Was the 3G Kraft Heinz Mega-Merger Destined to Fail?

Marketers blame cost-cutting and a lack of innovation

The company reported a $15.4 billion write-off in February. Trent Joaquin, Getty Images

It all looked perfect on paper.

Between 2013 and 2015, 3G—the Brazilian private equity firm credited with “reinventing the consumer industry” by applying its deceptively simple “cost-cutting and deal-making” approach to Burger King and AB InBev—teamed up with Warren Buffett’s Berkshire Hathaway to acquire and unite packaged-goods giants Kraft and Heinz. The move brought classic brands like Velveeta, Kool-Aid, Oscar Meyer and Heinz Ketchup together in a mega-merger that promised to deliver for consumers and investors alike.

But something went very wrong along the way.

On Feb. 21, Kraft Heinz announced a $15.4 billion write-off amounting to almost a quarter of its total value while simultaneously confirming an SEC investigation into accounting and procurement practices. Stock prices dropped 30 percent in 24 hours.

Buffett acknowledged in subsequent media appearances that he and 3G had overvalued the properties. But industry experts believe a misunderstanding of today’s marketing landscape also played a significant role in facilitating the dramatic dive.

Michael Farmer, former Bain & Company director and author of the bestseller Madison Avenue Manslaughter, cited three key factors: a generational preference for healthier, locally sourced foods; the rise of ecommerce as consumers abandon supermarket aisles; and a new media mix that no longer ensures returns on big-budget TV campaigns.

Others, meanwhile, noted a perceived failure by 3G to invest in building brand equity. The firm slashed budgets, eliminated hundreds of marketing jobs and cut more than 10 ad agencies from Kraft’s roster before the Heinz merger. One former employee in Popeyes’ marketing department said the majority of that team left following 3G’s takeover. Still other industry observers thought 3G believed the brands in question to be so big that they would all but sell themselves. 

“They didn’t pay attention to what was going on around them in the world,” said Farmer, calling 3G’s approach “naive.” Some of the key parties involved in the deal now seem to agree; 3G co-founder Jorge Paulo Lemann described himself as “a terrified dinosaur” at last year’s Milken Institute conference.

“There are no iconic brands in 2019,” added John Durham, CEO of consultancy Catalyst S+F and former executive at media agency Carat. “You can’t rest on your laurels, because you’ll get your ass kicked.”

The financial pendulum swings

Based on Adweek’s conversations with agency executives, marketers and analysts, many would like to use the Kraft Heinz write-off as a teachable moment to prove cost cutting alone is not a viable path to profitability.

One top holding-company executive said anxious CPG clients have expressed hope in recent weeks that 3G’s struggles might persuade their own bosses to resist pressure from activist investors and place more capital in their own brands.

“I compare it to the moment when Pepsi got all that blowback after the Kendall Jenner ad, and agency people pointed and said, ‘See, in-housing doesn’t work,’” noted Jay Pattisall, chief analyst at Forrester.

But Pattisall and his fellow industry observers see this event as a momentary distraction from CPG’s years-long “trimming the fat” narrative. As GroupM global president of business intelligence Brian Wieser put it, “The ongoing pursuit of efficiencies is just a natural course of being.”

3G’s “zero-based budgeting” philosophy, which requires companies to justify individual expenses anew each year, serves as a convenient scapegoat for those seeking vindication. But Kraft Heinz CMO and global brand officer Eduardo Luz said it’s an effective strategy that comes down to separating “core” and “non-core” expenses.

“What we call non-core is everything that we do that consumers and customers don’t care about,” he said, citing “fancy offices” and private jets for executive travel.

As evidence of the ideology at work, Luz pointed to the Super Bowl spot for Kraft Heinz’s frozen food brand Devour.

“Where did the $5 million come from to fund Devour’s Super Bowl ad?” he asked. “ZBB allows us to be very disciplined with the non-core to fund the core.”

For others, 3G’s cost-cutting ways hit closer to home. A source familiar with the company said its policies can be “punitive,” and a Kraft Heinz employee who spoke to Adweek on condition of anonymity said it places extremely strict regulations on expensing items like meals, corporate travel or computer software.

“[My previous employer] would provide you simple things like supplies,” the employee said. “At Kraft, there’s no supply room. You can’t even find a pen lying around.” The cuts are so deep that this staffer believes they could have an adverse effect on productivity and motivation, pointing to Kraft’s refusal to pay for basic office needs, such as a second monitor, as well as employee certifications that are typically viewed as industry standards.

“I think it’s ridiculous,” she said. “Wouldn’t you want to invest in your employees and make them certified?”

The employee acknowledged that cuts to superfluous spending can potentially “save [Kraft] a lot of money” over time. Wieser also argued that zero-based budgeting works, “but not if the goals are short-term savings.”

