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The reputation of some of the world's most powerful investors rests on a great but humdrum challenge: getting consumers tense about Kraft macaroni and cheese.
Kraft Heinz, the food giant who also makes Jell-O and Oscar Mayer meat, surprised Wall Street on Thursday when it announced poor revenue, a multibillion-dollar write-down, and an accounting survey by the Securities and Exchange Commission. The power shares fell 28 percent on Friday, beating over $ 1
The 3G Brazilian investment company, which led the merger between Kraft and Heinz in 2015 and manages the merged company, has taken a major financial hit on its 22 percent stake in Kraft. Warren E. Buffett's Berkshire Hathaway has an even bigger stake in Kraft and lost an estimated $ 4 billion on Friday.
However, the real pressure is on 3G. Although not well known on Main Street, 3G has a great influence over some of America's best-known brands.
Investors had bought in the idea that 3G's rigorous cost-saving approach to on-going companies would succeed in the long run. But Kraft's problems suggest that unintentional pressure spending can make it more difficult to stay competitive.
Power Heinz soon needs more. Consumers are increasingly attracted to products they perceive to be healthier and fresher than processed products. Kraft Heinz must show that it can win back with innovative new products and engaging marketing. And it can weigh on future profits.
"They don't anticipate this big change in consumer power, and they really focused their efforts instead of cost saving and acquisitions," said David Kass, a professor at the University of Maryland's Robert H. Smith Business School.
Kraft is not the only company where 3Gs approach is being tested. The company's partners have leading positions at Anheuser-Busch InBev, which makes Budweiser. Long before 3G's investment in Kraft Heinz, the leaders tried their cost-saving strategies with the company that eventually became Anheuser-Busch InBev. The beer retailer's shares are down to almost 30 percent over the past 12 months.
3G also effectively controls Food Brands International, which includes Burger King and Canada's Tim Hortons.
Ken Goldman, an analyst at JPMorgan Chase, asked Kraft CEO on Thursday night during an investor interview whether the company's belt tightening had damaged its marks. "We still strongly believe that our model works and has a lot of potential for the future," replied Bernardo Hees, CEO. On Friday, Mr. Goldman concluded in a research paper: "It is reasonable to question the entire 3G strategy."
The write-down Kraft announced on Thursday amounted to $ 15.4 billion. By taking the pace, the company reduced the value of the balance of certain operations in the US and Canada and Kraft and Oscar Mayer trademarks. The company also threw investors by announcing that it would reduce dividends. And S.E.C. inquiries can raise doubts in the investor's thoughts on how Kraft records its costs.
The company booked $ 25 million of costs in the fourth quarter that should have been recorded in previous periods. Kraft said it was taking steps to improve control and add that it continued to work with regulators.
"In absolute terms, $ 25 million is not a large number, but it poses the credibility of the question," says Jon A. Baumunk, accounting lecturer at San Diego State University's Fowler College of Business.
Kraft's problems can be another headache for Mr Buffett, who has drawn criticism as a major supporter of the firm over the years.
3G and Mr Buffett merged Heinz with Kraft into an over 45 billion deal that creates the fifth largest food and beverage company in the world. "The 3G peoples have Made fantastic purchases, "Mr. Buffett said in 2015.
But Mr. Buffett and 3G have seemed like a strange pairing. Mr. Buffett has long bashed private equity investors and their business model. He has also fostered a reputation for allowing The businesses that Berkshire buys to operate with little disruption and has not pushed for major work reductions, seem to be in contrast to 3G's cost-saving practices.
possibly to Berkshire's shareholders for 2015, Mr. Buffett defended 3G. He argued that, for example, Berkshire, 3G would be able to hold businesses in the long term, separating it from a typical private equity investor.
Over the coming quarters, Kraft must show that it can compete in a market where consumers want products they think are healthy and do not appear to be mass-produced. Other companies have had success on this front, says Mr. Kass, corporate professor, pointing to some of PepsiCo's foods. "Pepsi has been aware that growth comes from new products that are perceived as healthier and more nutritious," he said.
And some analysts see evidence that Kraft could still turn things around. It has had some success in reviving interest in its Capri Sun and Oscar Mayer lines, says Christopher Growe, an analyst at Stifel covering Kraft.
"There is hope here," he said.