Berkshire Hathaway’s newest investment partner also happens to be a serial cost cutter that may ultimately end up destroying growth over the long term in order to earn profits in the short term, and this is based on a confidential report that was recently completed about the firm 3G Capital.
The company that bought Heinz with Warren Buffett in June 2013 – that also happened to fire nearly 90% of the senior executives on the team – has watched its market share of Heinz Ore-Ida frozen potatoes, as an example, drop from 47.6% to 44.6% from just one year earlier in the first quarter of 2014. We learn this information from high profile consulting firm McKinsey & Co. But Heinz profitability did increase during that period.
The way that 3G severely cuts costs is quite the contrast to the reputation of Warren Buffett as much more of a reasonable manager, and someone who puts long-term success over gains in the short term.
3G Capital owns a couple of other iconic American brands including Burger King and Anheuser-Busch. It is even in the process of acquiring Kraft.
The difference in philosophies between Warren Buffett and 3G Capital has recently begun to cause pain among some of the Berkshire Hathaway investors.
During the Berkshire Hathaway annual meeting, during the Q&A session, Buffett had to defend 3G by saying that it “cuts costs humanely.”
Buffett mentions that 3G has reduced some of the jobs at the companies that it acquires, but then they do better than that. But the McKinsey report that came out in February paints a much harsher picture.
At Anheuser-Busch, as an example, the company has implemented severe cost-cutting that ultimately resulted in a drop in the United States beer market share from 42.9% to 40.5% in 2009. The biggest hits were from major brands Bud Light and Budweiser, where each beer lost about 1 ½% of total market share according to McKinsey.
The decline in market share is in line with other large brewers, which just like Anheuser-Busch, are losing out to other craft beers that are emerging.
Some other important things to note:
- A prior executive at Burger King said, “3G cuts so deep that they took out the entire level of service for franchisees, who need motivation, influence, and training to maintain the brands.” The goal of 3G is to use some of the money that it is saving with layoffs as a way to boost its advertising.
- A former senior executive at Heinz told McKinsey, “after terminating the first 600 employees [at headquarters], there was unrest, so they offered the remaining 1200 voluntary buyouts. They thought only 10% would accept, but 40% did.”
- McKinsey also found out that the cost-cutting is eating into the everyday habits of employees. As an example, 3G told the workers at Anheuser-Busch that ate at their desks that they shouldn’t throw their food away, because it would attract rodents. They said this because the cleaning crews are only going to show up once a week according to the report.
Regardless, the records show that 3G – which reports claim is “paranoid about costs and expenses” – doesn’t often improve market share or sales according to the report.
The report concludes saying that 3G capital has created a great deal of operational value, as their companies have improved margins greatly, but this model is ultimately prone to risks to brand health, in particular it’s a risk to future growth.