stats
globeinteractive.com: Making the Business of Life Easier

   Finance globeinvestor   Careers globecareers.workopolis Subscribe to The Globe
The Globe and Mail /globeandmail.com
Home | Business | National | Int'l | Sports | Columnists | The Arts | Tech | Travel | TV | Wheels
space


Search

space
  This site         Tips

  
space
  The Web Google
space
   space



space

  Where to Find It


Breaking News
  Home Page

  Report on Business

  Sports

  Technology

space
Subscribe to The Globe

Shop at our Globe Store


Print Edition
  Front Page

  Report on Business

  National

  International

  Sports

  Arts & Entertainment

  Editorials

  Columnists

   Headline Index

 Other Sections
  Appointments

  Births & Deaths

  Books

  Classifieds

  Comment

  Education

  Environment

  Facts & Arguments

  Focus

  Health

  Obituaries

  Real Estate

  Review

  Science

  Style

  Technology

  Travel

  Wheels

 Leisure
  Cartoon

  Crosswords

  Food & Dining

  Golf

  Horoscopes

  Movies

  Online Personals

  TV Listings/News

 Specials & Series
  All Reports...

space

Services
   Where to Find It
 A quick guide to what's available on the site

 Newspaper
  Advertise

  Corrections

  Customer Service

  Help & Contact Us

  Reprints

  Subscriptions

 Web Site
  Advertise

  E-Mail Newsletters

  Free Headlines

  Globe Store New

  Help & Contact Us

  Make Us Home

  Mobile New

  Press Room

  Privacy Policy

  Terms & Conditions


GiveLife.ca

    

PRINT EDITION
A bitter result: 3G's rigorous cost-cutting diet weighs down RBI, Kraft Heinz
space
space
By IAN MCGUGAN
  
  

Email this article Print this article
Thursday, April 19, 2018 – Page B1

There's no doubt about it: Tough, cost-conscious management is a vital ingredient at any good company. But right now, shareholders in Restaurant Brands International Inc. and Kraft Heinz Co. should be asking whether a lean and mean operating style is hitting its limits when it comes to peddling doughnuts and ketchup.

In recent months, RBI, the parent of Tim Hortons, and Kraft Heinz, maker of your favourite burger condiment, have disappointed investors. RBI shares have lost nearly 20 per cent of their value since October, while Kraft Heinz's stock price has slid by a third over the past year.

It wasn't supposed to be this way.

3G Capital, the famed and feared Brazilian investment firm, was a driving force behind the assembly of both companies. Only a couple of years ago, the guys from Rio were being lauded by analysts for their ability to slash costs and trim corporate fat - precisely what was needed to squeeze new profits from aging consumer brands, according to Wall Street.

But the 3G approach is beginning to show some flaws. Critics argue that managers who focus on streamlining existing operations can create a temporary bump in earnings, but have less time to spend on product development, corporate innovation and brand building. The danger, skeptics say, is that efficiency increases but sales and earnings per share don't.

"We harbor serious doubts about the management team's ability to generate sufficient product innovation to grow its collection of 'retro' brands in highly commoditized categories," Robert Moskow of Credit Suisse wrote this week in a report that downgraded Kraft Heinz to "underperform" status.

For its part, RBI is battling a group of Tim Hortons franchisees who claim the company is waging its war on costs at the expense of restaurant owners' profit. It's also being investigated by the federal government for alleged breaches of the promises it made when it acquired the doughnut chain in 2014.

To be sure, most analysts continue to offer glowing appraisals of both RBI and Kraft Heinz, in large part because of the success of the 3G model in cutting costs. After the company teamed up with Warren Buffett to buy Heinz in 2013, profit margins rocketed over the next two years. At RBI, which 3G created by merging Tim Hortons with Burger King, it has managed to propel return on equity to nearly 32 per cent, a remarkably high level by fast-food standards.

But softer measures suggest the profit is coming at a cost. Consider a survey of 1,501 Canadian adults published this week by Angus Reid Institute.

Thirty five per cent of respondents said their opinion of Tim Hortons had worsened in recent years. While Tim Hortons' advertising campaigns have tirelessly promoted the chain's deep roots in Canadian communities, the reality on the ground appears to be shifting.

At Kraft Heinz, signs of stress are also becoming apparent, according to Mr. Moskow. The company's Oscar Mayer cold cuts and Kraft natural cheese brands are losing market share to private labels, while Canadian retailers recently reduced their inventories, he said.

