Heinz, Kraft and Warren Buffett

Summary

Unhedged Podcast Episode Summary

Title: Heinz, Kraft and Warren Buffett
Release Date: July 15, 2025
Host: Rob Armstrong
Guest: John Foley, Editor of the Lex Column
Produced By: Financial Times & Pushkin Industries

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Introduction

In the July 15, 2025 episode of Unhedged, host Rob Armstrong is joined by John Foley, the editor of the Financial Times' Lex column, to delve into the intricate saga of Kraft Heinz and its association with Warren Buffett and 3G Capital. This episode provides listeners with a comprehensive analysis of the merger, its outcomes, and the broader implications for corporate structuring and brand management in the modern financial landscape.

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The Kraft Heinz Merger: A Decade in Review

Background of 3G Capital and Warren Buffett's Involvement The episode begins with a historical overview of the merger between Kraft and Heinz, highlighting the pivotal role played by 3G Capital and Warren Buffett. In 2013, 3G Capital, a private equity firm known for its aggressive cost-cutting strategies, partnered with Buffett to acquire Heinz.

Rob Armstrong (02:38): "Now everybody knows who Warren Buffett is. Tell us a little bit about 3G."

John Foley (02:38): "3G is a private equity firm founded by some Brazilian financiers that had this idea that you could ruthlessly cut costs at big, mostly consumer-facing companies using a thing called zero-based budgeting."

Zero-Based Budgeting and Cost-Cutting Measures John Foley explains 3G Capital's strategy of zero-based budgeting, which involves justifying every department’s expenses from scratch each year. This approach, while radical, has been a cornerstone of 3G’s methodology in streamlining operations and enhancing profitability.

John Foley (03:07): "They rolled out ruthless cost-cutting measures, firing up to 20% of staff to improve operating margins."

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Operating Margins and Initial Success

Following the merger in 2015, Kraft Heinz initially saw a surge in operating margins, skyrocketing from 15% at Heinz to an impressive 27%. This dramatic improvement garnered praise, with many lauding it as a triumph of capitalist efficiency.

Rob Armstrong (05:04): "The operating margin jumped to 27%. People were like, 'These guys have figured out capitalism.'"

Cultural Integration and Management Practices The merger wasn't just a financial maneuver; it was also a cultural blend. Foley recounts the introduction of 3G’s corporate culture, marked by monogrammed shirts and a relentless focus on efficiency.

John Foley (06:23): "They introduced a cult-like culture with Kraft Heinz branded shirts, emphasizing their unique way of thinking and operational efficiency."

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The Downfall: Changing Market Dynamics and Scandals

Shifts in Consumer Preferences Despite initial successes, Kraft Heinz began facing significant challenges as consumer preferences shifted away from traditional packaged condiments like ketchup. The public started favoring niche and alternative brands, undermining Kraft Heinz’s growth.

Rob Armstrong (07:04): "Americans started eating less ketchup. People wanted salsa, hot sauce, and more niche brands instead of Staples like Heinz ketchup."

Retailer Dominance and Pricing Pressure Consolidation in the retail sector, led by giants like Walmart, gave retailers unprecedented control over pricing, forcing Kraft Heinz to lower prices and erode profit margins.

John Foley (07:00): "Retailers used their bargaining power to dictate prices, turning Heinz into more of a loss leader than a profitable staple."

Accounting Scandal and Financial Struggles The situation worsened with an accounting scandal where Kraft Heinz was found to have misrepresented cost savings, leading to a significant stock price drop.

Rob Armstrong (09:23): "When the SEC investigated our accounting, the stock plummeted by 25%. It was a shocking blow."

By 2025, sales had stagnated, and profit margins had declined from a high of 27% to approximately 20%, reflecting the compounded impact of internal mismanagement and external market pressures.

Rob Armstrong (10:03): "Their sales have been flat at about $26 billion a year, which is a failure in a sector typically buoyed by food inflation."

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Lessons Learned: Corporate Strategy and Brand Management

The Impermanence of Strong Brands One of the key takeaways from the Kraft Heinz episode is the vulnerability of even the strongest consumer brands. Foley emphasizes that without continuous innovation and adaptation, brands can lose their market foothold.

