Investor Warren Buffett has told US business news channel CNBC he thinks his Berkshire Hathaway fund and co-investor 3G Capital paid too much for food group Kraft Heinz.
But Buffett said he had no intention of selling his stake in what is now Kraft Heinz, which on Friday (22 February) saw its shares tumble and US$16bn wiped off its market value as investors reacted badly to the company revealing it had suffered a $12.6bn fourth-quarter loss linked to a $15.4bn brand writedown.
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Buffett’s Omaha, Nebraska-based investment business, alongside 3G Capital, bought H.J. Heinz for $23bn in 2013 before working with 3G to help finance Heinz’s $49bn merger with Kraft in 2015.
But now Buffett said he paid too much in the initial deal.
“I was wrong in a couple of ways on Kraft Heinz,” he told CNBC. Buffett said packaged-goods companies are “losing ground” to retailers. “The really strong brands go toe-to-toe with Walmart or Costco or whoever it may be. But the weaker brands tend to lose out.
“The interesting thing about Kraft Heinz is that it is still a wonderful business in that it uses about $7bn of tangible assets and earns $6bn pre-tax on that … but we, and certain predecessors but primarily we, paid $100bn intangible assets. So for us, it has to earn $107bn, not just the $7bn that the business employs.”
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By GlobalDataBuffett, who saw the share price of Berkshire Hathaway drop as a result of Kraft Heinz’s announcement on Thursday, said the fund and 3G “misjudged the retail versus brand fight,” with private labels gaining at the expense of some brands.
“When you’re going a toe-to-toe with a Walmart, or a Costco or maybe an Amazon pretty soon and you have a modestly good brand, you’ve got a weaker bargaining hand than you had ten years ago,” he said.
To support his argument, Buffett pointed to the level of sales Costco generates from its Kirkland Signature private label. “That brand did $39bn last year, whereas all the Kraft Heinz did $26-27bn. House brands, private label, is getting stronger.”
