By William Davis
That sizzling noise you heard Friday? Yeah, that was the Oscar Mayer Wienermobile bursting a casing on the floor of the New York Stock Exchange. Not literally, of course, but it’s no secret now the mobile hot-dog-on-a-bun has some real issues. On Thursday, the little lunchmeat company’s unhealthy parent, Kraft Heinz sliced the value of its Kraft and Oscar Mayer brands by a cool $15.4 billion. Then, for good measure, company execs went ahead and announced a sharp dividend cut. To no one’s surprise, investors cleaved around 25% from Kraft Heinz stock.
Kraft Heinz is the third-largest food and beverage company in North America and the fifth-largest in the world
The bigger story, though, is what’s going on behind the deli counter. Fact is, while Kraft Heinz and its long menu of brands is well known, the food giant is actually controlled by a Brazilian private-equity outfit called 3G Capital. The investment company, which traces back to the South American beer market, burst onto the American scene a decade ago when it spent billions to buy old-school food companies like Heinz and Burger King. Why? To create efficient food production machines. How? Through relentless cost cuts and mass layoffs.
James L. Kraft started a wholesale door-to-door cheese business in Chicago with his brothers in 1909. In 1916, J.L. Kraft and Bros. Company patented a pasteurized processed cheese that gave cheese a longer shelf life.
Remarkably, the 3G approach has a name: Zero Based Budgeting, or ZBB as the Dilbert set likes to call it. Popularized by the 39th U.S. president, ZBB forces departments to justify their budgets every year then slash proposed costs if they can’t withstand top management scrutiny. To folks not named Jimmy Carter, ZBB sounds like one of the worst ideas in the world. Yet the 3G team has managed to implement the ham-handed approach in all of its portfolio companies: Anheuser-Busch InBev, Burger King, Tim Hortons, Heinz, Kraft Foods, and Popeyes Louisiana Kitchen.
Henry John Heinz began a small food business in Pittsburgh with his brother and cousin in 1876. Heinz Tomato Ketchup was among the company’s first products.
Even more remarkably, the Boys from Brazil have a regular customer, and he too has a name: Warren Buffet. True enough, the genteel billionaire who’s managed to put a friendly face on his big business by criticizing ruthless Wall Street bankers and rapacious private equity firms over the years, is not only an admirer but a co-investor in most of 3G’s ruthless and rapacious deals. To wit, the aforementioned Kraft Heinz. At last inventory, Mr. Buffet’s Berkshire Hathaway held nearly 326 million shares of Kraft Heinz, amounting to a 27% stake.
Today’s Kraft Heinz brands include Capri Sun, Jell-O, Kool-Aid, Lunchables, Maxwell House, Ore-Ida, Grey Poupon, Philadelphia, Planters, Weight Watchers, and Velveeta.
Like other management fads like “Six Sigma” and “Reengineering”, ZBB will pass, sooner, apparently, rather than later. And the Oracle of Omaha didn’t see it coming. The $4 billion hit his company’s taking would’ve bought a lot of hot dogs.
What the facts are saying…
- The blue-chip Dow, the tech-heavy NASDAQ, and the small-cap Russell 2000 have climbed in eight consecutive weeks to start 2019, the first such occurrence for the Dow since 1964, first for the NASDAQ since 1976, and first ever for the Russell.
- About $12.7 billion flowed out of global equity funds last week, continuing an early-year trend. Investors put $4.6 billion into bond funds for the same period.
- On this day in 1862, Abraham Lincoln signed the Legal Tender Act, which authorized the Treasury to sell 6% bonds maturing in 20 years. Philadelphia broker Jay Cooke, after slicing the bonds into denominations as small as $50, raised $361 million in less than two years.
- Shares of Nike fell 1% on Thursday, their largest percentage loss since Jan. 3, after Duke star Zion Williamson was injured in a Nike sneaker blowout.
- The CBOE Volatility Index, or VIX, which measures expected swings in the S&P 500, has fallen 45% this year amid the market recovery.
What the numbers are saying…
- $8 billion.
The amount raised in last week’s Treasury auction of 30-year inflation-protected bonds, a sign that some investors see potential for consumer prices to rise.
What folks who watch the Dow for a living are saying…
“Right now and for the foreseeable future, the U.S. is in quite a strong position economically. Even if growth slows, the expectation seems to be that we avoid a recession.”
- Ryan Larson, head of U.S. equity trading at RBC Global Asset Management.
“I’m a little more confident that we’ve got something real going on. This is not just a few mega-cap names catching a bid.”
- Norm Conley, CEO and chief investment officer at JAG Capital Management
“We still think the U.S. is a good place to invest. As everything has stabilized, clients are getting more confident.”
- Jake Halladay, managing director at Bel Air Investment Advisors
What folks with an ear to the Street are saying…
“The Kraft Heinz experiment in radical cost-cutting has failed. For the broader food industry, investments in innovation and brand-building are coming back into style. Investors and companies must now adjust accordingly.”
- Heard on the Street columnists Aaron Back and Carol Ryan
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