Berkshire and 3G Capital to Buy Heinz for $23 Billion

http://dealbook.nytimes.com/2013/02/14/berkshire-and-3g-capital-to-buy-heinz-for-23-billion/

by filvdg • 13 years ago

61 71 13 years ago

dealbook.nytimes.com

filvdg4• 13 years ago

Every dev needs Ketchup ...

dylangs1030• 13 years ago

Well, he's not a developer, but I see your point.

filvdg4• 13 years ago

Business development ?

geraldchan• 13 years ago

The fundamentals of this transaction will be outside the scope of understanding of the HN crowd.

ww520• 13 years ago

What are the fundamentals of this transaction?

jcampbell1• 13 years ago

Heinz is a 100 year brand and generates about $1.3B a year in after tax cash.

filvdg4• 13 years ago

Understanding value investing might be nice if you want to attract VC interest in your start up , taken that most start ups are bought by other companies and don't go IPO (if they don't fail)it might be interesting to understand the fundamentals ...

this one if brand identity for sure

Mvandenbergh2• 13 years ago

Value investing and venture capital are about as different as investment strategies could be. Value investors don't usually companies that don't pay regular dividend streams, most tech companies (let alone start-ups) never pay revenue.

Keyframe• 13 years ago

Why the blanket statement?

coob• 13 years ago

I think that's a little unfair. BH is buying Heinz for the same reason it buys as much Coca-Cola as possible.

AlexMuir3• 13 years ago

Over the last few months I've been noticing a lot of adverts for Heinz products on the radio. They go like this:

"When I was younger dad would take us out for fish and chips. We'd walk along the canal and feed the ducks, even in the rain. Then I'd unwrap the bag, with the steam rising, and squirt on a dollop of ketchup. And, like always, it has to be Heinz."

I'm always amazed at the ability of brands to sell £0.20 products for £2.00, and the supermarkets who then sell £0.16 products for £1.00 and claim it's value.

I worked for Lucozade (UK Gatorade) for a while. Our total cost, delivered to retailer, of a bottle was 12p. We sold it to them for min 50p and they sold it for at least £1.

Ultimately this is a bet on the longevity of consumer brands, which I think is probably a wise one.

erock4• 13 years ago

living in the town where Heinz was founded (Pittsburgh, PA) brand loyalty can get a little over the top, we look down on anyplace that doesn't have Heinz ketchup, and years ago when I live in the bay area, I chastised a restaurant because i knew (I just knew!) they watered down the ketchup. Come on, I'm from Pittsburgh, I know my Heinz

AlexMuir3• 13 years ago

I suppose one interesting thing about brands (or perhaps just Heinz) is that we assume they're local. I would have said Heinz was a British company, no question. Likewise with Kelloggs.

ErikAugust• 13 years ago

I have found the same thing about Kraft in Philly.

meaty3• 13 years ago

Spot on. Those figures make me shiver. Branding is just not worth it on food when you know about the details.

Small rant: I stopped buying brands years ago, avoid supermarkets like the plague and don't buy ready meals. Instead I purchase from wholesalers in bulk and grow a few expensive things (chillis, peppers, tomatoes, herbs etc). Granted I have to buy beans in 2kg tins and pasta by the 5kg bag from the wholesaler but my food bill for 2 adults and 3 children is around £200/month and we eat proper freshly cooked meals every day.

huherto2• 13 years ago

Well, you have an economy of scale. 5 people.

For me, I think it is cheaper just to buy at the super market and buy ready meals.

nirvana• 13 years ago

You're looking at the cost of production, and then the price and assuming that all of the space between the two is profit, and seem to be implying that somehow it is a ripoff.

What you're not considering is the value to the customer.

The incremental cost of a copy of Microsoft Office (with electronic delivery they cut out virtually all of their manufacturing cost) is close to zero. Probably 12p as well.

Yet Microsoft sells that Office Suite for $99 or much much more.

If the value of one copy of that office suite to a company is $10,000 in improved efficiency (eg: salaries saved by not having to pay overtime or hire as many people-- remember when spreadsheets were physical sheets of paper and companies had staffs of dozens of women whose sole job was to type up correspondence on typewriters?) then they are "profiting" even more than Microsoft is because the spread is wider.

Further, manufacturing costs are only one part of the costs of a product. Yes there's marketing, and advertising which you may hate, but there's also the offices that house the workers that run the company, the royalties paid to people who generate formulations, the taxes paid to the government, the manifold fees, costs, and expenses involved in running a business. All of these raise the actual "cost" from above the 12p manufacturing (and delivery costs I assume you included.)

For me, the value of buying a brand that has reliable quality control is often pretty high.

If a high quality bottle of ketchup elevates the satisfaction of an inexpensive meal (say fish & chips) to the point where it is on par with a much more expensive meal, like those workers using office, I may be getting more "profit" out of the transaction than the company.

This is how I use ketchup. It means I eat out less, and spend less on food and have a higher quality of life.

