Kraft Heinz employees and analysts say 3G Capital's cost cutting business strategy is setting it up for failure. Here's how the private equity firm's playbook left it playing catchup to its rivals.

<p><img src="https://static4.businessinsider.com/image/60ef40e361b8600019f171fe-2400/rtr3dsmq.jpg" border="0" alt="Heinz and Kraft merger" data-mce-source="REUTERS/Jason Cohn" data-mce-caption="Alex Behring (R), Managing Partner at 3G Capital, listens to Heinz Chairman, President and CEO William R. Johnson (L) during a news conference to announce that Heinz has agreed to be bought by Berkshire Hathaway and 3G Capital in Pittsburgh, Pennsylvania February 14, 2013."></p><p></p><bi-shortcode id="summary-shortcode" data-type="summary-shortcode" class="mceNonEditable" contenteditable="false">Summary List Placement</bi-shortcode><p>3G Capital was a master of combining companies and pulling profit from running them together.&nbsp;</p><p>The private equity firm did it twice, once with a string of acquisitions that created brewer AB InBev and another that combined fast-food chains Popeyes, Burger King, and Tim Hortons into Restaurant Brands International. Then they&nbsp;met their match: Kraft and Heinz.</p><p>At the center of 3G's strategy is zero-based budgeting, which asks managers to devise budgets from scratch each year. At all of 3G's&nbsp;portfolio companies, it has inspired deep cost-cutting, including layoffs.</p><p>"When it first came on the scene, everyone talked about it" as something to emulate, said Bob Goldin, cofounder and partner of food industry consultancy Pentallect.</p><p>Six years later, analysts say that 3G's brand of cost-cutting has lost its luster, due in no small part to its latest use case. "A lot of that is the result of the failure of the Kraft Heinz approach," Goldin told Insider.</p><p>Current and former <a href="https://www.businessinsider.com/kraft-heinz-employees-3g-cost-cutting-food-2021-7">Kraft Heinz employees told Insider</a> that they are leaving the behemoth behind Heinz ketchup and Oscar Mayer hot dogs after one of the company's best years in recent memory. Sales at retailers ramped up during the pandemic as more consumers ate packaged foods at home.</p><p>But many employees Insider spoke with said the 3G-inspired cost cutting has created a company unable to compete with rivals as well as attract and keep top talent who know the food business. Zero-based budgeting asks managers to justify expenses anew annually instead of using an old budget as a guide. That led the company to save money by closing plants, laying off workers, and even forcing employees to bring their own snacks and coffee to the office.</p><p>On the surface, AB InBev, Restaurant Brands International, and Kraft Heinz seem similar. All operate in the food business, where profit margins tend to be thin compared to other industries.</p><p>But Kraft Heinz is different, according to Goldin. At AB InBev, the portfolio is dominated by a handful of large international brands like Budweiser, Corona, and Stella Artois. Others, like Leffe and Hoegaarden, are much smaller.&nbsp;</p><p>That makes it easier to save money by sharing functions across multiple brands. "You can really concentrate a lot of your marketing dollars behind a few big brands," Goldin said.&nbsp;</p><p>Contrast that with Kraft Heinz, Goldin said, where sales and costs are diffused among dozens of brands, thus making it harder to devise a single budget or strategy for everything.&nbsp;"These broad portfolio companies are a little more challenging to manage," he added.</p><p>Kraft Heinz has argued cutting costs will allow it to reinvest in its business. In an investor presentation last September, CEO Miguel Patricio pointed to improving "speed and agility" as the keys to improving the company's gross profit. Some of that, he added, "we can reinvest strategically in growing areas."</p><p>But analysts said they haven't seen much investment since the merger. When it comes to tracking sales, for instance, the company tends to use backward-facing metrics and historical data instead of more up-to-date data collected at retailer registers, said Lora Cecere, founder and CEO of Supply Chain Insights, which advises companies on their supply chains.</p><p>That has hampered the company during the pandemic as consumer demand went up quickly and broke long-established models, she added. A less-restrictive budgeting method might have given Kraft Heinz more room to respond to that kind of demand shock.&nbsp;</p><p>"Their worldview is very much a CFO-dominated kind of thing," said Cecere. But especially in a fast-changing environment, "a zero-based budget is out-of-date with the market the minute it's published."</p><p>"Maybe 'disaster' is too strong a word," Goldin said. "But certainly, there's been a dramatic overreach in cost-cutting."&nbsp;</p><p><a href="https://www.businessinsider.com/3g-capital-private-equity-playbook-failed-at-kraft-heinz-2021-7#comments">Join the conversation about this story &#187;</a></p> <p>NOW WATCH: <a href="https://www.businessinsider.com/why-kolinsky-sable-brushes-are-so-expensive-england-art-painting-2019-12">Why kolinsky sable paintbrushes are so expensive</a></p>
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