Berkshire Hathaway (aka Warren Buffett) is best known for buying highly successful companies with very high-quality products run by people who have accumulated a deep understanding of all aspects of the business, and then lets those people continue to run the business just as they have in the past.
3G is a Brazilian-American private equity firm with a reputation for buying just about any company that has good products but is struggling from excessive cost and bureaucracy. They then begin doing the one and only thing they seem to know; cutting cost via massive layoffs, simplifying the organization, and installing a draconian cost management mentality. They tend to pay no attention to the products, consumer trends, or the retail channel; and have no expertise in these areas.
Given the significant strategic difference in these two firms, it was a huge surprise to Wall Street when, in 2013, Berkshire partnered with 3G to pay $23.6 billion for H. J. Heinz. In 2015 Berkshire and 3G helped financed Heinz’s $49 billion merger with Kraft Foods.
Very recently, the inevitable happened; the stock price of Kraft Heinz dropped 27% in one day, resulting in Kraft Heinz losing $16 billion of its market value, when it announced a barrage of negative news, including large write-downs on its well-known brands. In addition to the write-downs, the company also disclosed an investigation by federal securities regulators and slashed its dividend.
Why did this happen? It’s simple. Kraft Heinz failed to keep up with consumer shifts to simpler ingredients and healthier foods. Many of the company’s brands, like Oscar Mayer hot dogs, Kraft Mac & Cheese, Jell-O deserts and Kool-Aid drink mix clash with the growing interest of consumers in healthier foods..
Stepping back, the core problem is that Berkshire simply let 3G manage the Kraft Heinz business, and as mentioned above, 3G seems to know only one approach, the same thing most all private equity companies typically do; cut cost and then cut some more! On the other hand, many private equity companies are smart enough to realize what they don’t know (product, marketing, retail channel) and sell or take the company public after the cost and bureaucracy are cleaned up.
3G’s private equity mentality was vividly on display at the recent announcement of the disastrous Kraft Heinz results when they said they would tackle the problems by ”paring down some of their businesses and selling some brands that have the biggest profit problems.” Net, 3G was going to cut more, since that seems to be is their one and only skill!
What in the world was Berkshire thinking when it partnered with 3G? The lesson is clear; don’t partner with people that simply don’t share your values and basic principles that have led you to success.