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Friday, April 19, 2024

Patricio’s $20 million gamble

The new Kraft Heinz CEO is so confident of bringing the beleaguered food giant back on track, he’s put his money where his mouth is. By Eamonn Duff

Miguel Patricio

Miguel Patricio has demonstrated his commitment to Kraft Heinz by investing $20 million of his own money in company shares. The purchase agreement, subject to a four-year restriction on transfer, was disclosed last month when the food giant finally submitted its 2018 financial results – three months past the US regulatory deadline. The company also presented Patricio’s pay deal which it described as “largely performance-driven, based on sustained and significant growth in long-term shareholder value.” Certainly, anxious investors will be praying his arrival, on July 1, signals a new dawn. In early 2017, Kraft Heinz was a healthy looking $90 stock. Fast forward, however, to February this year and it found itself announcing a $15 billion write-down of its best-known brands, a sharp cut in quarterly dividends and an investigation by America’s securities watchdog into its accounting policies.  The triple blow sent company shares into freefall, plummeting 27 percent in a single day. The world’s fifth largest food company has been struggling for breath ever since.

“I bring diversity of thought to the team… and I think that this is critical in any company”

In May, an internal probe into its own accountancy procedures uncovered errors totalling £180 million. In a statement addressing the issues, the company said it had been forced to restate three years of financial results and was “taking actions” to improve internal policies. “We are pleased that Kraft Heinz is returning to a path of normalisation,” is how Chairman of the Board, Alex Behring, framed the situation. Shareholders, however, may need some convincing. Company stock is still suffering a year to date decline of around 30 percent and the pressure is now firmly on Patricio to deliver stability – and growth. “These next two months, I’m going to dedicate fully to knowing the people (at Kraft Heinz), to build on culture, to agree or tweak the long-term strategy of the company, and to know the financials behind the business in detail. These are the four big things I want to do,” Patricio told Reuters. “I bring diversity of thought to the team. My background is very different from the background of the other team members. And I think that this is critical in any company.”

Kraft and Heinz merged in 2015 through a deal that combined the investments of 3G Capital and Warren Buffett’s Berkshire Hathaway. On paper, it seemed a match made in heaven. But even before February’s meltdown, the company had been struggling with consumers’ changing tastes – and its own brutal cost-cutting policy. More than 5,000 workers lost their jobs within months of the mega-merger. The belt tightening, for those left behind, included memos from former CEO Bernardo Hees detailing a variety of “provisional measures” the company was taking to avoid unnecessary spending. They included instructing workers to print on both sides of paper, reuse office supplies like binders and file folders, and switch off computers before leaving the office. Executives, at the time, anticipated $1.5 billion in annual costs savings by 2017. They, of course, could never have foreseen the upheaval ahead.

If he can lead the company out of the quicksand, he stands to gain considerably more than his original wager

Patricio replaces Hees in the Kraft Heinz hot seat after a successful 20-year career with the world’s biggest brewer, AB InBev. Since 2012, he had served as its Global Chief Marketing Officer, overseeing brands such as Corona, Budweiser and Stella Artois, accelerating their organic sales growth up to the high single digits, nearly a third of the company’s organic growth in 2018. In his final year at AB InBev, it became the most awarded brand owner at the Cannes Lions awards for advertising and creative communications. The 52-year-old’s prior roles at AB InBev included stints as President of Asia Pacific and President of North America. When Kraft Heinz announced his appointment in an April press release, Patricio was quoted simply as saying he aimed to “capitalise on the growth opportunities that exist in the rapidly evolving food industry.” However, in later media interviews, he was far more candid about his new employer – and where he believed it had lost its bearings. “I think the obsession for efficiency has to be much bigger than the obsession for cutting costs,” he told Reuters. “Cost cutting should be a priority for any company. However, you cannot cut costs every year.” Around the same time, he remarked to the Wall Street Journal that some of Kraft’s brands were “a little bit dusty and we have to rejuvenate them.” He also flagged, with Forbes, the three brands he thinks carry “huge potential”, namely Philadelphia, Heinz and Planter’s. By ploughing $20 million of his own money into the business, Patricio is clearly banking on his own ability to reinvent the business – and make those dusty brands more relevant. Kraft Heinz stock has lost more than 50 percent of its value over the last 12 months and continues to languish around the $31 mark: if he can lead the company out of the quicksand, he stands to gain considerably more than his original wager. He also appears completely unphased by the switch from beer to the more volatile packaged food sector. “Consumer goods are consumer goods. Where there is transformation, there is opportunity,” he said, adding: “Great companies are the ones that have the costs in control, that grow the top line, and grow the bottom line – it’s not one or the other. “I have very good experience on that – on being more efficient every year, which doesn’t mean cutting costs. It means to be more efficient”.

Given the current Kraft Heinz mess, how should future success be defined? “It’s like sports,” said Patricio. “Either you win, or you do not.”

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