AlexMuir3• 13 years ago

Ketchup is a physical product with raw material costs which requires physical storage and delivery, and must be distributed through intermediaries. It also has a shelf life, and ingredients that fluctuate in price seasonally. Your comparison is about as sensical as me complaining I can't type an essay using 100 bottles of ketchup.

However, my points are that a) we routinely pay 10x the 'value' of food products, and b) supermarkets piggy back off our conditioning by brands to offer us 'value' products which still cost 8x what they are worth without any of the advertising/marketing overhead.

The parallel would be if Macbook Airs were being made and delivered to Apple stores for $100, or cars were delivered to dealers at a cost of $2,000 and then sold to you for $20,000.

bjourne2• 13 years ago

The OP is assuming it is a ripoff because you can buy other producers ketchup for half the price of "brand-name" Heinz ketchup. I doubt many people would tell the difference between Heinz and something else in a double-blind test. And if they can it is because the better tasting ketchup contains more sugar which anyway is bad. Same thing with jeans, you cant see the difference (unless they have the brand printed on them) so buying Levi's is a waste of money.

goatforce5• 13 years ago

> remember when spreadsheets were physical sheets of paper and companies had staffs of dozens of women whose sole job was to type up correspondence on typewriters?

Back in the 60's before I was around, my mum worked in the accounting department of a mid-sized car dealer. Her job title was "Computer" because she'd update their books by hand. Later on they got the first electronic desktop calculator in the city and the local paper came by to do a story on this modern marvel.

objclxt• 13 years ago

> I worked for Lucozade (UK Gatorade) for a while. Our total cost, delivered to retailer, of a bottle was 12p. We sold it to them for min 50p and they sold it for at least £1.

FMCG goods have typically awful margins on them for retailers. A 50p markup sounds good, but consider that out of that 50p the retailer has to cover transportation costs, salaries, cost of display, cost of retail space, etc. Supermarkets are not exactly raking in profit.

And it's not such a rosy picture for the brand manufacturers either. The 20p raw cost of supplying the bottle of Lucozade doesn't include advertising expenses, which for branded products tend to be substantial (after all, that's how they become brands in the first place).

Lucozade's parent company, GSK, makes a lot of money, but nearly all of that money comes from bio-tech and pharma. They don't make nearly as much money from Lucozade, and there was actually a story a week ago that they're trying to offload the brand[1].

[1] http://www.thisismoney.co.uk/money/markets/article-2274545/G...

specialist• 13 years ago

I, for one, get what you mean by "value".

Pedantics are not making a distinction between price and value.

To illustrate: how many eggs would you barter for a bottle of ketchup? Barter, as in there is no price signal.

olalonde• 13 years ago

> "When I was younger dad would take us out for fish and chips. We'd walk along the canal and feed the ducks, even in the rain. Then I'd unwrap the bag, with the steam rising, and squirt on a dollop of ketchup. And, like always, it has to be Heinz."

Reminds me a great scene from Mad Men http://www.youtube.com/watch?v=suRDUFpsHus

pathdependent• 13 years ago

Check out the call options yesterday. Either Buffet's traders were implementing some hedge strategy, or someone made a fat insider trade. Zero hedge covered it: http://www.zerohedge.com/news/2013-02-14/so-who-leaked-heinz...

filvdg4• 13 years ago

http://en.wikipedia.org/wiki/Heinz_57 has the list of the 57 varieties

WillyF• 13 years ago

I've heard stories that Heinz is so defensive of their brand that they send out "Ketchup Inspectors" to make sure restaurants aren't refilling Heinz bottles with lesser ketchup. This is the only somewhat legitimate source that I could find: http://www.freerepublic.com/focus/f-news/1067133/posts

erock4• 13 years ago

Sometimes people do it themselves https://news.ycombinator.com/item?id=5219485

adestefan5• 13 years ago

Why shouldn't they? Heinz ketchup has a specific flavor profile. If a restaurant is filling Heinz bottles with a different ketchup the consumer could be lead to believe that Heinz is changing their flavor and may never buy it again.

I don't even like ketchup and I could pick out Heinz in a blind taste test.

nicholassmith2• 13 years ago

I'm sure there was a reddit where someone said they'd worked in a restaurant and they'd seen the ketchup checks happening.

Evernoob• 13 years ago

What's the penalty if you get caught? Restaurants usually just say it's "ketchup" without mentioning that it's Heinz. What can Heinz actually do to you if you buy a bottle of their stuff and fill it with something else?

logn2• 13 years ago

You can see the workings of Heinz factories here (the video also corroborates the existence of restaurant ketchup inspectors):

https://www.youtube.com/watch?v=Yz6FudM0zKk

They have full-time tasters who are amongst the only 8 people to know the full recipe.

tribeofone• 13 years ago

Great article about Buffet and his strategy in the economist a while back: http://www.economist.com/node/21563735

Berkshire and 3G Capital to Buy Heinz for $23 Billion

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