From Fortune:
In Madison, they still struggle to accept that it’s really happening. On a not-yet-specified day before the end of March, a Kraft Heinz
employee will turn off the lights in the sprawling Oscar Mayer plant,
and for the first time in 98 years, no one will be coming back to work.
The
facility was once the city’s largest employer, with over 4,000 workers
transforming hogs, 900 an hour, into Oscar Mayer hot dogs, bacon, sliced
ham, and more. Employment was down to about 1,000 when Kraft Heinz
announced in 2015 that it would close the plant, and recently the
workers had dwindled to about 400; the products still being made include
an item called liver cheese, which few consumers under age 80 are
clamoring for. No one knows what happens after March.
— - - —
Because
the 50-acre site will need environmental remediation, its “value” is
estimated at negative $10 million to negative $20 million. The city is
scrambling to drum up interest in the site but was caught flat-footed;
planners never imagined that Oscar Mayer would leave. Redeveloping so
many acres won’t be easy. Madison Mayor Paul Soglin told a local
publication, “It’s possible that given its size, it will take a decade
or more to develop.”
So what happened? Why is a plant that provided good jobs to 1,000 people
just 15 months ago being shut down? (Other than the liver cheese.) The
answer explains a lot more than the fate of a Midwestern processed-meat
factory. It also illustrates Kraft Heinz’s iconoclastic strategy under
the hard-driving management of 3G Capital, the private equity firm
overseen by Brazil’s richest man, 77-year-old Jorge Paulo Lemann. The
answer even hints at the future of the U.S. food industry—and perhaps
has global implications—because all evidence suggests that 3G is just
getting started in an effort to transform this whole vast sector. But
evidence also suggests that the 3G playbook, which has worked
spectacularly well over the past 30 years, may not prove so effective
this time.
You can be forgiven if you’re not up to speed on the intertwined corporate marriages and
divorces in the world of Big Food. Kraft Heinz came into being 18
months ago when Heinz bought Kraft Foods Group, a mostly U.S. grocery
manufacturer that in 2012 had separated itself from a collection of
mostly non-U.S. snack businesses now known as Mondelez International,
an independent, publicly traded company that could reenter this saga
before long. Heinz had been bought and taken private in 2013 by 3G
Capital, with considerable financing from Warren Buffett. When it then
bought Kraft and merged it with Heinz in 2015, 3G took the combined
business public as Kraft Heinz. Buffett’s Berkshire Hathaway owns about 27% of the stock; 3G, about 24%.
Got that? While Buffett is the largest shareholder by a slight margin
and has three seats on the board of directors, including one for
himself, he’s happy to let 3G run the show. Back before they bought
Kraft, he said, “I’m not embarrassed to admit that Heinz is run far
better under [3G] than would be the case if I were in charge.”
The 3G management model that Buffett so admires is worth a close look
because it’s on track to eat the food industry. At its heart is
meritocracy, broadly defined. Every employee must justify his existence
every day. That’s great news for the very best performers; they are
promoted with speed that’s unheard-of in lumbering old food companies.
Kraft Heinz CEO Bernardo Hees, for example, first became a CEO in 2005
at a company called All America Latina Logistica, owned by a 3G
predecessor. He was then made CEO of Burger King, a 3G holding since
2010. He moved up to be CEO of Heinz in 2013 and now of Kraft Heinz.
He’s only 46.
Underperformers
get fired with the same alacrity. Budgeted costs also are evaluated
unsparingly every year, or more often, and are eliminated if they’re no
longer judged worth incurring. After all, Hees (pronounced “Hess”) and
other top executives are 3G partners. Their own money is tied up in each
venture, and they can’t afford to be sentimental about it.
Which brings us back to the Oscar Mayer plant in Madison. The truth is,
that plant should have been closed long ago, and everybody knew it. “The
Madison plant was a terrible plant,” says John Ruff, a retired Kraft
executive who spent much of his career in food-processing plants
worldwide. “It had good people, but it was an old plant that had been
added to over the years. It was never meant to be run as it was being
run. Closing it was probably the right thing
to do.” So why hadn’t Kraft closed it long before 3G came along? The reason is a classic problem for
big, old businesses: People loved that plant. It was a treasured part
of the company’s history. But not to 3G. “[Kraft] had trouble making
tough choices,” says Credit Suisse analyst Robert Moskow. “3G has forced
them to make tough choices, like closing the Oscar Mayer facility. It
was very emotional.” Ruff agrees: “3G got rid of a lot of remaining
emotional ties.”
Now
project that philosophy across a $26 billion company. Step 1 in the 3G
management model is a wholesale replacement of the top team and a
blitzkrieg of cost cutting. At Heinz, 3G cashiered 11 of the top 12
executives in one day (as this publication chronicled in a 2013 story
headlined “Squeezing Heinz”). When Heinz bought Kraft, 10 top executives
were quickly dismissed. Of Kraft Heinz’s top 10 leaders today, eight
are Brazilians from 3G who know the playbook. “If you don’t speak
Portuguese, you’re at a bit of a disadvantage,” says a former Heinz
director.
As with every 3G takeover, cost-cutting measures were imposed
immediately after the takeover of Kraft. Office refrigerators long
stocked with free Kraft products (cheese, Jell-O) were wheeled out
within days of the merger’s closing. Corporate aircraft were ditched,
and everyone from the CEO down was made to fly coach. And today
employees on the road are sometimes required to double up in hotel
rooms. More important than the actual savings is the message. “We think
and act like owners of our business, treating every dollar as if it were
our own,” the company tells prospective employees....MUCH MORE
