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FROM PERISHABLEPUNDIT 3/13/19
Was Kraft Heinz Saving Money or Eating the Seed Corn?
For a while, zero-based budgeting — a business manage- ment tool pioneered a half-century ago by Pete Pyhrr — was hot; then it was not, and then it came roaring
back with a focus on the food industry. The Wall Street Journal highlighted this history back in 2015 with a profile: “Meet the Father of zero-based budgeting.”:
Five decades ago, a young Texas Instruments Inc. (TXN) accounting manager named Pete Pyhrr pioneered a technique to help businesses shave costs. It led to a book deal, a People magazine interview and some consulting gigs, including as an adviser to then-Georgia Gov. Jimmy Carter.
Then things mostly turned quiet for Mr. Pyhrr and his arcane tool, known as zero-based budgeting, until the Brazilians behind private-equity firm 3G Capital Partners LP came along. 3G’s embrace of the system — a centerpiece of the firm’s strategy to reshape the U.S. food industry through deals like this week’s proposed $49 billion takeover of Kraft Foods Group Inc. — has thrust Mr. Pyhrr’s method [back] into the spotlight.
“I think it’s great in my old age to say something that was a major part of my life many, many years ago is being adopted — hopefully successfully,” the 73-year-old Texan said in an interview on Thursday, his first in many years.
3G and companies it controls, including Burger King parent Restaurant Brands International Inc. and H.J. Heinz Co.— which it plans to merge with Kraft — have used the technique to slash costs in everything from jobs to corporate jets and the use of color photocopies.
In zero-based budgeting, managers plan each year’s budget as if starting their department from scratch. ... The system calls for managers to break programs or activities into individual “decision packages,” including all associated costs, to help identify how funds are used. The technique forces them to justify the costs and evaluate benefits every 12 months, and to scrutinize whether dollars should be shifted from less-profitable to more-profitable projects.
Now, giant write-downs at 3G Capital, causing a big write-down at Berkshire Hathaway, have caused many to re-think the practice. Another Wall Street Journal piece tells the story: “It shook the Food business by Snagging Burger King, Kraft and Heinz. Now 3G Is Reeling”:
Now, after transforming the American consumer landscape, 3G’s financial strategy appears to be running out of juice.
The latest, starkest example: On Thursday, 3G-run Kraft Heinz Co. wrote down the value of its Kraft and Oscar Mayer brands
JIM PREVOR EDITOR-IN-CHIEF
and other assets by $15.4 billion, disclosed an investigation by federal securities regulators and slashed its dividend, sending its shares down nearly 28 percent.
Among the problems, 3G underinvested in its brands at the expense of future growth, rivals and analysts said. Especially at Kraft Heinz, 3G failed to see the speed of the decline in consumer interest in legacy food brands — Americans now want to buy healthier items, focusing on natural and organic ingredients, and are less loyal to the brands they grew up eating. 3G’s aggressive approach to savings turned off possible acquisition targets and squelched the innovation that might have helped its brands.
In abstract, zero-based budgeting makes a lot of sense. It only means that you don’t keep doing things just because you did them in the past. So rather than saying a company has had a sales office in St. Louis for 100 years and adjusting the budget up 3 percent to deal with inflation, executives are supposed to justify the need for the St. Louis sales office. Can the sales process be handled more efficiently out of Chicago? Does new technology, facilitating digital meetings, etc., reduce the need for people in the territory, etc.?
The reality, though, is that zero-based budgeting suffers from two serious flaws:
First, to do it well is time-consuming and expensive — and this draining of executive talent, makes it easy for the process to result in poor results. A classic example is paper clips. In his explanation of how zero-based budgeting works, Shin Shuda, one of the managing directors at Accenture Strategy, explains the 3G system:
How ZBB works
1. After 3G acquires a company, it asks for a full accounting of spending, down to specifics like paper clips.
2. Items are separated into companywide ‘packages,’ such as office supplies, and assigned a manager.
3. Every budget year, each package starts at zero and is assigned a cap, forcing managers to keep track of details such as paper use. 4. Bonuses for managers, and their reports, are tied to their
success in meeting ZBB targets.
The problem is that when important and expensive people are focused on reducing expenditures on paper clips and keeping copy paper to a budget, they are not focused on building the business.
Paper clips are relatively easy. But reviewing R&D or marketing expenditures requires enormous data collection, long-term projec- tions and countless meetings.
20 / MARCH 2019 / PRODUCE BUSINESS