBev.

Right.

So AB InBev was the pinnacle of this craze for crunching together beer companies.

It was the merger of Anheuser-Busch, which makes Budweiser, and InBev, which makes Stella Artois, right, among other things.

And it was a real merger of cultures as well, right?

Yes.

A family-led US business, the most American thing you can think of, Budweiser, with Stella Artois, which is the least American thing you can think of.

That was back in 2008, and it was seismic at the time, I remember.

The idea that Bud would be a global rather than an American company was just a shock.

Right.

So they were riding high.

And when Kraft and Heinz merged in 2015, this was seen as a great thing.

Right.

I want to make a minor point here.

I'm rarely right about anything, as my friends know.

But I did say when they bought Heinz, when Buffett and 3G bought Heinz in 2013, I said, I don't think this is a good deal.

It looks like he's paid a lot of money, big premium for

a company where there may not be that much cost to take out.

But two years later, when Heinz goes on to buy Kraft, there is great excitement and the stock kind of goes bananas and amazing things happen.

Right.

And I think Kraft was trading at $36 billion.

That was the size of the company before this deal.

Heinz paid $52 billion for it.

And by 2017, the merged company was worth almost $120 billion.

One thing that is incredible to look at is the operating margin of this operation.

So at Heinz, it was about 15%, which is a nice fat operating margin.

I'll buy a 15% operating margin package goods company anytime.

Thank you very much.

They merge it with Kraft.

They 3G eyes it.

And suddenly the margins, at least for a brief period, that's the sound of foreboding that you just heard, go to like 27%.

And people are like, these guys have figured out capitalism.

That was the kind of hyperbolic talk you heard.

Like, this is the new capitalism.

And people start looking around the world and saying, every business in the world has a third too much operating costs.

These guys had fired like something like 20% of the staff at Heinz, and the margins correspondingly went bananas.

I was on Lex at the time, and we were looking at every company in the world, and we're like, maybe a third of all corporate operating costs are just bullshit.

Yeah.

And it's hard to overstate how much this was like a cultural thing as well for 3G.

I remember meeting years ago the the then CEO and CFO of Kraft Heinz, and they showed up in these like adorable kind of monogrammed shirts with like Kraft Heinz like stitched into them and explained to me that this is what people wear.

Yes.

Because this is like a cult.

But you go in and you are like, we are here to make this company.

Work.

You know, we have a way of thinking about the world and we're going to apply it here.

And then we're going to apply it to other companies.

And then as you say, everyone in the entire world will be doing zero-based business.

And if you look very closely at that little logo, it says Kraft Heinz.

And in small letters, it says, you're fired.

Underneath it.

And a lot of people were fired, right?

Yeah, yeah.

A big part of zero-based budgeting is getting rid of staff.

And that's what they do.

So it's kind of 2017-ish.

The margins are incredibly high.

The company is lean and hungry.

The stock price is high.

And then,

looking back, they also got caught by two big trends.

One of them...

is that Americans started eating less ketchup.

I'm using ketchup as a kind of general category term, term, like these big packaged foody kind of stuff sort of went out of style.

It was like now we want salsa or hot sauce or even brands that are like nichier rather than these classic grocery store staple-y kind of brands.

And so that became a drag on growth.

And second, there was an industrial change.

where in the heyday of kind of packaged foods, the packaged food food companies themselves had a lot of control of the pricing, where everybody wants the good brands, they want Hellman's mayonnaise, they want Heinz ketchup, they want French's mustard, they want Heinz baked beans would be a brand more familiar to people in the UK.

But as retail consolidated as an industry and came to be very much dominated, not just by Walmart, but by other big chains, the retailers grasped the whip hand over price.

And I think this may have killed them even more than the change in customer preferences, that basically

if Walmart wanted to use Heinz as a kind of loss-leadery sale item, they could force that on Kraft Heinz to a degree.

That also came alongside some other things that had less to do with retailers and more to do with Kraft Heinz like an accounting scandal.

Yes.

They had a ton of debt.

Yes.

I think the point being that they'd been a bit complacent that they wouldn't have to also deal with a huge shift in the way people eat ketchup.

Yeah, that accounting scandal, I don't remember very well, but ironically, it was about accounting for costs.

Yeah, they'd basically fictionalized some cost savings.

Yes.

Which didn't make a huge difference to the numbers, but just made people think they weren't on the bus.

When that scandal came out, the stock went down by like a quarter.

