Expect a Kraft Heinz repeat
The sobering lesson of Kraft Heinz In coming months, Kraft Heinz Co. is expected to make another blockbuster acquisition.
That will not be a high point in economic history.
The 2015 merger of Kraft and Heinz has been a bust. Stock in Kraft Heinz has dropped by 13.5 per cent since the merger. Revenues at the combined firm have flatlined and lately begun to fall.
Kraft Heinz is the brainchild of Warren Buffett and the three Brazilian billionaires whose private equity firm, 3G Capital, also merged Burger King and Tim Hortons. Tim Hortons, too, has entered the 3G model’s slowgrowth phase.
In his chairman’s letter to shareholders, released Feb.24, Buffett could cite many Berkshire Hathaway Inc. acquisitions whose sales and market share have increased, markedly in most cases.
The Berkshire method is to nurture growth at acquired companies, with adequate R&D budgets and funds for constant new-product development.
By contrast, 3G doesn’t nurture growth but simply buys it with highprofile acquisitions. 3G quickly strips out costs, and doesn’t stop to wonder why growth has stalled before making yet another huge acquisition.
3G’s answer to unmanageable size and lack of focus is to get still bigger. Making matters worse, 3G is doing this in the traditionally slow-growth food business, made still more challenging by changing consumer demands.
3G is also the world’s biggest brewer. Consumers are turning away from the mass-market blandness of Labatts Blue and Budweiser (and Heinz beans) in favour of locally made specialty foods and craft brews.
This cycle of mediocrity in business management will end, of course, when 3G eventually breaks itself up to “unlock underlying value,” as the boilerplate goes. At which point, the suppliers squeezed during the 3G years and the thousands of workers laid off, many in Southern Ontario, will wonder, “What was that all about?”
Answer: Apart from 3G as a drag on the economy, not much. Rail chiefs are mending fences The two North American railways where the late Hunter Harrison was most recently CEO have embarked on “apology tours” to assure alienated shippers the causes of their annoyance with Canadian Pacific Railway Ltd. and later with CSX Corp. are being addressed.
During his tenure at each of those Big Four railways, the U.S.-born Harrison, who died in December at 73, imposed a cost-cutting regime that was remarkably effective at boosting efficiency and profitability.
There was a price to pay for that reinvention. CSX was unpopular with its customers during Harrison’s brief CEO stint last summer. The new boss’s abrupt closing of rail yards and idling of “surplus” locomotives caused delays in the CSX system.
In a recent interview, Jim Foote, Harrison’s successor as CEO of CSX, said, “I go to someone’s office with my hat in hand and say, ‘I’m sorry about last year, we screwed up and we didn’t do a really good job for you.’ ”
CPR is also mending fences with clients irked during Harrison’s fourand-a-half-year CEO tenure there, ending in January of last year when he moved to CSX.
Still, the unanticipated profitability that has characterized North American rail in the past two decades can be credited more to Harrison than anyone.
By the 1970s, rail operators were so bloated with costs and chronically insensitive to customers that rail’s viability was in question. And shippers that are honest with themselves about their earlier ways will tell you that Harrison’s “precision railroading” spurred them finally to offer their own customers rapid response times and flexible scheduling, in tandem with Harrison’s renaissance at no fewer than four major railways, including Canadian National Railway Co.
We’re waiting for the Rotman, Western University or Harvard case study on how this moribund industry was transformed into a consistent moneyspinner, a tome that would be instructive to managers across the economy. E.U. to U.K.: You must pick the Canadian or Norwegian model As Britain heads into the most difficult round of negotiations with the European Union on the Brexit divorce, the EU is insisting that a post-Brexit Britain adopt either Canada’s or Norway’s relationship with the EU.
These are opposite ends of a spectrum.
The Canadian model is an “EU-light” association, while in crucial ways Norway is practically an EU member. The U.K. rejects both of those options, preferring a “bespoke” post-Brexit arrangement that Germany, France and the European Union have already dismissed as a non-starter. With the new Canada-EU Comprehensive Economic and Trade Agreement (CETA), Canada now enjoys free trade in goods with the world’s biggest economy. But CETA provides little access to the EU in services.
Norway, by contrast, has complete access to the EU’s coveted single market. In return, Norway conforms with EU rules, European Court of Justice jurisprudence, and the EU’s cherished labour mobility.
Mobility is anathema to Brexiteers. The ill-fated Brexit referendum was an anti-immigration vote. The most strident Brexiteers are xenophobes who want an end to Polish workers easily getting jobs in Manchester, and will forfeit a Liverpool welder’s current ability to take a job in Krakow without need of a visa or work permit.
The EU won’t budge on the mobility principle.
But the U.K. government that won’t budge either is fragile. Jeremy Corbyn, the U.K.’s likely next prime minister if Theresa May’s shaky coalition government falls, has recently shown more signs of flexibility than May in conceding to some of the EU’s basic demands.
Which leaves what Michel Barnier, the EU’s chief negotiator, has called a “Canada Plus” solution. He hasn’t defined it, but in coming weeks Canada Plus will be defined. And it will likely offer Britain the continued singlemarket access it craves, but only if post-Brexit Britain embraces labour mobility, workplace and environmental protections and certain other EU social-justice standards.