8 Min Read
* Private equity mentality spreads in consumer sector
* Highlights importance of financial prowess
* JAB, Nomad Foods have links to 3G-controlled AB InBev
By Martinne Geller
LONDON, May 21 (Reuters) - The consumer goods world has long been dominated by marketing whiz kids raised through the ranks of Procter & Gamble or PepsiCo, but the executives now in demand come from a new school that values cost-cutting and mergers over marketing.
The new playbook, embodied by U.S. private equity firm 3G Capital, applies cutthroat Wall Street sensibilities to Main Street shopping aisles, demanding the highest performance from fewer people willing to work extra hard and progress quickly.
The spread of a private equity mentality to more of the largest names in the sector exacerbates the pressure on finance chiefs, already wading through increased volatility of commodities and currencies, and highlights the need for financial prowess outside the finance department.
The 3G management philosophy was developed by three Brazilian investment bankers and pioneered at Budweiser brewer Anheuser Busch InBev, the world's biggest brewer, which they helped create through a series of big mergers. It is now also in effect at Burger King owner Restaurant Brands International where they are major shareholders, and ketchup maker Heinz which they have bought. Soon it will arrive at Kraft Foods, which is being bought by Heinz.
The Brazilians have demonstrated that the private equity model can be implemented on a large scale, potentially creating big winners and losers in a low-growth sector.
Private equity firms in general are known for a more aggressive culture than marketing-focused consumer goods companies, with more competition and a higher turnover rate among executives, said Gary Stibel, CEO of New England Consulting Group. He said more consumer firms are adopting some of those philosophies, but it is not always a good fit.
"They have a maniacal focus on cash and results," Stibel said. "You've got to be very careful about putting a bull in a china shop unless you're prepared to have a lot of broken glass."
After 3G teamed up with billionaire investor Warren Buffett to buy Heinz in 2013, they closed six factories and cut 7,000 jobs in 18 months. Operating margins jumped from 18 percent to 26 percent.
Part of the 3G playbook is zero-based budgeting (ZBB), which forces managers to justify each year's costs from scratch rather than assume the previous year's budget as a starting point.
While 3G is often seen as extreme - at Heinz they limited employee use of company printers to 200 pages per month, required double-sided printing - ZBB is being adopted elsewhere, such as at Cadbury chocolate maker Mondelez International .
Executives familiar with the strategy are in demand as other companies seek to repeat the trick.
"Anyone who worked at ABI (AB InBev) or Heinz under the 3G regime would be very appealing to the market, because of their familiarity with ZBB," said Fabio Vacirca, head of the consumer goods and services group at consultancy Accenture.
As industry-wide sales have slowed for packaged food makers such as Kellogg, Campbell Soup and General Mills , all eyes have turned to profits.
3G's founders Jorge Paulo Lemann, Marcel Telles and Carlos Alberto Sicupira developed their management style at Banco Garantia, the investment bank they founded in Brazil in the 1970s. After selling it to Credit Suisse in 1998, they formed private equity firm 3G to invest in U.S. consumer names.
Lemann, Brazil's richest man and a former tennis pro, once served on the board of Gillette, where he met Buffett, who has partnered with Lemann on Heinz and Kraft and has said he would like to do more deals.
A shakeup in finance departments throughout the packaged goods sector suggests the emphasis on dealmaking and cost-cutting is putting new pressure on a side of the business that used to take a back seat to marketing.
Unilever announced the departure of its chief financial officer Jean-Marc Huet on Tuesday, becoming the fifth major consumer products firm to change the post in recent months, following Heineken, Danone, Nestle and SABMiller.
"Maybe it is just becoming a more pressurized and intense job as the CFOs are being required to actually become more operationally involved in all that cost-cutting rather than just adding up the numbers," said one investment bank analyst covering the sector, who declined to be identified by name.
Since the credit crunch, companies have been increasingly naming finance experts as CEOs and board members, "because it's been more about management of those risks as opposed to the more expansive agenda that perhaps marketeers had traditionally been better suited to," said Will Hayllar, co-leader of the global consumer goods team at OC&C Strategy Consultants.
Dealmaking activity is requiring a lot of attention from top executives, SABMiller's interim CFO, Domenic De Lorenzo, told reporters last week: "Conversations, evaluations, looking at transactions, that's still a big part of everyone's day-to-day job in this industry."
Many of the dealmakers and financiers taking up top jobs in the industry have outright connections to 3G and AB InBev.
Stefan Descheemaeker, the executive who led Belgium's Interbrew into the merger that formed the precursor to AB InBev, will soon take charge of Birdseye frozen foods owner Iglo Foods as the new CEO of acquisition firm Nomad Holdings.
Olivier Goudet, a veteran of the 2008 takeover of Wrigley by Mars, has been named as both the new chairman of AB InBev and as CEO at JAB Holdings, the family office of the German billionaire Reimann family which is putting together the world's largest pure-play coffee company. JAB's former CEO Peter Harf also served as AB InBev chairman.
The tumult helps the sector to be seen as a hot field for aspiring managers. Work in the fast-moving consumer goods (FMCG) sector became the most popular destination for business students last year, eclipsing banking for the first time, according to a global survey by Deloitte.
Deloitte's Margaret Doyle, who worked on the report, pointed to an increased number of female students, who she said often lean toward marketing jobs, and a weakening of the banking industry, whose reputation was bruised by the financial crisis.
"FMCG companies have always been perceived as having well-regarded graduate programmes," said Doyle, head of financial services insight at Deloitte. "People are initiated through different parts of the business - they get to market shampoo, market washing powder, they experience a real rotation which is a great foundation."
Procter & Gamble for decades was seen as one of the best breeding grounds for business executives, due to its world-class talent programme and reputation for promoting from within. Aside from consumer leaders like Unilever CEO Paul Polman and Estee Lauder CEO Fabrizio Freda, P&G alums include General Electric CEO Jeffrey Immelt and former Microsoft boss Steve Ballmer.
Yet industry bankers said they could they could see why new graduates might like to work for 3G, despite its culture being so thrifty that even top executives abide by restrictions on travel and entertainment.
"Come to them, and they'll teach you as much about consumer products marketing as anyone else, but they'll also show you how to develop that playbook," said one banker. (Additional reporting by Anjali Athavaley in New York and Anjuli Davies and Freya Berry in London; Editing by Peter Graff)