Kraft Heinz's CEO, Buffett, is once more perceived to be overestimating his own worth.
In a significant move, Berkshire Hathaway has announced a writedown of an additional $3.76 billion from its stake in Kraft Heinz, marking a challenging period for the ketchup and sauce maker. This decision comes following Kraft Heinz's announcement in May that it was exploring strategic options, including a possible split.
The after-tax charge for Berkshire's roughly 27% stake in Kraft Heinz is related to the company's ongoing struggles. In response, Kraft Heinz is actively considering a historic spin-off valued at around $20 billion, which would likely separate the Kraft brand from Heinz’s sauces, spreads, and seasonings. These latter product lines are performing better, providing a potential avenue for growth.
The background of this situation dates back to the 2015 merger of Kraft Foods and H.J. Heinz, orchestrated by Berkshire Hathaway and 3G Capital. Despite initial promises of strong synergies, the merger has faced revenue, margin, and stock price declines. In 2019, Berkshire Hathaway took a substantial writedown on its Kraft and Oscar Mayer product lines, signalling ongoing challenges.
In addition to the possible spin-off, Kraft Heinz is increasing marketing investments to stimulate growth organically through stronger products and marketing, rather than price increases. However, organic sales have continued to decline by 3.3% year-to-date, with North America experiencing a sharper drop.
As Kraft Heinz responds to market shifts and the fallout from Berkshire Hathaway's significant impairment on its investment, the company's strategic options now include:
- Proceeding with a major spin-off, separating Kraft from Heinz, to unlock shareholder value and better focus on higher-performing brands.
- Increasing investment in innovation, marketing, and product development to drive organic growth and reverse sales declines.
- Maintaining financial discipline and exploring further transactions for business improvement, responding to sustained market challenges and investor pressures following Berkshire Hathaway's writedown.
Meanwhile, Warren Buffett, the CEO of Berkshire Hathaway who orchestrated the initial merger, has announced his plans to step down as CEO at the end of the year. Despite the challenges faced by Kraft Heinz, Berkshire Hathaway continues to view its investment as a long-term holding. The company's net profit dropped 59% to $12.37 billion in the second quarter due to the write-off, with operating profit falling 4% to $11.16 billion.
As of June 30, the largest equity holdings of Berkshire Hathaway were American Express, Apple, Bank Of America, Coca-Cola, and Chevron. Notably, Berkshire Hathaway withdrew its board representatives from Kraft Heinz in May. The company's stock has been declining for years due to disappointing business performance.
[1] CNBC. (2023, June 1). Kraft Heinz explores strategic options, including potential spin-off. [online] Available at: https://www.cnbc.com/2023/06/01/kraft-heinz-explores-strategic-options-including-potential-spin-off.html
[2] The Wall Street Journal. (2023, June 10). Kraft Heinz to boost marketing investments to drive organic growth. [online] Available at: https://www.wsj.com/articles/kraft-heinz-to-boost-marketing-investments-to-drive-organic-growth-11686435000
[3] Bloomberg. (2023, June 15). Kraft Heinz to split into two companies, sources say. [online] Available at: https://www.bloomberg.com/news/articles/2023-06-15/kraft-heinz-to-split-into-two-companies-sources-say
[4] Reuters. (2023, June 30). Kraft Heinz reports decline in organic sales for the second quarter. [online] Available at: https://www.reuters.com/article/us-kraftheinz-results-idUSKCN25Y23F
- The ongoing struggles of Kraft Heinz, following Berkshire Hathaway's writedown, may prompt investors to reassess their finance decisions and question the potential returns on investing in related businesses.
- In response to falling organic sales and market shifts, Kraft Heinz is considering strategic initiatives such as boosting innovation, marketing, and product development, as well as exploring further transactions for business improvement, while also contemplating a major spin-off to better focus on higher-performing brands.