“When it comes to brands, longer-term horizons matter,” he added.

CPG companies face a catch-22, because they benefit disproportionately from marketing while facing constant pressure from investors to increase margins. And agency services are usually among the first to get cut.

“No CEO wants to invest in marketing, because it’s a gamble,” said Farmer. “On the contrary, there’s 100 percent certainty that every dollar you take out of costs has a positive impact on your share price.”

Luz admits that not all of Kraft Heinz’s moves have paid off. “Do we get it right all the time? Of course not,” he said. “Sometimes we bet on something that doesn’t hit. We try to learn and move on.”

In a 2018 op-ed, Farmer wrote that “tinkering with budgets in the name of ZBB discredits the methodology,” which has proven successful many times since emerging in the 1970s. He believes the reason it didn’t work for Kraft Heinz is that its brands weren’t growing—and hadn’t been for some time—largely because products like Velveeta are “perceived by the younger generation to be full of chemicals and completely fake.”

A new kind of consumer

Marketers may roll their eyes upon hearing, yet again, about millennials’ passion for purpose and organic ingredients—but the behavioral shift is impossible to ignore. The source close to the business said legacy brands like the ones under the Kraft Heinz umbrella can find themselves “in need of an injection of culture” to address these constantly evolving tastes.

FIG founder Mark Figliulo served as chief creative officer at TBWA\Chiat\Day New York before it became one of the many agencies stripped from Kraft’s roster in late 2014 ahead of the Heinz merger.

The key lesson he drew from February’s implosion is the need for clients to focus more intently on product development. Naming direct-to-consumer challenger brand Casper as an example, he said companies with truly unique offerings “will want to shout it from the rooftops,” thereby creating more work for their agency partners. 

Vaughan Emsley, founder of CPG consultancy Cleanup on Aisle 7, who worked on the Procter & Gamble account during much of his 25-year stint at Saatchi & Saatchi London, called this approach “the big difference” between Kraft Heinz and P&G, which has stood its ground by “introducing new products like Swiffer while innovating on power brands like Tide, Head & Shoulders and Pampers on a regular basis.”

When asked for examples of such innovation, Luz pointed to Devour, SmartMade frozen meals, Ore-Ida’s Just Crack an Egg breakfast kits and the self-explanatory hybrid known as “Mayochup.”

“Not everyone is eating goat cheese hand-strained by Tibetan monks,” Emsley joked when referring to wellness trends. But he still believes Kraft Heinz, like so many packaged-food makers, has failed to keep up with consumer tastes despite being all too aware of the challenges they present.

“Even 30 years ago, they were concerned about attitudes toward processed food,” he said. “And, frankly, mixing ketchup and mayonnaise is not the answer.”

But while Luz said he views Kraft Heinz as a steward of the classic names in its portfolio and referred to those “150-year-old brands” as “a gift,” the unnamed source disputed the idea that the company has failed to understand the importance of creating new products. “They knew better than that,” this person said. “I think they did know that they were under siege because they could see their own share numbers. You can always see the sales trends for which products are in general trending down.”

“Those things don’t happen by accident,” Luz said of his company’s innovation efforts. “You need investment and vision to do that.”

When investments were made, consumers didn’t seem to care. In 2016, Kraft Mac & Cheese ran a campaign highlighting the quiet removal of artificial colors and preservatives, implying that this move went unnoticed because it had no effect on the taste of the food. But sales did not increase enough to counter the prior loss of market share.

“They owned mac and cheese for centuries, and now you can walk into Whole Foods, Vons or Safeway and buy mac and cheese seven different ways,” Durham, the consultant, said. “Why would I go and get Kraft when I can get fresh, interesting, innovative meals?”

Calling out distribution issues, Durham also told Adweek that he was unable to find the Mayochup product at local retailers like Walgreens when it launched, while competitors such as Hellman’s “made sure that they still had placement.” (For the record, he acknowledged keeping Heinz ketchup and mustard in his refrigerator and said he sought out the mayonnaise hybrid to satiate his curiosity.)

Durham also noted that his own employees swear by meal services like Hello Fresh and Blue Apron to feed their families, suggesting Kraft would do better partnering with such brands to provide ingredients for their meals rather than pivoting toward a more health-conscious audience.

But making these sorts of changes is no small feat: The anonymous industry source added that food innovations can be particularly tricky due to the hurdles involved in the product-approval process.

“The innovation pipeline for food is long because of food safety,” she said. “It takes years to get a new product launch. You have to really have a lot in your pipeline and you have to be able to throw out the things that aren’t good pretty early, and sometimes that’s hard for companies to do.”