John Foley (12:35): "Brands like Coca-Cola and Kraft Heinz need to evolve or face declining relevance. Good companies invest in new products alongside their legacy brands."

The Role of Leadership and Decision-Making The episode critiques the leadership approach of relying heavily on cost-cutting and mergers as a primary strategy for growth, rather than investing in innovation and adapting to market trends.

Rob Armstrong (14:10): "CEOs often merge and demerge companies as a way to appear proactive, but without a clear strategy beyond financial engineering, it leads to instability."

Warren Buffett’s Involvement: Mixed Outcomes Despite the turmoil at Kraft Heinz, Warren Buffett managed to secure a 60% return on his investment through strategic dividends and savvy stake management, showcasing his ability to mitigate losses even in flawed ventures.

John Foley (16:14): "Buffett's involvement resulted in a 60% return primarily due to dividends and strategic sales of his stakes, despite the company's struggles."

Rob Armstrong (17:12): "When Warren Buffett picks a stock, it's not always about the company’s future but the advantageous terms he secures."

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Final Thoughts and Future Outlook

Potential Splitting of Kraft Heinz The episode concludes with discussions about the possibility of Kraft Heinz splitting into separate entities, a move that could unlock value for shareholders by allowing different brands to thrive under specialized ownership.

John Foley (13:52): "There is a case for splitting Kraft Heinz, similar to how Kellogg's was divided between Mars and Ferrero."

Wider Implications for Corporate Mergers Foley and Armstrong reflect on the broader trend of mergers and demergers in the corporate world, questioning whether these moves are genuine strategic decisions or simply financial gymnastics.

Rob Armstrong (14:20): "This pattern of merging and splitting feels like playing with building blocks without a long-term vision."

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Notable Quotes

• Rob Armstrong (02:38): "Kraft Heinz is one of the more dramatic and convoluted corporate structuring stories."
• John Foley (03:07): "Zero-based budgeting is getting rid of staff. And that's what they do."
• Rob Armstrong (05:04): "These guys have figured out capitalism."
• John Foley (12:35): "Brands need to reinvest or you're asking for trouble."
• John Foley (16:14): "Buffett's upside is well protected."

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Conclusion

The Unhedged episode on Heinz, Kraft, and Warren Buffett serves as a compelling case study on the complexities of large-scale mergers, the risks of aggressive cost-cutting, and the importance of adapting to evolving consumer preferences. Through insightful analysis and expert commentary, Rob Armstrong and John Foley provide listeners with valuable lessons on corporate strategy, leadership, and brand management in the ever-changing financial landscape.

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Additional Segments

Following the main discussion, the episode transitions into the "Long and Short" segment where John Foley suggests going long on Bitcoin amidst upcoming legislative changes, while Rob Armstrong opts to go long on potential Trump-imposed tariffs, reflecting divergent investment strategies and highlighting the podcast's ongoing coverage of dynamic financial topics.

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Production Credits:
Unhedged is produced by Jake Harper, edited by Bryant Urstadt, with executive production by Jacob Goldstein. Special thanks to Laura Clark, Alistair Mackey, Greta Cohn, and Natalie Sadler. FT Premium subscribers can access the Unhedged newsletter for free with a 30-day trial at ft.com/unhedged-offer.

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For more insights into the world of finance and markets, subscribe to Unhedged on your preferred podcast platform.

Transcript

[PGM Representative]

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[Rob Armstrong]

Pushkin It's July grilling season in America. Hot dogs, hamburgers, ketchup, mustard. Today on the show, Sizzling on the Grill, we have a tale of Warren Buffett, condiments and private equity.

[John Foley]

And I've brought a six pack of non alcoholic Budweiser.

[Rob Armstrong]

This is Unhedged, the markets and finance podcast from the Financial Times and Pushkin, I am Rob Armstrong. I'm coming to you from a tropical and sweaty New York City. I am joined by the editor of the Lex column, John Foley, who is always cooler than the other side of the pillow.

[John Foley]

Rob Unhedged is the Egyptian cotton sheet of the financial podcast world and it is a pleasure to slip into it.

[Rob Armstrong]

What's the news John? What are we talking about today? What brings us here?

