Brazilian investment firm 3G Capital has built an empire of consumer companies, and in the process, created an operational model that is gaining traction industry-wide.
3G has been on a roll over in recent years, snapping up consumer firms, slashing costs, and forming mergers. Along with Warren Buffett’s Berkshire Hathaway, 3G backed the 2015 merger of Kraft Foods and Heinz, one of the world’s largest food and beverage conglomerates. Anheuser-Busch InBev, which went on to acquire SABMiller, is also a 3G creation. It was a rare defeat when, in February 2017, Kraft Heinz’s whopping $143 billion bid for Unilever was rejected.
Perhaps more significant than the megamergers it is forming is the impact 3G’s modus operandi is having on the consumer industry. These are adapt-or-die times, particularly for big food companies. Consumers are demanding products that are healthier, more environmentally friendly and ethical. Strong online and local rivals are emerging. Big American food firms like General Mills and J.M. Smucker, as well as Swiss multinational Nestlé have had to lower revenue estimates and sales goals.
In this climate, the appeal of 3G’s “slash costs and merge” formula is growing. Especially popular is its “zero-based budgeting” strategy, which requires managers to justify their expenses every year, down to the last detail. It also encourages an “ownership mentality” among managers, linking financial rewards to company performance.
There is some doubt, however, as to whether 3G’s efficiency-centric model supports long-term growth. Further, some regard it as ruthless, as it typically entails closing factories and slashing thousands of jobs. Kraft Heinz closed seven factories in North America. This gave its profits a boost; however its sales have fallen in four of the six quarters since the merger.
The derailment of Kraft Heinz’s attempt to bring Unilever into the fold was due, at least in part, to a clash of cultures. Unilever is known for its emphasis on corporate responsibility. Its Chief Executive, Paul Polman, maintains that “products that meet the highest standards of social and environmental sustainability perform better than products that don’t”, The Economist notes.
At the moment Unilever’s operating-profit margin trails that of Kraft Heinz. This might explain why it is now among the many big consumer companies adopting aspects of the 3G credo. For example, last year the Anglo-Dutch giant introduced some zero-based budgeting. American food makers Kellogg, General Mills and Campbell Soup have made similar moves. Polman also said he plans to promote an “owner’s mentality” within the company. Some Unilever investors are pushing for more, while 3G itself is likely looking for its next acquisition target.