3G's Creative Destruction Of Kraft/Heinz

We've all read plenty about the whopper of a merger between Kraft and Heinz, creating the third-largest food and beverage company in North America and fifth-largest in the world. The question I'd like to explore is, "Is it a good thing or a bad thing?"

On the "good" side:

  • Undoubtedly good for Kraft shareholders who, since the news, have already seen a nice jump in the value of their shares
  • Good for 3G and Warren Buffet who, after reducing costs at Heinz faster than sales have fallen, are proving their model for extracting value out of underperforming assets, works (at least in the short run) and moving it onto more assets
  • Good if you've got brand management responsibilities for some of these iconic American brands in international markets
  • A good demo of survival-of-the-fittest capitalism at its best — when the beast gets a little old and slow, it rightfully becomes fuel for the strong



On the "bad" side;

  • Bad if you're a senior executive at either of these firms who has spent the better part of a career trying to grow the firm's brands. This merger is about cost cutting, not investing in attempts to grow mature brands, at least not in the United States. Did that single spot for Heinz ketchup in the Super Bowl convince anyone of 3G's commitment to invest in marketing?
  • Bad if you're a worker at any of the many factories processing Kraft's foods who will undoubtedly lose their jobs due to cost-cutting closures
  • Bad, if as part of the growing middle class in many international markets, you start adopting a highly processed, American diet (see Colin Campbell's The China Study).

There's plenty to like, and hate, about these deals. People get hurt. People get rich. So it kind of comes down to the side of the political spectrum on which you tend to sit. If you're a hard-boiled capitalist, you see this kind of "creative destruction" as an example of laissez-faire capitalism working its magic — breaking up under-performing assets and reallocating them to some more efficient and more profitable investment. If you're more of a "safety net" believer, you hate the way people get ground up and spit out in this kind of merger, and want to see some softer landing for folks.

In a dog-eat-dog world, the model wielded by 3G and backed by Buffet is ruthlessly efficient. It strips a slow-growth enterprise of its excess baggage and makes a lot of money doing it. We don't know yet what the end game is. Do they ultimately sell off the remaining assets and move onto another bloated organization, or do they eventually change the model and start focusing on growth? The purchase of Kraft suggests that they are not about to change the model, but rather port it over to other assets. It's the model they know how to wield better than anyone else right now. The chum is in the water. Expect more mega food and beverage mergers now that 3G has set a new benchmark and shown a way for generating higher value from Big Food brands. It's free market capitalism at its efficient best — as long as you're not caught in the middle of it.

1 comment about "3G's Creative Destruction Of Kraft/Heinz".
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  1. Stephen Reily from IMC/Vibrant Nation, April 10, 2015 at 2:21 p.m.

    Great analysis.  The sad point, from either end of the political spectrum, is that running either of CPG businesses with a strong spirit of innovation and growth is the best way to serve shareholders AND keep the efficiency vultures at bay.  Employees will now pay the price for decades of risk-averse complacency by executives and boards who couldn't adapt to new markets, new trends, and a changing consumer landscape.

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