[John Foley]

So Rob, we're talking about Kraft Heinz, which seems to be thinking about breaking itself up into at least two parts, which is fascinating for those of us who have been following companies and M and A for many, many, many years because Kraft Heinz only got together about a decade ago through a merger of Kraft and Heinz. And it's one of the more dramatic and convoluted corporate structuring and restructuring stories that I've covered my time as a.

[Rob Armstrong]

I love this tale. And so let's get in the unhedged time machine and head back to 2013 when Heinz, which was then a successful, well known, if somewhat stodgy packaged food company, is purchased by a private equity firm called 3G Capital in cooperation with Warren Buffett. Now everybody knows who Warren Buffett is. Tell us a little bit about 3G.

[John Foley]

So 3G is a private equity firm founded by some Brazilian financiers that had this idea that you could ruthlessly cut costs at big, mostly consumer facing companies using a thing called zero based budgeting, which was a financial fad that picked up in the 70s and was championed by Jimmy Carter. So Jimmy Carter thought that it would be good to use zero based budgeting, which is where you basically make every department every year justify every cost from scratch.

[Rob Armstrong]

It was not a success for Jimmy Carter.

[John Foley]

No, it was not.

[Rob Armstrong]

He tried to be Doge before doge and it never took off.

[John Foley]

Well, it's not dissimilar from what Elon Musk and Doge are trying to do. So they tried to inflict that upon various companies. Actually, Heinz, they did it for Burger.

[Rob Armstrong]

King, most famously for beer. This was their first big success. Right. Again, I don't want to harp on how long we've been doing this, John, but when we were young men and beer drinking young men, you and I remember a world in which there were a lot of beer companies, and now there are not a lot of beer companies. And that is because of 3G, which rolled up like half of the world's beer companies into the monstrosity we now know as AB InBev. Right.

[John Foley]

So AB InBev was the pinnacle of this craze for crunching together beer companies. It was the merger of Anheuser Busch, which makes Budweiser, and InBev, which makes Stella Artois.

[Rob Armstrong]

Right. Among other things.

[John Foley]

And it was a real merger of cultures as well. Right?

[Rob Armstrong]

Yes.

[John Foley]

A family led U.S. business. The most American thing you can think of, Budweiser Y with Stella Artois, which is the least American thing you can think of.

[Rob Armstrong]

That was back in 2008. And it was seismic at the time. I remember the idea that Bud would be a global rather than an American company was just a shock.

[John Foley]

So they were riding high. And when Kraft and Heinz merged in 2015, this was seen as a great thing.

[Rob Armstrong]

Right. I want to make a minor point here. I'm rarely right about anything, as my friends know. But I did say when they bought Heinz, When Buffett and 3G bought Heinz in 2013, I said, I don't think this is a good deal. It looks like he's paid a lot of money, big premium for a company where there may not be that much cost to take out. But two years later, when Heinz goes on to buy Kraft, there is great excitement and the stock kind of goes bananas and amazing things happen.

[John Foley]

Right? And I think Kraft was trading at $36 billion. That was the size of the company before this deal. Heinz paid 52 billion for it. And by 2017, the merged company was worth almost 120 billion.

[Rob Armstrong]

One thing that is incredible to look at is the operating margin of this operation. So at Heinz, it was about 15%, which is a nice fat operating margin. I'll buy a 15% operating margin packaged goods company anytime, thank you very much. They merge it with Kraft, they 3G eyes it, and suddenly the margins, at least for a brief period. That's the sound of foreboding that you just heard go to like 27%. And people are like, these guys have figured out capitalism. That was the kind of hyperbolic talk you heard, like, this is the new capitalism. And people start looking around the world and saying, every business in the world has a third too much operating costs. These guys had fired like something like 20% of the staff at Heinz and the margins correspondingly went bananas. I was on Lex at the time and we were looking at every company in the world and we're like, maybe a third of all corporate operating costs are just bullshit.

[John Foley]

Yeah. And it's hard to overstate how much this was like a cultural thing as well. For 3G. I remember meeting years ago, the then CEO and CFO of Kraft Heinz and they showed up in these like adorable kind of monogrammed shirts with like Kraft Heinz like stitched into them and explained to me that this is what people wear.

[Rob Armstrong]

Yes.

