If you or your company do not focus on the critical path, sooner or later, someone will do it for you—with the result that you could be out of a job. So, start thinking like you own the company. Better yet, think like a hedge fund activist who is eyeing your company as a potential takeover target. That’s what the employees and leadership of HJ Heinz ought to have been doing, as we will explore.
What is the current “known” value of your company, and what is the “hidden” value that an outsider would try to “unlock?” What costs would the hedge fund go after to slice off your balance sheet? What new revenue sources would they try to grow to add more profit? What new investments would they make for tomorrow’s critical path? In other words, what changes to the critical path would they make so that they could get a higher return?
As you look at your company’s internal operations, think like a hedge fund analyst. What changes would they make to increase the agility and nimbleness of your company? Which employees would they keep and which ones would they replace? What would they do to make the critical path better, smarter, faster, shorter, more effective, and more profitable? And not least of all, what could you personally contribute to these critical path initiatives?
Keep in mind that outside investors don’t “love” your organization or you. The only ones who may love the company (but not you) are the people who started the company from scratch, poured their hard-earned cash, time, and tears into it, and then nurtured it to success. To everyone else, the company is just a bundle of assets that must produce a return (just as you are a bundle of assets to your employer that must return more than you cost, as we will discuss in more detail in Part Six).
By thinking like these outside investors, you can keep them at bay by being one step ahead of them. If you want the company (and you) to maintain control of the business (and your job), then get your company ahead of the critical path sooner and better than outside investors can do it.
As you ponder this perspective, let’s take a closer look at what happened at HJ Heinz, maker of the famous ketchup.
Founded in 1869 by a German immigrant bottling horseradish in Pittsburgh, Heinz became a $9 billion food company selling everything from baby food to Baby Bites. Known for lavish employee perks, such as golf club memberships and first-class travel, it came under fire in 2006 by the activist investor Nelson Peltz who wanted Heinz to cut costs. After winning two board seats, Peltz forced many of those perks to disappear. By slashing costs, Heinz’s stock price rose 80% over the next six years as it outperformed its industry peers.
Nelson Peltz made Heinz take critical path action that its executives were reluctant to do on their own.
A successful realignment along the critical path. You would think the story ends there. It doesn’t.
When Peltz let it be known in 2012 that he was willing to sell his stake in Heinz, a Brazilian private equity firm called 3G teamed up with Warren Buffett to buy out all of Heinz in 2013 for $23 billion. 3G had a cost-cutting reputation after it bought Burger King in 2010, slashed its expenses significantly, including 600 jobs, and took it back public in 2012. Heinz’s management, having already cut many costs under Peltz and being known as a lean-cost competitor in the food industry, felt pretty good about 3G’s takeover. After all, according to Nicholas Fereday, a food industry analyst, Heinz was considered a well-run and efficient company. There couldn’t be much more to cut, if anything.
The good feelings didn’t last long.
At a regular corporate retreat for the top 50 executives at a Four Seasons in San Francisco a few weeks after the buyout, Bernard Hees, the new 3G appointed CEO of the company, sat in a side room. Throughout the day, he grilled each executive about her or his contributions to Heinz’s critical path. At the end of the day, 11 senior execs lost their jobs. Hees eliminated the corporate jets, 350 corporate jobs in Pittsburgh, and color printing. He did away with plush executive offices, gutting them to make room for open-plan workstations. He crammed managers into smaller spaces, and moved out of six floors at the company’s Pittsburgh headquarters.
Gil Schneider, the former CFO of Heinz's North America operation who lost his job during this time, reportedly said, "We weren't fat from head to toe. We were fat from head to shoulder." Senior-executive compensation and travel were left relatively untouched during the Peltz years. "We used to have meetings to discuss cost cutting at the Ritz-Carlton in Naples [Florida]," Schneider said. He and his fellow executives "always thought that was a little incongruous."
Heinz’s top management thought they were immune from the demands of the critical path. They weren’t.
Neither were the rank and file. The folks at Heinz’s frozen food plant in Pocatello, Idaho, were glad when they heard that Warren Buffett was involved in the 3G buyout. They knew his reputation for only buying companies that were already good businesses, with good management in place. He then supposedly left them alone to keep the good times rolling.
Considered a model plant, Heinz’s management ranked the Pocatello plant #1 in both 2009 and 2011 for quality, safety, and cleanliness. Plus, it had already done some belt tightening under Peltz’s influence, like cancelling the Christmas party. So, they assumed that it would be favored by the new 3G management. Plant managers gave a thumbs-up to the deal, telling workers to expect plant expansion.
If only.
In November 2013, shortly after the buyout, the new Heinz owners announced that they were closing the model plant in Pocatello. The reason: its location made Heinz’s critical path too long and therefore too expensive. Heinz built the plant originally in Idaho’s potato patch to be close to the main ingredient in its Ore-Ida frozen french fries. As the product lines shifted to frozen lasagna and enchiladas, that advantage was lost.
