“Heinz: Under Buffet’s wings but outside McDonald’s Heaven”

In June 2013, America’s Investing Alchemist Warren Buffet finalized the purchase and privatization of the world’s largest and most renowned ketchup maker “Heinz Ketchup” but after 5 months of victorious celebrations, Heinz got its first slap in the face from what is probably their biggest and most valuable customer McDonald’s.

The news – as shocking as it may be to the rest of the world- was probably expected by Heinz after appointing Burger King’s former Worldwide CEO Bernardo Hees as the new CEO (He is still a vice chairman of Burger King’s Board, conflict of interest? Anyone?)

But what does it really mean for Heinz to be taken under Buffet’s wings? And what does it also mean to be kicked out of McDonald’s heaven?

Let’s begin by being kicked out: In USA, the effects will probably be insignificant given that Mr. Ronald only uses Heinz in 2 markets Pittsburgh and Minneapolis (Yey my state!). In fact, Heinz lost McDonald’s USA more than 40 years ago during their tomato shortage crisis in the 70’s (so the 70’s had 2 disasters oil shortage and tomato shortage how come people only remember the oil shortage didn’t they miss their ketchup then?). But Heinz will feel the heat in their European Business Unit and in what McDonald’s calls APMEA (Asia-Pacific Middle East) those markets have been the fastest growers for McDonald’s compared to the slow growing USA in terms of sales, revenues and branch openings  in the last 3 years. (McDonald’s have plans for 2000 stores in China by the end of 2013) and what is the number of Burger King Stores globally? 11,100. In other words China alone represents 18% on Burger King’s scale. This kind of dwarfs what is supposed to be the world’s second largest Fast Food Hamburger Chain. Keep that in mind and add to it that two thirds of Heinz’s 11 and a half billion dollars in annual sales come from outside the USA and the picture of how hurt Heinz may be by McDonald’s move becomes clearer. The question that poses itself here is whether McDonald’s really thought this one through? They did announce that they were gradually moving away but will they be able to find one supplier to fill in Heinz’s shoes in their global market? More important, what if Heinz decided to cut off their supplies instantly? Sure they will be shooting themselves in the foot, but if the other guys have already taken their decision why to extend the pain?

But what made Heinz fall under the attention of the investment alchemist Mr. Buffet? Up until 2006 Heinz was suffering, then they started implementing a very aggressive plan that lead to cutting costs. The plan – though weird in some of its aspects – was successful (Heinz makes its employees pay for their parking spots in the company’s HQ parking!) that was combined by an overseas acquisition plan. So in contradiction to most major sales where a company gets sold for its poor performance, Heinz was at a strong position when the sale happened. Right after the purchase in which he partnered with the Brazilian investment firm 3G which is known for its aggressive shakeups in every purchase it does and for changing CEOs and cutting the workforce in a vigorous attempt to slash SG&A costs; Heinz’s former CEO was replaced right away signifying a new era at Heinz where the shakeup policy which was already started in 2006 is getting another shakeup itself.

Buffet can be called the Alchemist or King Midas because he has the golden touch in investment; all the companies he has major stakes in are some of the most profitable in the world. He has an eagle eye when it comes to catching the perfect prey and he sees logic in places where others see nothing. If you take a look at his portfolio you will realize that contrary to most investors and mutual funds that are going like crazy after tech companies and junk bonds, Warren Buffet always looks for the simplest business models to invest in. In fact, IBM is as most “techy” as it gets and even in there he does not have a big stake. At almost $141,000, Berkshire Hathaway’s stock is highest priced on the NYSE and most of the companies in the portfolio witnessed impressive growth after they were taken over by Berkshire. Some of the names in the portfolio are: Geico insurance (remember the famous lizard?), Dairy Queen Ice-cream, Burlington Northern and Santa Fe Railway Company, Acme and Fruit of the loom. All are very successful brands with very simple business models.

But this time it’s different, Buffet is going head to head against the fast food behemoth, in ways it is a clash of the titans. In the past, we have seen many companies go bankrupt after falling off the grace of Wal-Mart because they could not find any replacement for the big volume of business they lost. McDonald’s is the Wal-Mart of fast food and falling of their grace will surely have drastic effects. Of course Heinz is a big name and they supply many other chains but place them next to McDonald’s and they would be just…… Pocket change.

In the Greek mythology, King Midas used his touch and turned everything Gold; but then he touched his daughter and she changed to gold also; has Warren Buffet touched his own daughter this time?


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