[John Foley]

Because this is like a cult. But you go in and you are like, we are here to make this company work. You know, we have a way of thinking about the world and we're going to apply it here and then we're going to apply it to other companies. And then, as you say, everyone in the entire world will be doing zero.

[Rob Armstrong]

And if you look very closely at that little logo, it says Kraft Heinz and in small letters it says, you're fired.

[John Foley]

And a lot of people were fired, right?

[Rob Armstrong]

Yeah, yeah, yeah.

[John Foley]

Big part of zero based budgeting is getting rid of staff. And that's what they do.

[Rob Armstrong]

Yes. So it's kind of 2017ish. The margins are incredibly high. The company is lean and hungry, the stock price is high. And then looking back, they also got caught by two big trends. One of them is that Americans started eating less ketchup. I'm using ketchup as a kind of general category term. Like these big packaged foodie kind of stuff sort of went out of style. It was like, now we want salsa or hot sauce or even brands that are like Nichier rather than these classic grocery store staple kind of brands. And so that became a drag on growth. And second, there was an industrial change where in the heyday of kind of packaged foods, the packaged food companies themselves had a lot of control of the pricing. Where everybody wants the good brands. They want Hellman's mayonnaise, they want Heinz ketchup, they want French's mustard, they want Heinz baked beans would be a brand more familiar to people in the uk but as retail consolidated as an industry and came to be very much dominated not just by Walmart, but by other big chains, the Retailers grasped the whip hand over price, and I think this may have killed them even more than the change in customer preferences. That basically, if Walmart wanted to use Heinz as a kind of loss leader sale item, they could force that on Kraft Heinz to a degree.

[John Foley]

That also came alongside some other things that had less to do with retailers and more to do with Kraft Heinz. Like an accounting scandal.

[Rob Armstrong]

Yes.

[John Foley]

They had a ton of debt.

[Rob Armstrong]

Yes.

[John Foley]

I think the point being that they'd been a bit complacent, that they wouldn't have to also deal with a huge shift in the way people eat ketchup.

[Rob Armstrong]

Yeah. That accounting scandal, I don't remember very well, but ironically, it was about accounting for costs.

[John Foley]

Yeah. They. They'd basically fictionalized some cost savings.

[Rob Armstrong]

Yes.

[John Foley]

Which didn't make a huge difference to the numbers, but just made people think they weren't.

[Rob Armstrong]

But when that scandal came out, the stock went down by, like, a quarter. I don't know if you remember that day. It was like they had a kind of quarterly earnings release where they were like, A, sales are crap. And B, the SEC is investigating our.

[John Foley]

Accounting and we're writing down the value of our brands.

[Rob Armstrong]

And we're writing. And, like, 25% came off the stock. It was absolutely shocking. And if you look at the. The chart now, which I have before me, just of their sales, since 2016, sales have been flat at about $26 billion a year.

[John Foley]

Yeah.

[Rob Armstrong]

And by the way, as a food company, in the last 10 years, it's hard to keep sales from growing because we just had a massive food inflation. So their sales are flat in nominal terms. And like, if you look at Mondelez, mondelez was printing 10% increases in sales all through the pandemic, just on price increases. And Kraft Heinz apparently couldn't manage it to the same degree. You know, they were losing volume and couldn't make it up on price and end up flat.

[John Foley]

Yeah.

[Rob Armstrong]

So this is bad. And.

[John Foley]

And the sales are shrinking now.

[Rob Armstrong]

Their sales are shrinking now, and the profit margins have gone from that amazing 26% to more like 20.

[John Foley]

So just so quite high for. Even for food.

[Rob Armstrong]

It sure is, but it's not the level it was at when it was an $83 stock.

[John Foley]

Yeah.

[Rob Armstrong]

And now it's a $27 stock. So things have changed. It's really kind of an amazing tale, and I think we've gestured at the main points of what happened, but what lessons are we kind of taking away from all of this?

[John Foley]

So, I mean, one lesson here is that there was this big shift in Consumption. But the shift kind of started earlier. I mean, sure, you wrote this when you were writing for Lex, but when Heinz merged with Kraft, Heinz was already shaking.

[Rob Armstrong]

Yeah.

