But the problem for now is that for the most part big brands are
not growing as fast as they once did. So to maintain profit margins
and satisfy Wall Street, marketers are undertaking seismic
cost-cutting programs that could imperil long-term brand growth.
The cuts are occurring under the shadow of 3G Capital, a
private-equity firm known for orchestrating takeover deals and then
squeezing out cost-savings from the acquired companies.
The 3G effect
In 2013, 3G teamed with Warren Buffett's Berkshire
Hathaway to acquire H.J. Heinz, which has since eliminated some
3,800 positions. Earlier this year the new Heinz announced plans to
acquire Kraft Foods Group, spreading fears inside Kraft and beyond
that 3G could again wield its knife. In a recent note to employees,
Kraft CEO John Cahill said the company is considering implementing
"zero-based-budgeting." The method, which is emerging as a popular
tool for struggling food companies, involves making departments
justify all of their expenses every year.
"3G and Buffett have pulverized the food industry market,
particularly in America with serial acquisitions," Nestle Chairman
Peter Brabeck-Letmathe said at a shareholder meeting in April.
"3G's partners are known in our industry for ruthless cost-cutting
and have already proven numerous times that they are capable of
reducing operating costs in particular by between 500 and 800 basis
points, which has a revolutionary impact on all the other members
of the industry."
While part of 3G's methods include reinvesting cost-savings back
into marketing, the verdict is still out on the firm's approach.
"3G's focus on short-term profitability and cash flows does pose
risks to brand health, particularly to future growth," according to
a discussion document on the firm by McKinsey & Co. obtained by
Ad Age. McKinsey quoted an unnamed former Heinz exec as recounting
how 3G even dictated the number of pencils and other office
supplies allowed to be purchased. "It's not a fun place to work;
you can get some culture blowback," the person said.
But McKinsey also listed plenty of positives about 3G, saying
its affiliated companies provide an attractive setting for
"high-performing individuals." The document noted that brands
slated for cost-cutting have had "minimal consumer backlash to
date." Sometimes brands get more media support under 3G, like
Heinz-branded ketchup and condiments (with a new campaign, shown
above), which increased spending from $2.3 million in 2013 to $15.7
million in 2014, according to Kantar Media.
3G did not respond to a request for comment by press time.
Cutting too deeply can risk harming a company's "fundamental
source of value," such as organizational capabilities, said David
Garfield, managing director and co-leader of the consumer products
practice at AlixParners, a global business advisory firm. But
"given all of the challenges in the marketplace," including sagging
demand, "just continuing on with business as usual, even with nips
and tucks, is not going to yield sufficient breakout performance,"
Buying their way in
One way forward is to scoop up smaller, faster-growing brands that
have a built-in foodie following.
ConAgra, known for iconic frozen food brands like Marie
Callender's and Banquet, in May acquired Blake's All Natural Foods,
which makes natural and organic frozen meals like pot pies and
casseroles. The acquisition came after the company last year
basically conceded that it had wasted money trying to lure
millennial consumers to three of its largest brands: Healthy
Choice, Chef Boyardee and Orville Redenbacher's.