The best yardstick is a metric called Economic Value Added (or EVA). And the EVA numbers show an absolutely shocking deterioration over the past three years. (Not coincidentally, shares in Kraft Heinz (KHC) are down about two-thirds since their February 2017 peak.)

In 2015, Kraft bought Heinz. And over the next couple of years, Wall Street cheered 3G, the Brazilian investment firm that had teamed up with Warren Buffett’s Berkshire Hathaway to buy Kraft in 2013 and then engineered the Heinz acquisition, for achieving unheard-of efficiencies, and setting a new standard that rivals would need to rush to match. (Read “Buy. Squeeze. Repeat.“)

But what was advertised as the 3G cure has cost the ketchup-maker a lot of blood since then.

What ‘EVA’ reveals

EVA is the most basic measure of whether a company is earning sufficient profits on the capital invested by shareholders to truly reward those owners. It’s a trademark and service of ISS, a global leader in corporate governance and analytics. The idea behind EVA is that a company isn’t really profitable unless it’s generating returns greater than what a shareholder could garner from another, equally risky investment. Hence, EVA deducts a “capital charge” from reported earnings on all of the billions backing the business––representing the “opportunity cost” of what that capital could be earning elsewhere.

When the adjusted, after-tax profits exceed the capital charge, EVA is positive, and the enterprise is rewarding investors. When it’s negative, the company’s operations are underperforming, uncompetitive, and killing shareholder value by doing a poor job of deploying investments in plants, R&D and working capital to generate profits. (EVA makes adjustments to traditional accounting to calculate operating profit, including capitalizing and amortizing R&D, marketing and restructuring costs.)

When a company beats the EVA bogey, it’s meeting the minimum requirement for adequate performance––just as, when a professional golfer shoots par, they’ve hit the benchmark for a decent 18 holes.

The ISS EVA methodology assess a 5% capital charge on all of Kraft Heinz’s $112 billion in combined equity and debt. What Heinz earns after subtracting that charge amounts to its real economic earnings. In 2016, the first full year following the Kraft-Heinz merger, the maker of Oscar Mayer hot dogs and Kraft cheese beat its cost of capital handily, and in the process, generated a positive $305 million in EVA, equal to 1.1% of sales. But by 2018, economic profit dropped to a minus $605 million, a swing of $910 million, to -2.3% of revenues. From the period starting in 2015, when EVA was also strongly positive, only one in six U.S. food and beverage companies performed worse, measured by the 3-year trend of EVA as a share of sales.

Three keys to a collapse

Kraft Heinz’s EVA went the wrong way due to a confluence of three negatives.

Kraft Heinz couldn’t grow the top line. From the close of 2016 to the end of last year, Kraft Heinz’s revenues fell by $229 million, or roughly 1%, to just over $26 billion. Kraft Heinz faced stiff competition from online retailers and heavily discounted in-store brands that share space with such signature offerings as Kraft cheese slices. In a recent CNBC interview, Buffett acknowledged that the company overestimated the strength of its brands, and misfired by strongly resisting the big retailers’ demands for lower prices. “We weren’t as strong as we thought,” Buffett declared.

Still, if Heinz even managed to hold sales constant and kept costs the same, it would have generated respectable EVA last year. Pounding down expenses was supposed to be 3G’s strength. It did lower costs, but not enough.

Cost-cutting got swamped by falling margins. From 2015 through 2018, Kraft Heinz lowered its sales, general and administrative costs (SG&A) from 10% to 8% of sales. That’s the payoff from 3G’s vaunted “zero based budgeting” program that demands that managers justify every expense, starting from scratch, each year. A steep fall in gross margins, however, overwhelmed the progress on overhead. From the start of 2017 through the end of 2018, that figure––consisting of revenues minus cost of good sold––fell by 3.5 percentage points, from 39.5% to 36%.

The reason is two-fold. First, production costs on many products seem to have risen significantly. For example, management states that it spent heavily on producing a fresh version of its fruit drink Capri Sun. The in-store sales force for that product in the U.S. rose by 80% last year in a campaign to boost shelf space with big retailers. Second, “Kraft Heinz appears to be garnering smaller markups on many of its products,” says Bennett Stewart, a senior advisor to ISS who pioneered the EVA concept. Despite its efforts to preserve pricing, the pressure from house brands at big grocery retailers such as Kroger and Wal-Mart forced Kraft to offer far deeper discounts than the deals it had offered two years ago. On CNBC, Buffett referred to its “weaker bargaining hand.”

In short, the 3.5% fall in gross margins exceeded the 2% shrinkage in overhead, leaving Kraft worse off by 1.5% of sales. And the decline in overhead came at the expense of R&D and advertising plus promotional spending, categories crucial to boosting sales. In total, outlays in those two categories fell by $84 million, or over 10%, from the end to 2015 through last year, accounting for roughly half the savings in SG&A.

Big spending on capex, but no returns. In 2015, Kraft Heinz was deploying 32 cents for every dollar in sales in property, plant and equipment (PP&E) assets on its balance sheet, using it to make everything from Velveeta to Mac & Cheese to Miracle Whip. Last year, that number rose to 41 cents, a gigantic jump of 32%. Kraft spent heavily to revitalize decades-old plants churning out those venerable brands.

Management has also disclosed that business suffered from shipment delays, necessitating big expenditures to upgrade its supply chain and warehouse network. “But Kraft failed to recoup all of that investment by being able to lower costs and hence improve margins,” says Stewart. The upshot is that It’s now deploying capital a lot less efficiently than a few years ago. Today, it’s garnering $2.50 in sales for every dollar invested in PP&E, down from $3.50 in 2015.

A $20 billion shortfall

The ultimate measure of how richly a company rewards investors, or how badly it penalizes them, is Market Value-Added (MVA), an EVA offshoot that measures the spread between the equity investors have put into the business, and its current market value. “It’s money in versus value out,” says Stewart. “MVA tells you how much wealth is created over and above what shareholder put into the company.”

By the middle of 2016, when Wall Street was touting the genius of 3G, Kraft Heinz was trading at market value premium to its book capital on the order of $50 billion, representing the cumulative of wealth created for shareholders. Now, the company’s MVA is far in the red at a negative $20 billion, due to the big drop in the stock price, as well as investments that haven’t paid off. It’s the swoon in EVA, the relentless fall in profits after subtracting the charge for capital, that accounts for the collapse in MVA. No surprise that Kraft Heinz has destroyed more shareholder value than any other packaged goods company over that time frame.

3G had good ideas for cutting, but not for growing. And if you can’t grow in old-line packaged goods, you end up spending more just to keep from falling further behind.