I don't know if you remember that day.

It was like they had a kind of quarterly earnings release where they were like, A, sales are crap, and B, the SEC is investigating our accounting.

And we're writing down the value of our brands.

And we're writing down, and like 25% came off the stock.

It was absolutely shocking.

And if you look at the

chart now, which I have before me, just of their sales,

since 2016,

sales have been flat at about $26 billion a year.

And by the way, as a food company in the last 10 years, it's hard to keep sales from growing because we just had a massive food inflation.

So their sales are flat in nominal terms.

And like if you look at Mondelez, Mondelez was printing 10% increases.

in sales all through the pandemic just on price increases.

And Kraft Heintz Heinz apparently couldn't manage it to the same degree.

You know, they were losing volume and couldn't make it up on price and ended up flat.

Yeah.

So this is bad.

And.

And their sales are shrinking now.

Their sales are shrinking now.

And the profit margins have gone from that amazing 26% to more like 20%.

Which is still quite high, even for food.

It sure is.

But it's not the level it was at when it was an $83 stock.

And now it's a $27 stock.

So things have changed.

It's really kind of an amazing tale.

And I think we've gestured at the main points of what happened.

But what lessons are we kind of taking away from all of this?

So, I mean, one lesson here is that there was this big shift in consumption, but the shift kind of started earlier.

I mean, sure, you wrote this when you were writing for Lex, but when Heinz merged with Kraft, Heinz was already

shrinking.

Yeah.

Like, sales were already really weak.

So these were not two, this was not a strong company merging with a weak one or even, it was just two basically quite weak companies being glued together with the hope that they could cut.

Now they were very good brands, right?

Right.

What you describe about the brands is really relevant to Warren Buffett and how we understand what he does.

He had this line, which I'm pretty sure he actually said.

Not all of the things that he said did he actually say.

But he's attributed with this.

I don't know who's going to be making the computers in 10 years, but I have a pretty good idea who's who's going to be making the candy.

The idea being you can make a lot of money investing in technology, but you don't have that kind of stability of outlook, the deep barriers to entry that you know are going to last for a long time as you will in a consumer brand.

And part of the lesson here is even those amazing consumer brands,

they are not permanent.

They're not like mountains that will always tower over the industrial landscape.

Things change.

And the Coca-Cola's and the Krafts and the Heinzes,

if they don't change,

they're going to have trouble too.

But the good ones do change, right?

The good ones, even if you look at Unilever on Nestle, they invest in new stuff

as well as having the old stuff.

Right.

Which is a thing that Kraft conspicuously did not do.

Yes.

They thought that people would always be eating Velveeta, which, for British listeners...

Velveeta is one of the greatest surprises I got when I moved to the US.

Yes, and probably not a pleasant surprise.

I was just like, what is it?

Why is it?

Yes.

Okay.

Anybody who doesn't know what Velvete is, we invite you to Google it.

As a footnote to that, a former CFCraft once said that internally they referred to Volvitra as liquid gold.

It's just jewels falling from your lips today, John.

It's great having you on the show.

So, one, brands, you need to reinvest in brands or you're asking for trouble.

I think there's probably some lessons here about general putting together of and taking apart of conglomerates.

I mean, this is a case where they put something together, presumably give some investment bankers a load of money to do it, and then 12 years later, they're thinking about taking those exact same two parts apart again, because that will now be a good idea.

Are we just having fun putting the blocks on top of each other and then knocking them over and putting the blocks on top of each other again?

Is that what's happening?

It does feel like it.

There is a case for saying that if you split it up, it's easy to sell the bits to other people, which is what Kellogg's just did.

Right.

Sold half to Mars and half to Ferrero.

So that can work.

Yeah.

And different people are presumably the right owners for different brands at different times.

Yeah, but I'm not sure who is the owner for like the Velveeta.

We'll find out, I guess.

We shouldn't pin the whole.

We shouldn't cover these people with Velveeta.

They have other products.

They do.

Yeah.

I think also

there is a phenomenon where

CEOs are expected to do some damn thing.

And this leads to a lot of demerging and merging.

In other words, what is it that a CEO can really do?

They can cut costs,

they can invest in innovation, they can pay a dividend, they can buy back their stock, they can borrow some money, or they can do or undo a transaction.

And once you've tried all the other stuffs, maybe you just do a transaction.

Makes you look like you're up to something.

Just go back through the list again.

That's capitalism.

