Posts made in February, 2019

The Gut Squeeze Strategy Fails

The Gut Squeeze Strategy Fails

By on Feb 26, 2019 in Business | 0 comments

By David Aaker Published on February 25, 2019 On Friday, February 22, 2019 the stock of Kraft Heinz, the firm put together in mid-2015 by 3G, a Brazilian private equity group, fell over 25% in a single day to around $35 which was 44% of its initial price and 36% of its highest price in late 2017. The business plan of 3G Capital to “Buy Squeeze Repeat,” as Fortune once described it, dramatically and visibly failed. By ruthlessly reducing headcount and operational expenses to improve operating margins, profits and, most important, per-share earnings, 3G guts brand-building assets and budgets, and squeezes growth initiatives and investments. The predictable results at Kraft Heinz were short-term financial gains at the expense of long-term health and performance. It was always surprising that Warren Buffet, the very symbol of long-term investing would be involved in this 3G venture. The 3G methods are extreme. During the first 15 months after buying Kraft, for example, the employee count went from 46,600 to 41,000 and overhead went from 18.1% to 11.1%. Just days after the purchase, ten top executives were fired (presumably replaced with 3G cost cutters), company planes were gone, everyone flew coach–all in the name of creating a cost-reduction-first culture. All programs and people were placed on zero-based budgeting systems with a “justify what you are worth” ongoing evaluation. It is hard for brand-building efforts to sustain programs that yield long-term benefits to withstand this myopic focus on cost. The sharp stock decline was caused in part by a $16 billion brand evaluation write-off that undoubtedly, when it was created, did not take into account the fact that a cost-first strategy eventually runs out of costs to cut and, in the meantime, damages brands instead of keeping them energized and relevant.  Of course, Kraft Heinz is living in a world where people are turning away from packaged goods to eat “fresh.” However, the other large packaged food firms are not suffering like Kraft Heinz. General Mills during that same period saw its stock fall from 56 to 47 and Mondelez actually had a stock increase from 35 to 48. The good news is that other firms with strong brands are a bit less threatened by...

Read More