昨日阅读2小时，累积阅读668小时3G Capital discovers the limits of cost-cutting and debt
NOT MANYconsumers have heard of 3G Capital, an investment fund, but it controls some ofthe planet’s best-known brands, including Heinz, Budweiser and Burger King. Inthe business world 3G has become widely admired for buying venerable firms andusing debt and surgical cost-cuts to boost their financial returns. But afterKraft Heinz, a 3G firm, revealed a $12.6bn quarterly loss on February 21st whatappeared to be a successful strategy suddenly looks like a fiasco.Theimplications reach beyond Kraft Heinz. In total, 3G-run firms owe at least$150bn (3G’s founders hold direct stakes in some firms while others are held by3G’s investment funds; for simplicity, it makes sense to lump them together andcall them 3G). Notable investors have got not just egg, but ketchup, on theirfaces—Warren Buffett’s investment firm, Berkshire Hathaway, lost $2.7bn on itsKraft Heinz shares in 2018. There is a queasy sense that 3G’s approach ofdealmaking, squeezing costs and heavy debts, can be found at an alarming numberof other firms.Leveraged takeovers are nothing new. In the 1980s raiders suchas James Goldsmith terrorised boardrooms while private-equity tycoons launchedbuy-outs, most famously of RJR Nabisco in 1988. With its roots in Brazil, 3Ghas brought twists of its own to such barbarism. One is the scale of itsdealmaking. It is history’s second-most acquisitive firm, after Blackstone,with $480bn of takeover bids, including the purchases of Anheuser Busch and SABMiller. Another is its distinct style of buying popular brands witholigopolistic market shares. It believes that competition in such industries ismuted and that consumers will reliably drink beer and eat beans for ever: Budwas, after all, founded in 1876 and Heinz in 1869. And since 3G is confidentthat sales will remain steady, it then loads firms with debt and cuts costsusing zero-based budgeting, a technique that requires managers to justify everydollar of spending from scratch each year and reinvest only some of the savingsin the best brands.It sounds plausible and it worked for a time—indeed therestaurant division is still performing reasonably. But recently problems haveemerged elsewhere. Consumers are getting more fickle and are switching toindependent beer brands and healthier food (see article). Competitors haveraised their game; supermarkets are promoting cheaper white-label brands whilee-commerce has given a leg up to insurgent brands. And capital markets haveadapted. Investors have urged other firms to copy 3G’s cost-cutting tactics, evenas takeover targets have got pricier because investors expect 3G to pay topdollar for them.Signs of trouble emerged in October, when AB InBev, 3G’s beerarm, cut its dividend. Although it is still growing overall, in North Americaits volumes and profits shrank in 2018. Meanwhile, Kraft Heinz’s recent woeshave led it to cut its dividend and warn that profits in 2019 would fall.Alarmingly, this doesn’t seem a mere blip: it wrote down $15bn of acquisitioncosts. For good measure it also said that regulators are investigating itsaccounting. Neither AB InBev nor Kraft Heinz is likely to go bust, but in thelong run they might end up being broken up yet again.Cost-cutting is essentialin mature industries. The process of reallocating labour and capital away fromdeclining products and towards new ones, as well as to new firms, is whatboosts productivity. Nonetheless, managers have to get the mix right betweenslashing expenses and investing for growth, while maintaining an appropriatelevel of debt. Kraft Heinz has failed on both counts. It now forecasts thatgross operating profit in 2019 will be slightly lower than in 2014, before thetwo firms merged, while its balance-sheet is creaking.Far from being anexception, Kraft Heinz is a super-sized version of the strategy of much ofcorporate America over the past decade. Although sales have been sluggish, 66%of firms in the S&P 500 index have raised their margins and 68% have raisedtheir leverage since 2008. A mania for deals in mature industries, premised ondebt and austerity, is in full swing. AT&T has bought Time Warner, Disneyis buying Fox and Bristol-Myers Squibb, Celgene. These three deals aloneinvolve over $110bn of extra net debt and envision a $6bn cut in total annualcosts.Perhaps the good times will roll on. But there have already been two bigblow-ups of acquisitive, indebted firms: Valeant, a drugmaker, in 2015-16; and,in 2017-18, General Electric, which has just sold its biopharma arm in order tocut its borrowings. There have been lucky escapes, too. In 2017 Kraft Heinz and3G tried to buy Unilever for cash and stock for about $140bn. It was onlythanks to a determined fight by Unilever’s managers, not its shareholders, thatKraft Heinz withdrew.Any time a firm has a string of successes, boards andinvestors tend to drink the Kool-Aid (another Kraft Heinz brand). In fact theirunsentimental collective task is to enforce discipline and to block bids byover-extended firms. Since the end of 2016 the value of 3G’s portfolio hasdropped by about a third, lagging far behind both the S&P 500 and food andbeverage firms. Shares of Kraft Heinz have underperformed Unilever by anincredible 84 percentage points since the failed takeover bid. That’s enough tomake you choke on your beer and burger.
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