So public investors in Kraft Heinz, since the dizzy heights of 2017,

have done terribly.

They have lost two-thirds of the equity has disappeared.

By the way, the chart of AB InBEV looks not dissimilar.

Also peaked in 2016, 2017, has lost a lot of value since.

That is a footnote.

But you wrote very interestingly that despite what has happened to the share price of Kraft Heinz, Warren Buffett has come away doing characteristically well.

Quite well, yeah.

So over the

10 plus years that he's been involved, I guess since he bought Heinz in 2013, he's about 60% up.

And that's because two things.

One is that Kraft Heinz has paid a load of dividends out.

Yes.

A lot of which have gone to regular shareholders too.

So when you look at the fall in the share price, they've still got dividends.

So it's not as bad as it looks.

Yes.

It's still bad, but it's not as bad as it looks.

He also, though, cleverly sold his Heinz stake into Kraft Heinz and got quite a good deal.

So he put in about $10 billion in total into that deal.

And by the time Kraft was, you know, Kraft Heinz had come back onto the market, he'd doubled that.

And he's lost again some of that, but he's still 60% is not, it's not great over like, you know, 12 years.

We've had an amazing 12 years for stocks and games.

Yeah, he could have invested in NVIDIA.

Yeah.

I mean, look, he could have invested in the S ⁇ P 500, frankly, and done better than that.

Or you never.

He didn't lose any money, that's for sure.

Yeah, that's pretty terrible.

He's damn far away from losing money.

And this is kind of a lesson about Warren Buffett's best deals.

It's not always that he's a brilliant stock picker.

Instead,

he knows the value of his dollars to partners, and he extracts really good terms from anybody, whether it's 3G or someone else, or Bank of America, or Goldman Sachs, and tons of people that have been in the past.

He gets really good terms on the money he puts in.

So his downside is really well protected.

That's so true.

And it means that when Warren Buffett picks a stock, you can partly say it's a good stock, but really what you need to look at is how

price he got in.

Exactly.

And it's important to note about him, you know, as this saga kind of comes to an end, and with his recent announcement that he would retire from being Numero Uno at Berkshire Hathaway, that he has made big mistakes.

Precision Car Parts, a $40 billion deal he did that he took a big write-down on being the other recent example, but there's plenty more.

So in general, the art of being Warren Buffett is not really the art of seeing the future of companies.

He doesn't know

the future of appetite for ketchup better than anyone else, right?

But he's like an operator, right?

That's a big part of success, I should say, rather than a prognosticator

and a deal maker rather than a person who has the crystal ball.

Listeners, we will be right back with Long and Short.

Bonds are back.

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Listeners, welcome back.

This is Long and Short, that portion of the show where we go long, the things we like, and short, the things we do not like.

John, you got anything for me?

Yeah, I'm going to go long

Bitcoin.

Oh!

Oh, it agonizes me to

say that, John.

Not because of Bitcoin, but because it's crypto week.

Ah,

there's a bunch of legislation going through Congress, through the House of Representatives, that could make it more easy for institutions to get into crypto, which I think they will.

I'm not saying they should, but I think they will.

And so I would long it for a while.

It's up quite a bit in the last kind of month or so, and then I would short it again.

All right.

I'll be watching carefully and not investing in that crazy nonsense.

I myself am long

Trump following through on his August the 1st tariff threats.

I think he's tired of being called a chicken by myself and many, many other people on Wall Street, and that he will impose many of the tariffs he's talking about unless he gets big concessions from trade partners.

Now,

I also think he'll have a chance to chicken out later.

In other words, if the market has a big puke when he does this, then it's a whole new ballgame and the dynamics will change.

But my guess, as of today, is that August the 1st might be a big day.

for tariffs.

Do you think if he doesn't chicken out, it's your fault?

No.

Nothing's ever my fault, John.

You should know this by now.

Listeners, nothing is your fault either, and we will be back in your feed later this week.

It might be your fault.

Nothing is my fault.

Unhedged is produced by Jake Harper and edited by Brian Erstadt.

Our executive producer is Jacob Goldstein.

We had additional help from TOEFR 4 has Cheryl Brumley, who's the FT's global head of audio.

Special thanks to Laura Clark, Aleister Mackey, Greta Cohn, and Natalie Sadler.

FT Premium subscribers can get the unhedged newsletter for free.

A 30-day free trial is available to everyone else.

Just go to FT.com/slash unhedged offer.

I'm Rob Armstrong.

Thanks for listening.