Ahead of my Senior Executive Breakfast on June 8th in Geneva in Four Season Hotel Des Bergues, I will release every few days brief insights of the drivers behind the wildly successful FMCG companies. Those insights will be developed further during the Executive Breakfast and put in perspective with detailed case studies.
Today, we are not talking about a specific FMCG but about a private equity firm that has been transforming the whole food & beverage industry for the past 30 years and that is now showing growing ambition: It is 3G Capital. For people not familiar with 3G Capital, here are few facts:
3G Capital is a global investment firm focused on long-term value in the consumer & retail industries. It has been founded by Brazilian investors (Jorge Paulo Lemann, Carlos Alberto Sicupira, Marcel Herrmann Telles and Roberto Thompson Motta) in 2004 . It owns/co-owns:
3G Capital has been regularly making the FMCG industry headlines for the last 5 years as much for its aggressive cost-cutting style as for its impressive track records of financial improvement. Let’s look at the facts and understand what sets 3G Capital apart.
3G Capital has been regularly making the FMCG industry headlines for the last 5 years as much for its aggressive cost-cutting style as for its impressive track records of financial improvement. Let’s look at the facts and understand what sets 3G Capital apart
Going beyond cost cutting, 3G Capital has been (so far) a champion at creating long term shareholder value
– From a regional player with an EBIT of 9% in 2000, Ab-Inbev has raised to the #1 position in the beer industry. It is also by far the most profitable (EBIT at 32% in 2015 vs. only 12-14% for Carlsberg/Heineken) and the fastest growing brewer over 2000-15 (Net revenue CAGR of 14% vs. 8% for the peer group)
Over the last 15 years, Ab-Inbev expanded its EBIT 23 times… improving its EBIT % from 9% to 32% while delivering a revenue CAGR of 14%
– This growth was mostly driven by a string of acquisitions (mainly InterBrew; Ambev and Anheuser-Busch)
– Ab-Inbev has been so successful that it acquired in 2015 SABMiller, the #2 largest brewer for more than $100bn. The overall group will weight more than $60bn in revenue and will be almost three times bigger than Heineken and seven times larger than Carlsberg (before any assets disposal required for Anti-Trust reasons)
– Since its acquisition in 2010 by 3G Capital, Burger King profit has trippled and its revenue growth has been accelerating steadily (+4% in 2013, +6% in 2014, +10% in 2015) despite a flat market growth and fierce competition from casual dining format (Five Guys, Chipotle…)
Since its acquisition in 2010 by 3G Capital, Burger King profit has trippled and its revenue growth has been accelerating steadily (+4% in 2013, +6% in 2014, +10% in 2015) despite a flat market growth and fierce competition
– Since 2012, Burger King has been consistently outperfoming competition (McDonald’s, Wendy’s) and became the 2nd largest fast-food chain ahead of Wendy’s. During the same period (2010-15), McDonald’s sales and profit stagnated
– Logically, Burger King stock outperformed its peers and the overall Restaurant Brands International Holding delivered a staggering 250% return between mid 2012 and end 2015.
– Since its acquisition in July 2015, 3G Capital has been mainly focused on integrating and streamlining KraftHeinz. Organic revenue performance has been behind its peers with low single digit decline posted both in 2015 and Q1 2016 but structural profitability (operating income) has already improved dramatically (+400bps in Q1 2016 vs YAG) from 19% to 23%. which sets already a new benchmark for the peer group and more margin improvement are still under way
If KraftHeinz has yet to demonstrate its ability to deliver long term growth; 9 months only after the acquisition, the progress delivered on the profitability front is impressive and Kraft Heinz displays already by far a leading industry margin
Going beyond individual turnaround cases, what are the common drivers for success? What 3G Capital is doing differently? What is the 3G Capital playbook to unlock dramatic value?
What is the 3G Capital playbook?
We reviewed in details each case study and we isolated 5 ‘genes’ for success spread across strategy, culture and execution that explained 3G Capital’s outperformance.
1. A clear disciplined playbook
All acquisitions seem to follow the above playbook that we tried to formalize:
– The priority is always to integrate acquisitions and deliver the promised synergies in the first 24 months, that is at that time that structural profitability increases dramatically;
– During that time non value adding costs are ruthlessly cut; zero based budget (ZBB) implemented and organization structure is streamlined;
– New management teams are rapidly put in place and young internal talents are mixed with experienced 3G partners. For example, Bernardo Hees was the former CEO of Burger King, then the CEO of Heinz and today the current CEO of Kraft Heinz. Carlos Brito has been working in the beer industry alongside 3G Capital for more than 25 years and is since 2010 the CEO of Ab-Inbev;
– An entrepreneurial culture of business ownership is encouraged with agressive bonus structure, flat organization and use of opened space;
– Once integration is completed, priority is to focus and execute the growth strategy. For example, at Burger King growth really kicked-in in the 3rd year post acquisition and the key drivers for success were:
i. The renovation of current restaurants, the revamp of menu (grilled hot dogs introduction, ..), the use of impactful promotions (10 nuggets for $1.49…) while maintaining low complexity in restaurants and improving service. It enabled BK to deliver yearly like-for-like growth of 3 to 5% between 2013 and 2015.
ii. The implementation of a new franchise model that boosted considerably restaurants openings, revenue growth and ROCE.
– Finally, when structural profitability potential is maximized and growth plans are in place, time comes to look for new acquisitions that could deliver synergies and build further the business. Usually, it is every 2 to 4 years and it depends acquisition opportunities. Kraft acquisition took place 2 years after the Heinz one. The Tim Horton acquisition took place 4 years after the BK one.
– Then ‘rinse, repeat’
– 3G Capital is usually extremely disciplined in focusing on one acquisition at the time.
