Why the Failed Unilever-Kraft Heinz Merger is a Very Good Thing

The Brazilian private equity group, 3G Capital, who own Kraft Heinz and InBev, and whose strategy was summarized by Fortune as “Buy Squeeze Repeat,” were rebuffed in their effort to buy Unilever. Thank goodness.

Unilever is a shining light. In 2010, Unilever launched USLP (Unilever Sustainable Living Plan) with the vision of addressing the environmental and social problems in the world. Unilever has a host of specific environmental goals dedicated to reducing its footprint (cutting it in half), getting people access to safe water, increasing the use of renewable energy and stopping hazardous waste from going to landfills. Social programs abound at Unilever, like Dove’s programs to raise girls’ and women’s self-esteem and Lifebuoy’s program to change handwashing habits to reduce infant deaths throughout the world (they are halfway toward the goal).

Unilever’s Belief in Corporate Responsibility

The rationale, as explained by CEO Paul Polman, is fascinating. He notes that (in part) because of the limits of capitalism, we have created an unsustainable set of problems which include global warming, resource depletion and an increasing gap between the rich and poor. He believes that businesses have a responsibility to address these related issues. The Unilever business model calls on the firm to be an active contributor in finding solutions. Toward that end, the needs of citizens and communities carry the same weight as the demands of shareholders at Unilever.

“The Unilever business model calls on the firm to be an active contributor in finding solutions.”

Polman argues that such actions will help businesses in the end. Better employees, especially millennials, will be attracted. Enough customers will respect – even admire – you to make a difference. And, brands will get more visibility and energy, key determinants of long-term success. By raising the living standards of third-world counties, new markets will open. The risk of catastrophic damage to the environmental, social and economic framework will be reduced; which should objectively be a plus for business.

The Kraft Heinz Difference

In sharp contrast, 3G Capital strategy acquires and merges firms, and then ruthlessly reduces headcount and operational expenses to sharply improve operating margins, profits and, most important, per-share earnings. During the first 15 months after buying Kraft, the employee count went from 46,600 to 41,000 and overhead went from 18.1% to 11.1%. Just days after the purchase, ten top executives were fired, office refrigerators were removed, company planes were gone, everyone flew coach, people even shared hotel rooms—all in the name of creating a cost-reduction-first culture. All programs and people were placed on a zero-based budgeting system with a “justify what you are worth” ongoing evaluation.

Because of these changes, the Kraft Heinz market cap went up sharply. Wall Street is impressed by cost moves. This strategy may work short-term, but cost-oriented strategies can and have run out of steam requiring firms to change – sometimes painfully – to invest in rebuilding brands and finding growth avenues. Maybe that will happen at Kraft Heinz and maybe not. Perhaps the lack of a higher purpose will inhibit them from hiring the best people, and adversely affect the loyalty of a part of the customer base. Or maybe not.

It seems unlikely that over time 3G will champion a higher purpose or develop substantial programs to protect the environment or address social issues to the extent that Unilever and many other firms are doing. They may be right in setting their priorities and the result may be a financial success. Or maybe not.

Unilever invests in solutions to social problems in the context of running a business. I submit that we are better off because of the Unilever’s of the world, which incidentally, include many, if not most, major firms.