Food for thought: Buffett model will take time to digest

Warren Buffett

With a merger of Kraft and Heinz expected soon, entrepreneur-led food firms are wide-eyed with optimism for the future, writes Kyran Fitzgerald.

Warren Buffett has again joined forces with a Brazilian-run equity finance outfit, this time to acquire a legendary US corporation, Kraft, and merge it with recent acquisition Heinz Foods. This would create the world’s fifth-largest food and beverages giant.

The legendary founding chairman of investment group Berkshire Hathaway has, over the years, conjured fortunes for his shareholders by applying the principles of value investing, originated by Benjamin Graham, and by mixing in large salad cream dollops of common sense.

Buffett is a genius at wrapping his cuddly tea-cosy persona around his investments, but in spite of being just a few months shy of his 85th birthday, he appears to have lost none of his gimlet-eyed shrewdness.

True, the Buffett succession remains up in the air, but he continues to fly the flag for his generation, the generation of Americans that first grew prosperous in President Dwight Eisenhower’s booming post-war US.

Berkshire Hathaway has snapped up some legendary brands in its time, including Fruit of the Loom, one of the world’s oldest brands.

The company, which in the 1980s employed thousands in Donegal and the north-west, was brought out of bankruptcy by Buffett in 2001. It remains best known for its slogan, “We cover the asses of the masses.”

Other famous Buffett bargain buys include Net Jets, the private jet firm now booming on the back of economic recovery, and Borsheims Fine Jewelry and Gifts; along with leading US insurer Geico, which flogs polices online and over the phone.

In a perceptive late career move, Buffett spotted a clutch of sharp young Brazilian managers who have developed a reputation for sweating hard assets that have been recently acquired. 3G Capital, a private equity outfit, was founded by Jorge Leman, Marcel Telles, and Carlos Sicupiro.

They joined forces with Berkshire Hathaway to acquire Heinz for $23bn just under two years ago and, since then, the group best known for its baked beans and catchy slogans such as ‘Beanz Meanz Heinz’ has performed well.

The team of 3G Capital and Berkshire has snapped up Kraft Foods and is set to weld it together with Heinz in a deal worth $100bn. Buffett, who seems to forget his age, has indicated that he wants to put together further deals, but right now, the Heinz Kraft merger will take some digesting.

The two companies in the group, to be known as Kraft Heinz, will have combined annual revenues of $28bn. Inevitably, employees in both groups have reason to be concerned about their job security.

When Kraft acquired Cadbury, hundreds of jobs were lost following a closure of a long-established plant near Bristol in the UK, despite assurances that the plant would be kept open.

Cadbury has since announced 160 redundancies at its plants in Rathmore and Coolock, with unions expressing concerns about a possible transfer of production of lines from Ireland to Poland.

These plants had successfully resisted a previous wave of closures that saw the departure from Ireland of iconic brand names including Jacobs, the biscuit maker.

When Buffett and 3G paid around $23bn for Heinz, annual cost savings of $1.5bn were pencilled in.

The background to all of this is the slowing, to a near halt, in the runaway growth in mature Western consumer markets of sales of established food brands. The Financial Times last week posed the question: Is the era of big food coming to an end?

It would be far too soon to predict such an outcome. Demand for convenience foods, after all, is rising in emerging markets, despite recent financial blips. Analysts agree that the issue is not profits, which will remain massive, but rather growth.

Producers of health-laden foods are increasingly capturing a chunk of the customer purse. Fortunately Ireland is well-placed in this regard with companies like Glenisk and Cully & Sully, the latter being acquired for around €10m in 2012 by the US organic products company Hain Celestial.

What is interesting about Hain is that it allows considerable latitude to entrepreneurs in companies it has acquired.

Glenisk, with revenues approaching €20m a year and set to benefit big time from the lifting of milk quotas, appears to be another tempting target. Many big food brands stuck in stagnant markets have been snapping up health food firms in an effort to burnish their image and push into fast growth sectors.

The Midlands outfit would look good on many global branded shop windows.

For Ireland, the future clearly lies with entrepreneur-led outfits, which manage to take advantage of the country’s natural assets, which we can only hope will be allowed to endure.

But those employed in producing or promoting the traditional big brands that have grown up over the course of the 20th century must expect to bear ever-increasing pressure from lean and mean managers, with more and more production transferring to places such as Latin America and Asia, where consumer demand for traditional big brands can be exploited.

Meanwhile, the rising economies can be expected to produce their share of emerging groups pushing brands with local appeal.

All of this is happening at a fascinating time for the Irish food industry, with the 30-year milk quota regime drawing to a close from tomorrow and with the prospect of a new transatlantic regime generating plenty in the way of controversy.

Irish food producers bridging the gap from field to fork will have to box clever at a time of euphoria and one of clear danger.

A glut of production looms on the horizon. Moving up the food chain and diversification, rather than simple farmyard expansion, would seem to be the name of the game. Easier said than done.

They would do well to copy the common sense ‘value investment’ approach of Buffett and follow the lean and mean approach to day-to-day management favoured by his Brazilian proteges.


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