[John Foley]

Like, sales were already really weak. So these were not too. This was not a strong company merging with a weak one or even. It was just two basically quite weak companies being glued together with the hope that they could cut.

[Rob Armstrong]

Now. They were very good brands.

[John Foley]

Right, Right.

[Rob Armstrong]

What you describe about the brands is really relevant to Warren Buffett and how we understand what he does. He had this line, which I'm pretty sure he actually said. Not all of the things that he said did he actually say, but he's attributed with this. I don't know who's going to be making the computers in 10 years, but I have a pretty good idea who's going to be making the candy. The idea being you can make a lot of money investing in technology, but you don't have that kind of stability of outlook. The deep barriers to entry that you know are going to last for a long time, as you will in a consumer brand. And part of the lesson here is even those amazing consumer brands, they are not permanent. They're not like mountains that will always tower over the industrial landscape. Things change. And the Coca Colas and the Krafts and the Heinzes, if they don't change, they're going to have trouble too.

[John Foley]

But the good ones do change, right? The good ones, even if you look at Unilever and Nestle, they invest in new stuff.

[Rob Armstrong]

Yes.

[John Foley]

As well as having the old stuff. Right. Which is a thing that Craft conspicuously did not do.

[Rob Armstrong]

Yes.

[John Foley]

They thought that people would always be eating Velveeta, which for British listeners, Velveeta is one of the greatest surprises I got when I moved to the U.S. yes.

[Rob Armstrong]

And probably not a pleasant surprise.

[John Foley]

I was just like, what is it? Why is it.

[Rob Armstrong]

Yes. Okay. Anybody who doesn't know what Velvete is, we invite you to Google it.

[John Foley]

As a footnote to that, a former aircraft once said that internally they referred to Volvitra as liquid gold.

[Rob Armstrong]

It's just jewels falling from your lips today, John. It's great having you on the show. So one, brands. You need to reinvest in brands or you're asking for trouble. I think there's probably some lessons here about general putting together of and taking apart of conglomerates. I mean, this is a case where they put something together, presumably give some investment bankers a load of money to do it, and then 12 years later they're thinking about taking those exact same two parts apart again. Because that will now be a good idea. Are we just having fun putting the blocks on top of each other and then knocking them over and putting the blocks on top of each other again? Is that what's happening?

[John Foley]

It does feel like there is. There is a case for saying that if you split it up, it's easy to sell the bits to other people, which is what Kellogg's just did.

[Rob Armstrong]

Right.

[John Foley]

Sold half to Mars and half to Ferrero. Yes. So that, that can work.

[Rob Armstrong]

Yeah. And different people are presumably the right owners for different brands at different times.

[John Foley]

Yeah. But I'm not sure who is the owner for like Velveeta.

[Rob Armstrong]

We'll find out. I guess we shouldn't pin the whole. Shouldn't cover these people with Velveeta. They have other products.

[John Foley]

They do, yeah.

[Rob Armstrong]

I think also there is a phenomenon where CEOs are expected to do some damn thing and this leads to a lot of demerging and merging. In other words, what is it that a CEO can really do? They can cut costs, they can invest in innovation, they can pay a dividend, they can buy back their stock, they can borrow some money or they can do or undo a transaction. And once you've tried all the other stuffs, maybe you just do a transaction, makes you look like you're up to something.

[John Foley]

Just go back through the list again. That's capitalism.

[Rob Armstrong]

So public investors in Kraft Heinz since the dizzy heights of 2017 have done terribly. They have lost two thirds of the equity. Has disappeared. By the way, the chart of AB InBev looks not dissimilar. Also peaked in 2016, 2017 has lost a lot of value since. That is a footnote. But you wrote very interestingly that despite what has happened to the share price of Kraft Heinz, Warren Buffett has come away doing characteristically well.

[John Foley]

Quite well. Yeah. So over the 10 plus years that he's been involved, I guess since he bought Heinz in 2013, he's about 60% up. And that's because two things. One is that Kraft Heinz has paid a load of dividends out.

[Rob Armstrong]

Yes.

[John Foley]

A lot of which have gone to regular shareholders too. So when you look at the fall in the share price, they've still got dividends. So it's not as bad as it looks. Yes, it's still bad, but it's not as bad as it looks. He also, though cleverly sold his Heinz stake into Kraft Heinz and got quite a good deal.

