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And one of the classic problems in business is that information is expensive. The famous quote attributed to department store titan John Wanamaker — “Half the money I spend on advertising is wasted; the trouble is I don’t know which half” — is not an argument against advertising, nor is it an argument to extend massive efforts to learn which half is wasted. It is really a call for the necessity of executive judgment.
Let us imagine that a captain of the industry is being honored, and a dinner is being held. A page in the journal and a table at the dinner costs $3,000. There are so many variables. The influ- ence of this important industry leader — how will it be impacted by your company not supporting the dinner? His friends and colleagues in the industry? The willingness of other individuals to work with your company in the future? What will your own employees, and perspective employees, think of your company?
We could get answers to this. Hold focus groups, do survey work, etc. But the research might cost $50,000! Then executives must read the research reports, assess them, meet, etc. The company will spend tens of thousands to save $3,000! And because it is zero-based — the center of which is the idea that things change from year to year — they may have to do it again next year!
Second, anyone doing zero-based budgeting requires some kind of framework within which to assess success or failure.
If you have a fixed number of Oscar Mayer weiners that are going to be sold year after year at a fixed price, then one can maximize profitability by constraining costs. That may be the case in business for a period of time, but it’s almost never the case long term.
That is why zero-based budgeting — done in the context of a company doing acquisitions and applying the technique to the new acquisition — has just a hint of fraud in it. After all, knowledgeable executives will choose to do many things that do not result in a positive return this year but that, over time, maximize sales and profits. To, say, halt all brand building for a year and announce record profits, speaks more to the limitations of accounting than the virtues of zero-based budgeting.
Even some “obvious” extravagances — boxes at sporting events or private planes — don’t really tell any story. Maybe these perks attract the best employees, and those employees produce great profits. ZBB doesn’t have any answers — this year, getting rid of these things will create profits, but will it mean the company is more profitable 10 years from now?
In some ways, zero-based budgeting redefines a business. If you view the business as selling Budweiser beer, then zero-based budgeting may maximize profits. But the business will shrink as consumers move to craft beers or switch to cocktails or as competitors ramp up marketing and promotion.
If you view the business as an effort to retain and expand market share in the broader alcoholic beverage category, you need to invest a lot more in developing new drinks, marketing new brands, sustaining and enhancing brand positioning, etc.
The Wall Street Journal article suggests that 3G is actually changing the criteria by which zero-based budgeting is done:
In 2018, Kraft Heinz made a shift, spending $300 million on developing and marketing its products, reducing out-of- stock items and getting better shelf space in stores. Doing so accelerated what would have been three years of investments into one year, the company said. That “was a pivot moment,”
FROM PERISHABLEPUNDIT.COM
Kraft Heinz chief executive Bernardo Hees said at a September conference. “We’re going from an integration phase to a more reinvesting phase.”
The focus on resuming and accelerating growth has come at the expense of profits. Comparable sales at Kraft Heinz rose 2.4 percent in the fourth quarter, but a key measure of profitability, adjusted EBITDA, fell 13.9 percent.
Note that this doesn’t necessarily indict zero-based budgeting, but rather points to the importance of using any budgeting tool with an eye on the future.
The truth is that many of the flaws of zero-based budgeting are expressed in companies that don’t do zero-based budgeting. For example, companies that give employees bonuses for meeting short-term profitability numbers are, often, incenting behavior that reduces long-term growth and profitability.
Warren Buffet points out how easy it is to lose market share without extensive investment. He gave an interview with CNBC in which he explained the huge challenge of the rise of private label:
According to Buffett, the packaged-food icons in Kraft Heinz’s portfolio are struggling to compete with private-label brands at retailers such as Walmart and Costco.
Costco’s Kirkland brand, in particular, is proving to be a dangerous competitor. While Kraft Heinz has spent billions of dollars on advertising over the past century, the company’s sales totaled $26.3 billion last year. Sales of Costco’s Kirkland brand, as Buffett pointed out, grew to $39 billion in 2018.
“Here they are, 100 years plus, tons of advertising, built into people’s habits and everything else,” Buffett said of Kraft Heinz’s brands. “And now, Kirkland, a private-label brand, comes along and with only 750 or so outlets, does 50 percent more business than all the Kraft Heinz brands.”
We would say Mr. Buffett is attributing too much to low prices. Today’s private-label environment draws strength from three things: 1. Private-label assortment has changed. You go into a Wegmans and you look at their pasta, you see they offer private- label items that surround the national brands — they are less expensive or more expensive and a broader assortment. It is not
about being cheaper all the time.
2. Retail brands are stronger because they mean something.
Sitting next to a CEO of a tuna company on a plane, we were told the Kirkland line included a better-quality tuna than this national tuna company sold itself. Anyone who knows Costco knows it seeks not the cheapest product but product right for its customers.
3. Failure of national brands to invest. The 2017 ad budget of Kraft and Heinz was 39 percent lower than what those compa- nies spent before they were merged. Reputation is an asset that must always be replenished.
In the end, ZBB was a chimera — “a thing that is hoped or wished for but in fact is illusory or impossible to achieve.” The idea that massive amounts of spending are both wasteful and possible to identify is more a wish than a strategy.
In the end, the big profits in the first few years of an acquisition turned out to be not that ZBB identified waste — just that the company ate its seed corn. Without a constant flow of innovative products, backed up by strong marketing, 3G found its brands increasingly vulnerable to private-label alternatives. Now it is playing catch-up. And that is always a hard game to play. pb
PRODUCE BUSINESS / MARCH 2019 / 21