Warren Buffett wasn’t kidding when he said he likes to eat like a six-year old. Now he’s once again putting his money where his six-year-old’s mouth is—by co-investing with Brazilian private equity firm 3G to buy Kraft (KRFT).
The problem is, Buffett, who drinks at least five Cokes a day and likes ice cream for breakfast, may be underestimating six-year-olds today. Millennials and moms with young kids are the driving force behind a wholesale change in how people eat: They are increasingly turning their backs on processed goods like Cheese Whiz and Cool Whip—both products at the core of Kraft’s portfolio.
Kraft is hurting as a result. During its fourth quarter and annual call with analysts last month, the company noted that organic net revenue growth of 0.9% trailed North America food and beverage industry growth of about 2%. Kraft did not gain market share in any individual category but was instead flat in 60% of its U.S. businesses and lost share in the other 40%. The executive team admitted that its marketing was ineffective.
“It’s clear that our world changed and our consumers have changed, but our company has not changed enough and certainly has not kept pace,” said Kraft CEO John Cahill on the call. Cahill took over in December, replacing Ton Vernon, who left amid the company’s struggles. Cahill will be vice-chairman of the new merged Kraft Heinz.
Buffett and 3G—both of which are highly respected for their investing acumen—are doubling down on junk food. The duo now own the world’s No. 1 ketchup brand, Heinz, a top burger brand (Burger King) and a top donut shop (Tim Horton’s). On its own 3G controls much of the beer market with SABMiller. With Kraft, it now owns close to everything a helicopter mom abhors.
The number crunchers at 3G might think that they can come in and clean up Kraft, but clearly this is not just a balance sheet issue.
Take the recent example of Kraft Singles. About two weeks ago word came that its packaging would soon be graced with the “Kids Eat Right” seal from the Academy of Nutrition and Dietetics, ostensibly intended to convey the product is healthy. The certification backfired and mockery ensued. The Daily Show’s Jon Stewart opined that “the Academy of Nutrition and Dietetics is an academy in the same way [Kraft Singles] is cheese.” Jimmy Fallon on The Tonight Show joked (without discussing the seal), “Thank you Kraft Singles for being edible Post-It-Notes.” A Change.org petition to repeal the seal has more than 11,000 supporters.
That kind of response is the very reason that most food companies are taking the opposite tack from Kraft and Heinz. In the past few years Campbell Soup Company (CPB) has acquired Plum Organics and Bolthouse Farms, and General Mills (GIS) bought Annie’s Homegrown, just to name a few of the recent acquisitions of healthier brands. Indra Nooyi, CEO of PepsiCo (PEP), has staked her reputation and much of her company’s future on the global trend toward consuming healthier items.
During Kraft’s fourth quarter call, an analyst asked a then-hypothetical question about whether 3G-style cuts would be dangerous for the company. Cahill responded that “cutting into the bone doesn’t really make sense at the end of the day for a consumer products company. I won’t opine on what Heinz has done or not done. But with respect to Kraft, I will tell you that as I see it today, there remains plenty of opportunity to…take off, costs out without jeopardizing in any way our top line opportunity.”
This deal will certainly cut the fat at Kraft, but that might not impress customers as much as cutting the fat and calories and salt in its products.