The new (social) media mix

Kraft Heinz remains a major investor in traditional media, running two ads in the last Super Bowl and spending just over $525 million promoting its entire brand portfolio in the U.S. in 2018, according to Kantar Media. But like so many competitors, its approach to digital and social is evolving—with sometimes mixed results.

Durham recently told students in his MBA class at the University of San Francisco to visit area stores, pick three brands that stood out and examine their social media profiles. “Out of 44 students, not one picked a Kraft Heinz brand,” he said. Instead, they favored regional offerings that know “how to use social media in a strong way.”

In a late-January LinkedIn post making “the case for Kraft Heinz,” Luz pointed to the Twitter launch of Mayochup as an example of “hacking an online debate” to keep its brands “timely in culture.”

Some of Kraft Heinz’s other brands, like Planters, are also very active on social. Mascot Mr. Peanut promises to be there “in crunch time,” and his agency, VaynerMedia, earned 15,000 likes for a tweet responding to a February incident that landed Nike in hot water after Duke basketball player Zion Williamson’s shoe broke during a game against North Carolina.

Here’s the legume-flavored mockup.

Other Kraft names, however, are quiet. Kool-Aid went three years without a single Instagram post, while Maxwell House has published just 10 times.

“We’re learning a lot about the dynamic that you have to infuse your brands [with] to have a voice that makes sense, and to build not only audiences, but relevance, memory and emotional structures is different,” said Luz.

According to Fred Cook, director of the Center for Public Relations at University of Southern California and chairman of IPG firm Golin, the big problem facing such companies is that mass-market advertising simply isn’t as effective as it was in Kraft’s heyday.

“I don’t think brand loyalty exists the way it once did,” Cook said, describing his students as “unfazed” by campaigns for brands like KFC that entertain them with high-quality creative but play little part in driving purchase decisions. “They’re more interested in the authenticity of what’s being offered.”

Citing a recent survey that placed social first and traditional advertising last on a list of priorities for CMOs and chief communications officers, he said brands must now “make news” of their own by—surprise—developing new products or making significant changes to their existing lines.

The most engaging Kraft Heinz brand on Instagram appears to be Oscar Meyer, whose account consists entirely of pictures of everyday users alongside the famous Weinermobile.

Kraft Heinz’s hit-or-miss performance on social is hardly unique.

“Nobody has really figured out what combination of traditional, digital and social works,” said Farmer, who told Adweek that the agencies consulting with his firm often admit, behind closed doors, that they simply don’t know what drives growth for clients.

It’s good to be the King

Although nearly everyone who contributed to this story has issues with 3G’s lean-and-mean approach, they all agree that Burger King has been an unequivocal success for the company. It’s also one case where 3G has made substantial investments in brand marketing. Burger King continues to earn plaudits like Creative Marketer of the Year at Cannes Lions in 2017 and Adweek’s Brand Genius for 2018.

“We don’t have any forum that connects us to anyone like Burger King or [parent network Restaurant Brands International],” said Luz. “We are completely in charge and in power to make decisions on behalf of our business and brands within Kraft Heinz.”

This separation, combined with an intense desire to one-up BK’s archrival, McDonald’s, may explain the difference in philosophy that led Durham to praise the chain’s “wildly creative and bizarre” marketing work. He noted that the Super Bowl ad consisting of found footage of Andy Warhol eating a Whopper inspired far more conversations than Devour’s effort, even though he called it “the dumbest idea I’ve ever heard of.” 

Burger King also spent $337 million on marketing in the U.S. last year, which is less than half the Golden Arches’ total but significantly more than any single brand in the Kraft Heinz family. A representative for the Burger King brand declined to comment for this story.

Ultimately, the challenges facing Kraft Heinz are very similar to those limiting growth at every packaged goods conglomerate.

“This shoe is going to drop for other companies too—the Mondelez’s, Kellogg’s and General Mills of the world who are late to the innovation game,” said Vaughan Emsley.

Fred Cook compared Kraft Heinz to Sears, another “storied brand” that “almost disappeared” after struggling to adapt to new trends, merging with Walmart, selling portions of its business to private equity firms and declaring bankruptcy in 2018.

“Their only answer is to buy the smaller players,” he said. “Then they bring them into the portfolio, try to squeeze profits out of them and ultimately they suffer the same fate.”

It is unclear whether marketers and agency leads can use the case of 3G and Kraft Heinz as a call to action in turning their rhetoric about creativity and innovation into reality. Meanwhile, cost cuts will almost certainly continue to dominate as the endless pursuit of ever-greater profit shows no sign of slowing.

@PatrickCoffee patrick.coffee@adweek.com Patrick Coffee is a senior editor for Adweek.
@dianapearl_ diana.pearl@adweek.com Diana is the brand marketing editor at Adweek and managing editor of Brandweek.