Here’s what happens when 3G Capital buys your company
To hear Jorge Paulo Lemann describe the corporate philosophy of private-equity group 3G Capital, you’d think he was talking about running a marathon: “You’re running, you’re always close to a limit, you’re working very hard and being evaluated all the time.” That’s what Lemann told Fortune in 2013 in a rare interview for a story about Anheuser-Busch InBev, the beer behemoth born out of a $52 billion buyout that 3G orchestrated in 2008.
Now, 3G and Warren Buffett are teaming up on a mega-merger of Heinz and Kraft just seven months after they worked together on Burger King’s $11.4 billion takeover of Canadian chain Tim Hortons. One year before that, they bought ketchup-maker Heinz.
In the new deal, Heinz will buy 51% of Kraft. (When rumors of the move first broke, late Tuesday, they bumped Kraft shares up 16% in after-hours trading.) The new corporation, The Kraft Heinz Company, will have around $28 billion in annual revenue, and current Heinz CEO Bernardo Hees will remain chief executive.
So, what can Kraft employees expect next? First: widespread layoffs, lower budgets, new levels of austerity, and a shift in the corporate culture. And then, for shareholders: profit.
When 3G led InBev’s hostile takeover of Anheuser-Busch, it quickly cut 1,400 jobs from the American company (75% of them in St. Louis) and brought in Brazilian executives from InBev — itself the result of a 2004 merger of Belgian beer maker Interbrew and Brazilian beer maker Ambev, which was the result of a 1999 merger between Brahma and Antarctica — to run things. They included Lemann protégé Carlos Brito as AB-InBev CEO, and former Ambev exec Luiz Edmond as zone president of North America (effectively CEO of Anheuser-Busch). Industry consultant Tom Pirko told the St. Louis Post-Dispatch at the time that InBev’s top execs are “not known for their gentle demeanor.”
AB-InBev quickly earned plaudits, and still does, for its lean operations and profitability. Brito brought to Anheuser-Busch the concept of “zero-based budgeting,” wherein every expense must be newly justified every year, not just new ones, and the goal is to bring it lower than the year prior. “They are a profit- and margin-generating machine,” Harry Schuhmacher, editor of trade publication Beer Business Daily, told Fortune for our 2013 profile on Brito. That reputation comes directly from the 3G handbook.
With Heinz, it was the same story. The CEO of 15 years, Bill Johnson, was replaced with 3G partner Bernardo Hees (pronounced “hess”). After his first speech to the 50 top executives, at a Heinz leadership conference in a San Francisco, Hees immediately summoned most of them, one by one, into a separate room to inform them of whether they still had a job. Eleven of the top 12 execs did not — they were swiftly replaced by younger talent from within Heinz or by outside executives who had worked at other 3G-owned companies. Within another month, Heinz announced it would cut 350 of the 1,200 full-time jobs at Pittsburgh headquarters, plus another 250 elsewhere in North America.
At Tim Hortons, where the deal with 3G, Buffett and Burger King was finalized in December, 350 people lost their jobs in January. CBC News in Canada reported that the workers were “blindsided.”
It’s all part of what analysts call “the 3G way.” That is not necessarily a Brazilian method, per se, according to Lemann. In fact, he told Fortune that the 3G style has been influenced mostly by American businesses: “We’re a copycat, really. That’s what we are. Most of the stuff we’ve learned has been from Jack Welch, Jim Collins, from GE, from Wal-Mart. We’ve sort of put it all together. Most of the people who are at the top of InBev are people who came from our trainee system, which was developed and worked at Ambev. So they’re at the top not because they are Brazilians, but because these are the people who we were training 20 years ago, and they’re the best-trained people available.”
Regardless, the 3G way has come to stand for: extreme transparency; merit-based pay; austere budgeting (“treat the company’s money as your own,” AB-InBev employees are constantly told); promoting young talent quickly; and a spirit of competitiveness. “We’re constantly trying to train new people and we’re constantly telling everybody that the newer people should be better than the old people,” said Lemann. “And you can only go up in the firm if you have picked people as good as yourself or better to be below you.”
3G rewards loyalty, and AB-InBev’s Brito is a perfect example. He is a product of Lemann’s system. He first met Lemann in 1987 when he was working for Shell Oil and had been accepted to Stanford Business School. Lemann and his partners at the investment bank Banco Garantia ran a scholarship program, and they backed Brito. After finishing business school, Brito went straight to work with 3G partner Marcel Telles at Brahma, a Rio-based brewer that Lemann and his partners had bought. From there, it was a rung-by-rung rise: Brahma to Ambev to InBev to Anheuser-Busch InBev, which now also includes Grupo Modelo. Telles and Paulo Alberto Lemann (Jorge Paulo’s son) both sit on AB-InBev’s board of directors.
“There will always be people who don’t like it, especially the ones who were just entitled to be there for historical reasons, the ones who were not performing,” said Luiz Edmond, who now holds a global role as AB-InBev’s chief sales officer, about the 3G culture. “Our processes, our systems, do not allow that. They do not allow you to hide in a nice room, stay for the whole day. No.”
If that sounds like the work environment for you, the newly formed Kraft Heinz Company may soon be hiring. But first, it’ll likely be cutting.
Read more from Fortune on the Heinz-Kraft deal: