Warren Buffett’s Big Consumer Bets Bite Back
(Bloomberg) -- Warren Buffett has warned investors to stay in their circle of competence when it comes to bets. But now, more than 30 years after Buffett started plowing money into Coca-Cola Co., the rules of the consumer-product game have changed.
Both Coca-Cola and Kraft Heinz Co., companies that claim Buffett’s Berkshire Hathaway Inc. as their largest shareholder, have shown in the past two weeks just how hard it is to navigate shifting consumer tastes. Coca-Cola shares slumped last week amid a lackluster profit forecast. On Friday, Kraft Heinz fell to a record low after announcing a $15.4 billion writedown of the goodwill value of assets including the Kraft and Oscar Mayer trademarks.
“This is something that is more of a long-term problem, a major shift in consumer taste and sentiment,” David Kass, a professor of finance at the University of Maryland’s Robert H. Smith School of Business, said in an interview. “Very few people saw this coming, including Warren Buffett and including 3G Capital.”
Buffett’s Kraft Heinz investment has come under pressure as he’s set to release his annual letter. He was a key part of Kraft Heinz’s formation, teaming up with private equity firm 3G to orchestrate the merger of Kraft Foods Group Inc. and H.J. Heinz in 2015, and has remained a large shareholder ever since, with a stake valued at more than $11 billion Friday.
But the challenges faced by both Kraft Heinz and Coca-Cola raise questions about the attractiveness of those investments amid a sea change in the industry. Even Buffett himself has recognized that customers might want different products these days.
“The consumer votes every day, and some things are affecting the consumer, like a feeling that other things are healthier,” as well as prices, Buffett said last year in an interview with CNBC. “There’s still a huge loyalty factor, but it is not as strong as it was five or 10 or 20 years ago.”
With Kraft Heinz, Buffett again made a bet on household names that he grew up loving, like Oscar Mayer. But much has changed over the years, with consumer tastes shifting away from processed food like Velveeta toward organic options.
Buffett has said that a strong brand is “really potent stuff,” but Kraft Heinz acknowledged on Thursday how out of step some of its brands are with Thursday’s announcement.
“That sort of strikes at the core of a consumer-products company -- you’re as good as your brand,” Cathy Seifert, an analyst at CFRA Research, said in an interview Friday.
Now Kraft Heinz is left trying to soothe investors through cost-cutting and the sale of assets to pay down debt. It also cut its dividend by 36 percent to preserve cash. It’s all part of a plan to deleverage so it can get back to making more acquisitions, a key part of Berkshire and 3G’s strategy for Kraft Heinz.
Buffett may love drinking Coke, but he’s part of a shrinking minority. Soda has been under siege for a decade from health advocates around the world, who blame it for helping increase obesity rates. In response, Coca-Cola has diversified its portfolio by pushing further into categories such as juice, coffee and water.
But, in the most recent quarter, its ties to soda continued to weigh on results. Coca-Cola shares plunged the most in more than a decade on Feb. 14, after the company issued an underwhelming profit forecast. That’s put even more pressure on Chief Executive Officer James Quincey to make good on the company’s $5.1 billion purchase of U.K. coffee chain Costa last month. But this shift isn’t a slam dunk because the coffee category is highly competitive.
In the short term, Kraft Heinz’s announcement stings. Barclays Plc analysts cut their estimate in half for Berkshire’s fourth-quarter operating earnings, to $1,726 from $3,522 per Class A share. Berkshire’s scheduled to report results Saturday.
In some ways, Berkshire’s been tilting away from investing in some iconic consumer-brand companies. Last year, the company piled even further into financial institutions and technology stocks, a move that might also be influenced by investing deputies Todd Combs and Ted Weschler.
And Buffett’s bet on Kraft Heinz isn’t a total wash. In 2016, he pegged the cost of his Kraft Heinz investment at $9.8 billion, putting the per-share cost at about $30. With today’s drop, the value of his shares still stands at $11.4 billion. In addition, Berkshire has collected $2.3 billion in dividends since 2016, putting the total return on the investment at 41 percent.
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