Employees may not be all that happy, either. Mr. Moskow said industry sources have expressed concern about growing turnover rates among Kraft Heinz staffers.

"We find it quite telling that the company chose not to publish its turnover rate in its February 2018 presentation called Recruit, Develop and Align our People," he wrote.

When asked for comment, a company spokesman said, "At Kraft Heinz, we are a company of owners that thrive in a performance-driven environment - and we invest heavily to develop our employees."

Of course, the recent weakness in RBI and Kraft Heinz shares could be transient.

But investors who want to take a long-term view should consider the case of AnheuserBusch InBev SA, which some of the principals of 3G were instrumental in building.

The beer giant assumed its current shape in 2008, after InBev, a Brazilian-Belgian brewer, took over the U.S. firm Anheuser-Busch.

A rigorous diet of cost cutting produced great results for investors over the next few years. Since 2013, however, the stock has lagged the S&P 500 by about 9 percentage points a year of total return and the company has turned to acquisitions to drive revenue growth.

For now, wary investors may want to keep their distance from RBI and Kraft Heinz.

"The 3G business model is very good at cutting non-essential overhead, focusing on price realization, and running an efficient plant and distribution network," Mr. Moskow said. "However, its ability to drive sales growth through marketing, new products, and strategic investment has yet to be proven."

RESTAURANT BRANDS (QSR)

CLOSE: $69.53, UP $1.27 KRAFT HEINZ (KHC)

CLOSE: US$60.79, DOWN 90¢

Associated Graphic

RBI, which 3G created by merging Tim Hortons with Burger King, has seen its shares drop nearly 20 per cent since October, while Kraft Heinz's stock price has slid by a third over the past year. DANIEL BECERRIL/REUTERS

Pastries are displayed at a Tim Hortons during a media event in Mexico in October, 2017. While its parent company has generated a nearly 32-per-cent return on equity, the reality on the ground appears to be shifting against the Tims brand. DANIEL BECERRIL/REUTERS


Huh? How did I get here?
Return to Main Rex_Murphy Page
Subscribe to
The Globe and Mail
 

Email this article Print this article

space  Advertisement
space

Need CPR for your RSP? Check your portfolio’s pulse and lower yours by improving the overall health of your investments. Click here.

Advertisement

7-Day Site Search
    

Breaking News



Today's Weather


Inside

Rick Salutin
Merrily marching
off to war
Roy MacGregor
Duct tape might hold
when panic strikes


Editorial
Where Manley is going with his first budget




space

Columnists



For a columnist's most recent stories, click on their name below.

 National


Roy MacGregor arrow
This Country
space
Jeffrey Simpson arrow
The Nation
space
Margaret Wente arrow
Counterpoint
space
Hugh Winsor  arrow
The Power Game
space
 Business


Rob Carrick arrow
Personal Finance
space
Drew Fagan arrow
The Big Picture
space
Mathew Ingram arrow
space
Brent Jang arrow
Business West
space
Brian Milner arrow
Taking Stock
space
Eric Reguly arrow
To The Point
space
Andrew Willis arrow
Streetwise
space
 Sports


Stephen Brunt arrow
The Game
space
Eric Duhatschek arrow
space
Allan Maki arrow
space
William Houston arrow
Truth & Rumours
space
Lorne Rubenstein arrow
Golf
space
 The Arts


John Doyle arrow
Television
space
John MacLachlan Gray arrow
Gray's Anatomy
space
David Macfarlane arrow
Cheap Seats
space
Johanna Schneller arrow
Moviegoer
space
 Comment


Murray Campbell arrow
Ontario Politics
space
Lysiane Gagnon arrow
Inside Quebec
space
Marcus Gee arrow
The World
space
William Johnson arrow
Pit Bill
space
Paul Knox arrow
Worldbeat
space
Heather Mallick arrow
As If
space
Leah McLaren arrow
Generation Why
space
Rex Murphy arrow
Japes of Wrath
space
Rick Salutin arrow
On The Other Hand
space
Paul Sullivan arrow
The West
space
William Thorsell arrow
space





Home | Business | National | Int'l | Sports | Columnists | The Arts | Tech | Travel | TV | Wheels
space

© 2003 Bell Globemedia Interactive Inc. All Rights Reserved.
Help & Contact Us | Back to the top of this page