Boyden Executive Search

Bernardo Hees told Kraft Heinz employees that he would be stepping down this week as Miguel Patricio, a marketing executive from AB InBev, is appointed as the new CEO.

By Alistair Gray, James Fontanella-Khan and Arash Massoudi of The Financial Times

This article was originally published on The Financial Time's website. Click here to view the original article.

As Bernardo Hees this week told Kraft Heinz employees that he would be stepping down as chief executive, the Brazilian insisted on how “proud” he was of the company’s achievements.

Profit margins at the group behind brands including Philadelphia cream cheese, Oscar Mayer hot dogs and Maxwell House coffee were “world leading”, he wrote in a memo to employees. Sales had at least kept pace with US peers in the struggling industry.

Investors have lately taken a less upbeat view of Kraft Heinz, created by the 2015 merger of two of America’s best known food groups in a deal engineered by the investment firm 3G Capital and backed by Warren Buffett’s Berkshire Hathaway. The company has since lost more than half its market capitalisation, with Wall Street increasingly worried by an over-reliance on cost cuts to drive returns.

Mr Hees’ departure comes just weeks after a disastrous set of results in which the company took a $15bn writedown, cut its dividend by one-third and revealed the US Securities and Exchange Commission was investigating its accounting in procurement.

“Something needed to be done,” said John Baumgartner, packaged food analyst at Wells Fargo. “There was a low degree of confidence in the investment community with the status quo.”

However, Kraft Heinz’s choice of Miguel Patricio, a marketing executive from AB InBev, the brewer behind Budweiser beer, as the next chief executive has raised concerns over whether the change is enough to mark a clean break from a 3G approach best known for cost cutting and ambitious acquisitions.

Mr Patricio is not a 3G partner, as Mr Hees was, although he is connected to the investment group through a two-decade career at AB InBev. The drinks company is backed by the same trio of Brazilians, including billionaire Jorge Paulo Lemann, who founded 3G.

“The real question is whether their pick for CEO can really impose a new culture and mentality within the firm,” said one leading sector adviser. “More of the same won’t work now. They need to change fast.”

After an initial rally, Kraft Heinz shares closed with little change on Monday. The stock has dropped by almost a quarter this year.

“The company is still significantly controlled by 3G,” said Chris Growe, an analyst at Stifel.

As global chief marketing officer at AB InBev for six years, Mr Patricio, a Portuguese national who attended business school in Brazil, was responsible for beer brands including Corona and Stella Artois. Marketing initiatives under his watch included a rebranding of Budweiser as “America” and the roll-out of limited edition National Football League cans for Bud Light.

Mr Patricio, who will take the top job in July, joins a list of new chief executives in a consumer packaged goods sector grappling with quickly changing shopper tastes and rising competition from retailers developing their own, cheaper, versions of the same products. Unilever, Colgate-Palmolive and Campbell Soup have also changed leaders in recent months.

In an echo of the background of some of the other newly-appointed leaders in the sector, Mr Patricio has built his career in marketing — a field companies are leaning on as they try to convince increasingly sceptical shoppers that big, well-established brands are still alluring. Other new chief executives with strong marketing pedigrees include Sean Connolly at ConAgra and Jeffrey Harmening of General Mills.

“Increasingly, marketing folks are getting the nod to CEO,” said Doug Ehrenkranz, managing partner at the executive search firm Boyden who specialises in consumer goods. “That used to be the exception, not the rule.”

Noting the rising importance of consumer analytics and research, Mr Ehrenkranz said marketing in large part determined the products that companies such as Kraft Heinz sell. “The real heavy lifting comes months and even years before the marketing campaigns are devised,” he said.

Speaking to the Financial Times following his appointment, Mr Patricio said he wanted the group to anticipate new consumer trends rather than react to them. “If we can understand the next market trends we can lead the future and win,” he said, adding that he brought a “new background” to the top job.

One former colleague at AB InBev says he was seen as a “talent builder” at the brewer, who was not afraid to ask difficult questions. “He was a champion for marketing to experiment more. He has a healthy belief in the power of investing in the equity of brands.”

Yet the challenges facing him at Kraft Heinz are considerable. While attacking costs have helped push operating margins comfortably above 20 per cent, the top line has been decidedly sluggish. The company, which has headquarters in Chicago and Pittsburgh, generated sales of $26.3bn in 2018, down about 4 per cent from 2015 levels.

While the 52-year-old gave few immediate details of his strategy, he made clear his focus would be to grow organically rather than by acquisition, which has long been a hallmark of 3G. That marks a change in emphasis from Mr Hees, who signalled even after the release of the alarming earnings in February that Kraft Heinz had an appetite for more deals.

The options for growth are constrained by the company’s long-term debt burden, which stood at $30.9bn at the end of last year.

Mr Baumgartner added that there was still room for Kraft Heinz to expand — perhaps in product categories where it has little presence, such as premium cheese.

“Kraft Heinz might not be considered a growth company,” he said. “But the performance could certainly be better than it has been over the past two years.”

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