Warren Buffett Drinks the Kool-Aid
Heinz-Kraft link up may rearrange your pantry
•Colorful events ...
•Unhealthy company ...
•Signs of weakness ...
•Junk food desperation ...
Dear Customer,
Warren Buffett wants a seat at your kitchen table. Since you probably didn't invite him, Buffett will buy his way in via those colorful boxes in your pantry — and he's bringing some Brazilian friends along, too.
If, like many Americans, you're trying to cut back on processed food, your goal just got a little farther away.
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Blockbuster mergers are always colorful affairs. The secretive players often stage media events in front of bright backdrops. Executives use words like "synergy" and "efficiencies."
(These code words usually signal "layoffs," but that's another subject.)
Today's buyer is H.J. Heinz, which was acquired by Buffett and Brazilian private equity firm 3G Capital in 2013. Now, Heinz is buying packaged food powerhouse Kraft (KRFT) and its many familiar brands.
The joint news release included the customary logo-laden infographic:
As the left bottom circle says, 98% of North American households own at least one Kraft product. They're hard not to buy, especially if you have children.
On the other hand, looking at those brand logos, are they what you would feed children? Most parents and grandparents will say NO... and that's a big problem for Kraft.
It's not a healthy company, in any sense of the word.
Kraft's earnings plunged 60% last year as Americans shifted their food budgets away from boxed products to fresher produce and meats. People no longer want industrialized food.
Low-income families are now the prime junk food market, since packaged calories tend to be cheaper, but few people eat this kind of diet voluntarily. We all know they aren't good for us.
The Heinz-Kraft merger looks to me like a sign of weakness. Both companies are struggling. That said, the combination will give them more pricing power with grocery chains and might reduce production costs.
Will it help anyone eat healthier? Of course not — even though that's what consumers really want.
The junk-food roots of this merger go even deeper. Warren Buffett's Berkshire Hathaway (BRK.A) also owns Dairy Queen while 3G Capital controls Burger King (BKW).
With this move, they're doubling down on a declining industry.
Now consider the way Monsanto (MON) and the other genetically modified seed companies are flailing against GMO food labeling initiatives. The junk-food industry is clearly desperate.
They're swimming against a very strong current.
I know it sounds foolish to question Warren Buffett's business judgment, but I really wonder about this move. Maybe he knows something I don't.