3G Capital has ‘cut costs excessively at the expense of market share' at Kraft Heinz, says investor

By Elaine Watson contact

- Last updated on GMT

Recent launches from Kraft Heinz include the O, That's Good! range of comfort food in association with Oprah Winfrey. Picture: Kraft Heinz
Recent launches from Kraft Heinz include the O, That's Good! range of comfort food in association with Oprah Winfrey. Picture: Kraft Heinz
Kraft Heinz stock is down 30% since its 2015 IPO. So, is 3G Capital - which manages the company and owns 22% of its stock – doing a lousy job, as one investor has suggested in an open letter to its board and shareholders this week? Or does the slump reflect other factors beyond 3G’s control?

According to Krupa Global Investments (KGI), which owns c.$100m in Kraft Heinz stock, and has been organizing demonstrations outside the offices of Warren Buffett (Berkshire Hathaway) in Omaha and 3G Capital in New York (the company’s two largest shareholders), “investors deserve better​.”   

In the open letter​ penned on September 4, KGI contends that 3G Capital has “cut costs excessively at the expense of market share​” while failing to make strategic acquisitions to help the company meet changing consumer demands.

3G Capital has failed to effectively make strategic acquisitions. Instead of aiming for behemoth acquisitions like Unilever, why not aim for food companies whose brands tap into emerging high margin food trends including healthy foods and beverages?”

KGI also takes issue with Buffett's “failure to take an active role​” (he stepped down from the board earlier this year), urges him to rejoin the board, and says Kraft Heinz should be taken private to allow it to “make long term investments which are necessary for growth but difficult to justify amid day to day stock market pressures​.”

Bernstein: Share drop reflects lack of large deal, rather than mismanagement

But is this criticism fair?

Alexia Howard, senior research analyst, at Bernstein noted that with a $100m stake in a company with a market cap of close to $70bn, KGI was a “relatively small” ​shareholder.

While the performance since the IPO has been disappointing, this is likely because of the lack of a larger-scale deal, which investors had been expecting, particularly since the failed Unilever bid in early 2017, rather than mismanagement by the company of the fundamental business,” ​she told FoodNavigator-USA.

“Many US-centric food companies have struggled to retain consumer interest in recent years in the US, as concerns over additives, other ingredients and processing methods have led shoppers to become more distrustful of big, established food brands. 

“These problems have been exacerbated as retailers have begun to become more price competitive more recently, particularly in the wake of the Amazon-Whole Foods market deal last year. And while Kraft Heinz has had similar troubles to its peers in the US, its overseas business remains strong.”

"At Kraft Heinz, our No. 1 priority is a relentless focus on driving long-term value and doing what’s best for all shareholders and the Company. We always welcome feedback from our shareholders and investors, and are happy to meet with Krupa Global Investments to discuss the many ongoing investments we’re making to support our iconic brands and to drive growth."

Michael Mullen, SVP corporate and government affairs, The Kraft Heinz Company

Kraft Heinz: Targeting top line growth in the third quarter in the US

Speaking on the firm’s Q2 earnings call in early August after posting a modest 0.7% increase in group net sales vs Q2 the previous year, CEO Benando Hees said that the picture was improving in the US (where sales were down 1.9% YoY): “We saw consumption trends improve as Q2 unfolded… we're targeting top line growth in the third quarter.”

just-crack-an-egg-Kraft-Heinz

He also highlighted new products including Oscar Mayer meat and cheese plates​, Heinz Real Mayonnaise, Planters Crunchers​, new Capri Sun products, O, That’s Good​! products with Oprah Winfrey, and Just Crack an Egg​, the latter generating “velocities roughly two times our estimates."

He added: "This is by far the strongest innovation pipeline we have had in place in our short history as Kraft Heinz.”

Outside of traditional grocery retail, he said, Kraft Heinz is also investing more in c-stores, club stores, dollar stores, drugstores, gas stations, e-commerce, and foodservice:

“We have innovation distribution and assortment initiatives underway in foodservice to drive substantial incremental gains in each region, as well as in the e-commerce channel where, in the US alone, we're up more than 75% in both Q2 and through the first half.”

Read more about Kraft Heinz Springboard platform HERE​.

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