Kraft Heinz
Company Overview
Kraft Heinz is one of the world's largest food companies, selling brands including Heinz ketchup, Kraft mac and cheese, Oscar Mayer, Philadelphia cream cheese, and dozens of others. Berkshire partnered with Brazilian private equity firm 3G Capital to acquire Heinz in 2013 and then engineer the merger with Kraft Foods Group in 2015, creating a combined company with $26 billion in revenues.
Investment Story
2013: Heinz acquisition. Berkshire and 3G Capital jointly acquired H.J. Heinz Company for $23 billion — Berkshire providing $4 billion in common equity plus $8 billion in preferred stock paying 9% annually, and 3G providing common equity as well. The 3G partnership was attractive to Buffett because 3G's management team (Jorge Paulo Lemann et al.) had demonstrated extraordinary value creation through operational efficiency at other food companies.
2015: The Kraft merger. 3G and Berkshire engineered the merger of Heinz with Kraft Foods Group, creating Kraft Heinz Co. Berkshire's stake in the combined company was approximately 26.7%, making it the second-largest shareholder after 3G.
3G's zero-based budgeting. 3G applied its signature zero-based budgeting (ZBB) methodology to Heinz and then Kraft — requiring every expense to be re-justified annually rather than authorized based on prior year. This produced dramatic overhead savings (thousands of jobs eliminated, facilities consolidated) that temporarily boosted reported earnings margins.
2017–2019: The thesis fails. The efficiency improvements proved insufficient to offset changing consumer preferences away from traditional packaged food brands. Millennials preferred fresh food, ethnic cuisines, and local brands over heritage names like Kraft and Oscar Mayer. Revenue declined persistently. The 2019 annual report disclosed a $15.4 billion goodwill impairment — acknowledging that the brands were worth dramatically less than the acquisition price implied.
Buffett's candid assessment. In the 2019 letter, Buffett admitted: "I was wrong in a couple of ways about Heinz. I paid too much for it." He wrote down Berkshire's Kraft Heinz investment by approximately $3 billion and held the remaining position as a long-term, lower-return investment.
Buffett's Own Words
Johnson & Johnson.................................. 2.2 3,943 4,287 124,393,800 Kraft Foods Inc........................................ 8.1 4,152 4,059 48,000,000 Moody’s Corporation .............................. 19.1 1,714 3,486,006 POSCO.................................................... 4.5 2,136 101,472,000 The Procter & Gamble Company ............ 3.3 1,030 7,450 17,170,953 Sanofi-Aventis......................................... 1.3 1,466 1,575 227,307,000 Tesco plc...........................................
Johnson & Johnson.................................. 2.2 3,943 4,287 124,393,800 Kraft Foods Inc........................................ 8.1 4,152 4,059 48,000,000 Moody’s Corporation .............................. 19.1 1,714 3,486,006 POSCO.................................................... 4.5 2,136 101,472,000 The Procter & Gamble Company ............ 3.3 1,030 7,450 17,170,953 Sanofi-Aventis......................................... 1.3 1,466 1,575 227,307,000 Tesco plc...........................................
Kraft Foods Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8.9 4,330 3,498 3,947,554 POSCO . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.2 1,191 91,941,010 The Procter & Gamble Company . . . . . . . . . . . . . . . . . 3.1 5,684 22,111,966 Sanofi-Aventis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.7 1,827 1,404 11,262,000 Swiss Re . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.2 227,307,000 Tesco plc . . . . . . . . . . .
Kraft Foods Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8.8 4,330 3,541 3,947,554 POSCO . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.2 2,092 83,128,411 The Procter & Gamble Company . . . . . . . . . . . . . . . . . . . . 2.9 5,040 25,108,967 Sanofi-Aventis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.9 2,027 1,979 234,247,373 Tesco plc . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.0 1,367 1,620
Kraft Foods Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.6 3,207 3,063 19,259,600 Munich Re . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10.5 2,896 2,924 3,947,555 POSCO . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.6 1,706 72,391,036 The Procter & Gamble Company . . . . . . . . . . . . . . . . . . . . 2.6 4,657 25,848,838 Sanofi-Aventis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.0 2,060 1,656 2
Investment Lessons
Cost-cutting does not substitute for brand investment. Zero-based budgeting can produce dramatic short-term margin expansion by slashing costs categorized as 'unnecessary.' What ZBB cannot determine is whether cost reductions that seem unnecessary in the short run are actually necessary to maintain brand relevance over time. Kraft Heinz cut advertising, reduced R&D, and streamlined product innovation — costs that looked discretionary but were actually sustaining consumer awareness and brand freshness. The consequence was revenue decline that no amount of further cost-cutting could reverse.
Heritage brands are not permanent consumer franchises. Heinz ketchup and Kraft mac and cheese were legitimately strong brands in 2013. The acquisition mistake was assuming these brands' competitive positions were as durable as Coca-Cola's or See's Candies'. Consumer preference for familiar, traditional food brands proved more transient than Buffett expected as demographic and dietary preferences shifted. This was a competitive durability error, not a price-paying error alone.
Paying premium prices at cyclical peaks of brand valuation is dangerous. The 2013-2015 period was the peak of corporate enthusiasm for heritage consumer brands — multiple large food companies were acquired at premium valuations during this period. Acquiring at a price that required the brands to demonstrate ongoing revenue growth left no margin for the secular decline that actually occurred.