The Supply Chain Matters blog has devoted quite a number of commentaries reflecting on ongoing industry changes occurring among consumer product goods firms and consequently their respective customer demand and supply networks.
In late February 2019, we published a consumer goods industry-specific blog: Kraft-Heinz Stumble- A Watershed Industry Development. The essence of our commentary was to reflect on the stunning financial performance disclosures from Kraft Heinz.
A dark wave surrounding this industry is often termed the “3G Effect”, that being the presence of 3G Capital’s Kraft Heinz model of multiple acquisitions and squeezing out all forms of cost. The “3G Effect” fuels broader activist investor sentiments.
The startling financial stumble of Kraft Heinz, having to write down the value of its Kraft and Oscar Mayer brands by a whopping $15.4 billion and slash its quarterly dividend to shareholders by 35 percent was indeed an industry threshold development. The company was responding also to an ongoing SEC investigation into the company’s procurement practices that led to a $25 million one-time charge for reported higher inbound direct material and other costs that should have been recorded in prior quarters.
As this blog opined in May 2017:
This wave of zero-based budgeting and cost cutting will not likely achieve that objective, and we as consumers, will have limited choices for healthier food. It is a race to the bottom with notions that the survivors gain the spoils.
Industry Flash Forward
A snapshot of this industry’s Q2-2019 financial performance among a sampling of noted consumer goods brands reflects healthy revenue growth and added innovation surrounding brands. Yes, some of that revenue growth was driven by broad product price increases, which has always been an industry favored practice. However, credit where credit is due, some of this growth has come from new vision and leadership at the C-level of management, an emphasis on increased product innovation centering on brands, embracing the beginnings of digital business and supply chain practices.
From our lens, companies that elected not to whole-heartedly embrace across-the-board zero-based budgeting models indeed have something to show, and that includes their supply chain management teams.
Reflecting on Added Kraft Heinz Developments
In June of this year, a new CEO was appointed at Kraft Heinz. Miguel Patricio, a former executive at 3G Capital’s Anheuser-Bush In-Bev SA, took on the senior leadership role. According to The Wall Street Journal: Patricio was given: “a charge to boost sales of established brands without straying from the 3G focus on controlling costs.” The company’s stock has declined 40 percent since the beginning of the year, and there is a huge debt load on the company’s books.
The former CFO, Paulo Basilio, another 3G Capital Insider will replace David Knopf, who on his appointment in 2017 was described at the age of 29 to be the youngest CFO at a Fortune 500 company. Basilio, after his first turn as CFO, took on the role of President of Kraft Heinz Commercial, and just recently, Chief Business Planning and Development Officer.
In an email to employees, the new CEO explained the change as charting a new course and rebuilding business momentum by focusing on longer-term profitable growth.
Business media has provided a mixed response, one that either reflects bringing back a more experienced CFO with broad company knowledge or to a view reflecting that to precipitate needed business change, there is too much reliance on the 3G Capital well of executives and business practices.
As the WSJ points out in its reporting, Basilio was at the CFO helm when financial misstatements were made that included understating cost-of-goods sold by $208 million over three years, which were related to how rebates and expenses with suppliers were booked. For its part, company management has told investigators its was unaware of the errors and has subsequently fired responsible employees.
More baffling for us, was the WSJ’s follow-on article iterating that U.S. companies are looking for more experience in their finance chiefs and equating that to average age and cumulative years of industry or corporate experience. That view seems to ignore that young and knowledgeable executives are just as able to lead needed change or business turnaround, if they are supported by an experienced and knowledgeable team. Again, the question of the revised purpose of corporations arises. Is it to singularly serve the needs for investors in more timely monetary returns equating to stock buybacks and added dividends or to balance other corporate investment and societal needs.
In our perspective, the idea of turning to proven leadership and industry experience in business or supply chain management has to have a context and framework related to the timeline of needed change.
If the particular business model is generally working but leadership has become too comfortable and is unwilling to encourage teams to challenge existing practices or entertain new areas such as higher levels of advanced technology driven change, then leadership change may be appropriate.
That model reflects the current wave of new executives that are leading growing consumer goods companies.
The idea that experience relates to years on the job, or knowledge of where all of the financial or operational skeletons reside, or an effort to justify a failing business model, is detrimental for investors and for existing business teams, including the many business enabling aspects of today’s supply chain management organizations.
It is what one can successfully accomplish, not how long one has been doing it that will lead to successful transformation of consumer goods business and their associated supply chain management teams.
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