[Rob Armstrong]

Yes.

[John Foley]

So he put in about $10 billion in total into that deal. And by the time Kraft was, you know, Kraft Heinz had come back onto the market, he doubled that and he's lost again some of that. But he's still 60% is not, it's not great over like, you know, 12 years.

[Rob Armstrong]

We've had an amazing 12 years for stocks.

[John Foley]

And he could have invested in Nvidia.

[Rob Armstrong]

Yeah, I mean, look, he could have invested in The S&P 500, frankly, and done better than that.

[John Foley]

Or you never.

[Rob Armstrong]

He didn't lose any money, that's for sure. Yeah, that's damn far away from losing money. And this is kind of a lesson about Warren Buffett's best deals. It's not always that he's a brilliant stock picker. Instead, he knows the value of his dollars to partners and he extracts really good terms from Anybody, whether it's 3G or someone else or bank of America or Goldman Sachs and tons of people that has been in the past. He gets really good terms on the money he puts in. So his downside is really well protected.

[John Foley]

That's so true. And it means that when Warren Buffett picks a stock, you can partly say it's a good stock, but really what you need to look at is how, what price he got in. Exactly.

[Rob Armstrong]

And it's important to note about him as this saga kind of comes to an end. And with his recent announcement that he would retire from being numero uno at Berkshire Hathaway, that he has made big mistakes. Precision car parts, a $40 billion deal. He did that. He took a big write down on being the other recent example, but there's plenty more. So in general, the art of being Warren Buffett is not really the art of seeing the future of companies. He doesn't know the future of Appetite for Ketchup better than anyone else. Right. But he's like an operator. Right. That's a big part of success, I should say, rather than a prognosticator and a deal maker, rather than a person who has the crystal ball. Listeners, we will be right back with long and short.

[Unknown Speaker]

In the short term, it is almost a given that we are going to see disruption in production and maybe also reduced volumes in global trade. But over the long term, actually we could see deeper economic realignments because of these policies. For example, the tariffs might benefit certain industrial sectors.

[Rob Armstrong]

To learn more about the intersection of geoeconomics and investing in subscribe to PJIM's the Outthinking Investor. Listeners, welcome back. This is Long and Short, that portion of the show where we go long the things we like and short the things we do not like. John, you got Anything for me?

[John Foley]

Yeah. I'm gonna go long. Bitcoin.

[Rob Armstrong]

Oh. Oh. It agonizes me because you say that.

[John Foley]

John, not because of bitcoin, but because it's crypto week.

[Rob Armstrong]

Yippee.

[John Foley]

There's a bunch of legislation going through Congress, through the House of Representatives, that could make it more easy for institutions to get into crypto, which I think they will. I'm not saying they should, but I think they will. And so I would long it for a while. It's up quite a bit in the last kind of month or so, and then I would short it again.

[Rob Armstrong]

All right. I'll be watching carefully and not investing in that crazy nonsense. I myself am Long Trump following through on his August 1st tariff threats. I think he's tired of being called a chicken by myself and many, many other people on Wall street and that he will impose many of the tariffs he's talking about unless he gets big concessions from trade partners now. I also think he'll have a chance to chicken out later. In other words, if the market has a big puke when he does this, then it's a whole new ball game and the dynamics will change. But my guess as of today is that August 1st might be a big day for tariffs.

[John Foley]

Do you think if he doesn't chicken out, it's your fault?

[Rob Armstrong]

No, nothing's ever my fault, John. You should know this by now, listeners. Nothing is your fault either. And we will be back in your feed later this week.

[John Foley]

It might be your fault.

[Rob Armstrong]

Nothing is my fault. Unhedged is produced by Jake Harper and edited by Bryant Urstadt. Our executive producer is Jacob Goldstein. We had additional help from Topher for his. Cheryl Brumley is the FT's global head of audio. Special thanks to Laura Clark, Alistair Mackey, Greta Cohn and Natalie Sadler. FT Premium subscribers can get the Unhedged newsletter for free. A 30 day free trial is available to everyone else. Just go to ft.com unhedged offer I'm Rob Armstrong. Thanks for listening.