3G Capital is not the usual private equity firm that acquires businesses, fix them and finally sell them for a profit. 3G Capital partners are patient entrepreneurs that buy to keep, that assemble businesses and create long term shareholder value
2. People at the core
If 3G Capital has a solid track records in firing sooner than later most of the management teams of acquired businesses, it has also a reputation to promote from within young talents and develop them extremely quickly. The best example is surely Daniel Schwartz that became CEO of BK at the age of 33 in 2014 and that has then become the CEO of Restaurant Brands International, the holding company of BK and Tim Hortons. Plenty of similar examples exist also within the business units.
Best example is surely Daniel Schwartz that became CEO of BK at the age of 33 in 2014
“We’re constantly trying to train new people and we’re constantly telling everybody that the newer people should be better than the old people,” Jorge Paulo Lemann, 3G Capital’s founding partner, once told Fortune.
3. A ruthless non value adding cost cutting culture
This is somehow what sticks to 3G Capital’s image: a ruthless cost cutter. Yes, 3G Capital puts back Zero Based Budget in fashion but beyond tactics; what sets 3G apart is its deeply rooted ‘Zero based culture’, this drive to challenge the status quo and make things happened and this is the most valuable lesson to retain here.
What sets 3G apart is its deeply rooted ‘Zero based culture’, this drive to challenge the status quo and make things happened and this is the most valuable lesson to retain
4. Master at acquisitions, integration and shareholder value creation
They are master at expanding the structural profitability of the businesses they acquire while delivering long term growth. Ab-Inbev displays an operating profit of 32% vs. 12-13% for Heinken/Carlsberg. KraftHeinz is already at 23% whereas most of its peers lag at +/- 15%. The focus is always put on businesses that display the highest level of synergies (supply chain, go-to-market, geographic footprint…). Let’s take for example the SABMiller acquisition: beyond the fantastic portfolio of premium beer brands, one of the key driver of the acquisition was SABMiller footprint in Africa where significant growth is expected in the decade to come.
5. An entrepreneurial culture of ownership encouraging fast decision-making
The management team strives to look for ‘owners’: hard-working and driven people eager to gain responsibility and grow fast in their careers.
The organizational structure is lean. People work in open office environments to encourage collaboration and faster decision-making. Formal controls and weekly performance reviews based on hard data keep people accountable and focused on achieving results.
Formal controls and weekly performance reviews based on hard data keep people accountable and focused on achieving results
The compensation structure and reward system are also aligned with the firm’s business model. 3G Capital usually pays salaries in line with the industry, but the upside potential in stock-options and bonuses is significant. This results-oriented approach has managers rewarded by performance and not by seniority. Thus, the firm has effectively fostered a culture that acknowledges people for their hard work and pushes aside those who do not keep up with the pace.
the firm has effectively fostered a culture that acknowledges people for their hard work and pushes aside those who do not keep up with the pace
Going beyond cliches
Before starting writing this article, I heard a lot of adjectives being associated with 3G Capital: cost-cutter, short-term approach, private equity tactics, ruthless with people. I think the reality is much more balanced. Even if they have had their own challenges, they have been extremely successful for the past 25 years. They are currently in the process to reshape the entire FMCG industry directly through their acquisitions and indirectly through popularizing their own management style. No one can deny that they are doing something right and plenty can be learnt from them.
They are currently in the process to reshape the entire FMCG industry directly through their acquisitions and indirectly through popularizing their own management style. No one can deny that they are doing something right and plenty can be learnt from them
Who comes next?
– 25 years: It is the time they took to build the undisputed #1 beer player with Ab-Inbev and the 5th largest FMCG
– 4 years: It is the time they took to turnaround Burger King and made it the 2nd largest fast food chain in the world
– 2 years: It is the time they took to assemble KraftHeinz and make it the 3rd largest food company in the world
Clearly they demonstrated their ability to create dramatic shareholder value across categories. Associated with the finance power of Berkshire Hatheway/Warren Buffet, they succeeded to accelerate dramatically the pace of their acquisitions. It would not be surprising to see another major acquisition in the food space in 2017-18 once KraftHeinz would have been structurally fixed.
Associated with the finance power of Berkshire Hatheway/Warren Buffet, they succeeded to accelerate dramatically the pace of their acquisitions. I would not be surprised to see another major acquisition in the food space in 2017-18 once KraftHeinz would have been structurally fixed
Now the really interesting question is: In which extent few of those ‘genes of success’ can be inoculated to companies like Nestle, Mondelez, General-Mills, Kellogg’s or Heineken, Carlsberg … Which of those genes would be the most relevant and to whom? A company cannot change fundamentaly and Nestle, Kellogg’s or Mondelez will never be KraftHeinz and the other way around, but we are persuaded that things should and must be learnt from the 3G Capital success story.
Now the really interesting question is: In which extent few of those ‘genes of success’ can be inoculated to companies like Nestle, Mondelez, General-Mills, Kellogg’s or Heineken, Carlsberg …
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About the author:
Frederic Fernandez is an expert and thought leader in the FMCG industry. He is the Managing Director and Partner of Frederic Fernandez & Associates a bespoke Strategy Consulting Firm exclusively focused on the FMCG industry. His focus areas are mainly in growth and profit turnaround, corporate strategy, direct-to-consumer and business model innovation in the FMCG industry. His passion is to help FMCG leaders to develop, achieve and exceed the potential of their business. He spends his time advising senior FMCG leaders across Europe, Middle East and Africa (EMEA). Before joining the world of management consulting, he spent more than 10 years working with Fortune 500 companies like Procter & Gamble, Reckitt Benckiser, PriceWaterhouseCoopers and Societe Generale in leadership positions across Europe (France, UK, Nordics, Germany, Switzerland, Austria), Central Africa and India.