Frozen enchiladas made in a San Diego plant were being packed into refrigerated trucks to travel almost a thousand miles to Pocatello for further processing. Simultaneously, 70% of the ingredients used at the Pocatello plant were being shipped in from warehouses 1,000 miles away on the other side of the Mississippi River. The model factory added rice and sauce to the enchiladas before sending the finished goods to East Coast distribution centers several thousand miles away where they had to make their way to large customer segments on the East Coast.
"It's a long way from Pocatello to customers in the Northeast and Southeast," said Mr. Schneider, the former CFO. "3G didn't do it with malice. It's all business." From a customer and logistics standpoint, the model factory was a long detour off the critical path, making it longer, less effective, and less profitable.
The Pocatello plant wasn’t alone. Heinz also announced plant closings in South Carolina and Ontario, Canada.
Up to this point, Heinz’s new managers from 3G focused on the cost side of the critical path. However, Heinz’s customer and competitive environment had also changed in ways that management hadn’t yet responded to. Consumer tastes have moved from processed pre-packaged food to healthier, more natural, more locally supplied, and fresher food. Heinz still has not come up with a good answer for that. Remaining on the critical path will depend on their ability to do so.
Since Heinz bought Kraft Foods in 2015, the combined company has struggled to improve the revenue side of the critical path. They have lost market share in many of their traditional products like Jello and Oscar Meyer deli meats. Their new product innovations in 2017 only accounted for 7% of sales, while their competitors’ innovations contributed sales in the low to mid-teens. Now management is looking to drop some product lines altogether to free up capital to invest in more promising products. Mr. Hees has praised the launch of a new Kraft Heinz-brand mayonnaise, as well as Mayochup, a mix of Heinz ketchup and mayo, as vehicles of their revenue growth.
But, as a Wall Street analyst reported, “So far, there is no evidence these efforts are paying off. It hardly seems that consumers are crying out for an alternative to established mayo brands like Hellmann’s and indeed Kraft. If this is what passes for innovation at Kraft Heinz, investors are right to doubt its capacity for growth. Until this food conglomerate demonstrates an ability to actually start selling more food, investors should leave it on the shelf.”
Leave it on the shelf, they have. In 2019, it had to take a $17 billion write-down on the value of its old-time products that had less appeal to its customers. Meanwhile, they had no new innovative products that would win back those customers. Even Warren Buffet, who partnered with 3G, has stated publicly that he overpaid for Kraft during its 2015 merger with Heinz. Berkshire Hathaway saw its own stock drop as it swung to a $25.4 billion loss in the fourth quarter of 2018 due to Kraft Heinz’ unexpected write-down and other unrealized investment losses.
One might argue that Heinz was functioning perfectly well prior to its takeover and that 3G miscalculated, thinking it could find hidden value to unlock. As we noted in the Sear’s example, perhaps 3G’s cost cutting went into the Heinz organization’s muscle and bone doing irreparable harm. To compound the injury to Kraft Heinz, 3G’s over-focus on cutting today’s costs led them to ignore today’s and tomorrow’s revenues via products that its customers want. It seems 3G did not know how to diversify into new products like Goizueta did at Coca-Cola.
Or, maybe 3G picked the wrong target. Instead of buying an already low cost target like Heinz, they should have pursued one of Heinz’s more complacent competitors, like Campbell’s, Smuckers, Mondolez, Kellogg, or ConAgra.
Kraft Heinz’s cost cutting and focus on the critical path has not been lost on those competitors. They were surprised that 3G wrung $1.7 billion in costs out of their low-cost competitor. Each of them has re-focused on both the cost and revenue parts of their critical path, driving costs down across the industry, while also getting in better touch with their customers’ product preferences. If they did not, they feared finding themselves in the sights of private equity take-over experts.
"Many in the industry have been surprised (scared!) by the size of the savings squeezed out of Heinz, a company that was previously considered well-run and efficient," industry analyst Nicholas Fereday commented. "This has left them sifting through their own business operations for savings knowing that if they do not, they might just find themselves on the menu of private equity."
That is the real takeaway from this case study of Heinz.
Sure, maybe Heinz would have been better off left having never been purchased by 3G. But that’s a moot point. Try telling that to the 11 top executives who got fired at the quarterly meeting. Or the 650 employees who lost their jobs. Or all the ex-employees at the Idaho, South Carolina, and Ontario plants that were shuttered. Or the employees who lost their offices and now are crammed together.
As mentioned in the previous chapter, if you don’t fix your company, someone else will fill in the gap -- either competitors, investors, or customers who go elsewhere. From the Kraft Heinz merger in 2015 to 2019, the stock market has punished the company’s stock with a 65% price drop. Mr. Hees was replaced as CEO in 2019. Kraft Heinz may now attract another hedge fund or PE firm who might think it can buy the company on the cheap and unlock hidden value by fixing its critical path.
Critical Path Action Items
How would a hedge fund view your company?
What “value” would they try to unlock?
What costs would they slash?
What new products or projects should they invest in?
Who would they keep and who would they fire?
If you were interviewed by new owners, would they keep you or fire you?