In today’s Finshots, we tell you why Kraft Heinz is calling it quits on a decade-old merger.

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The Story

Warren Buffett is upset!

Back in 2015, his company Berkshire Hathaway, joined hands with Brazilian private-equity giant 3G Capital, to pull off a blockbuster merger. The plan was to mash together Kraft Foods, the cheese champion of American households, with H.J. Heinz, the company you might know as the world’s ketchup king, cross-leverage the brands, and build a global food giant.

On paper, it looked like a delicious idea. Berkshire and 3G already had big stakes in both companies. So they took Heinz private in 2013 for $28 billion. Two years later, they bought Kraft for $63 billion and merged the two companies together.

And 3G had a reputation too. They were famous for their ruthless cost-cutting playbook, which they’d already tested at Heinz. The idea was to save $1.5 billion through synergies by 2017. Everything was lined up for sweet returns.

But then it turns out that cheese and ketchup go well in a sandwich, not so much on Wall Street.

Because over the past decade, Kraft Heinz’s stock has lost more than 60% of its value. Meanwhile, the S&P 500, the benchmark for US stocks, has more than tripled over the same period.

To put it simply, the merger just didn’t deliver as expected.

While 3G read the writing on the wall early and slowly sold its stake, finally exiting in 2023, Berkshire stayed put — even though Buffett admitted they overpaid, calling himself ‘wrong in a couple of ways on Kraft Heinz.’

And that regret seems to be catching up now. Kraft Heinz has finally had enough and wants to undo the decade-old merger, splitting back into two separate companies. But this U-turn won’t come cheap. It’ll cost about $300 million just to make the split happen.

Naturally, Buffett isn’t pleased. Berkshire still owns 27.5% of the company, making it the largest shareholder. And in his view, such a huge decision only means wasteful spending that eats into shareholder value.

Which makes you wonder — what exactly went wrong at Kraft Heinz?

To understand that, we’ll need to go back and dig into why the two companies merged in the first place.

The idea behind the merger was simple. Kraft and Heinz had different strengths that seemed to complement each other. Kraft dominated grocery staples in North America. Think cheese, packaged lunches, pantry essentials. And Heinz was the global leader in sauces and condiments. Put them under one roof, and the thinking was that the brands could work together and grow faster.

But the reality was trickier. Once the merger happened, the problems began to show. Managing so many overlapping brands under one roof wasn’t easy. The company struggled to decide how to spend its money and resources between Kraft’s old-school groceries and Heinz’s faster-growing condiments. This tug-of-war meant that some brands didn’t get the attention they needed. At times, Kraft and Heinz products even ended up competing against each other for shelf space in the same stores. That hurt sales instead of helping them.

Another big issue was cost-cutting. 3G Capital, which helped drive the merger, was known for slashing expenses aggressively. At Kraft Heinz, this meant cutting back on investments in advertising and innovation. For a while, this saved money. But over time, it left some of the company’s most famous brands underfunded and struggling to keep up.

Meanwhile, the market was changing. Inflation meant shoppers were hunting for cheaper options, and local grocery store-brand labels were getting more popular. And since Kraft Heinz wasn’t investing enough in its own brands, many of them lost ground to these private-label products.

Sure, the company tried to fight back with $1 packs of Mac & Cheese and salad dressing, but it wasn’t enough as consumer tastes were shifting too. People wanted healthier, less processed food. Lunchables — Kraft Heinz’s iconic snack trays for kids, even had to be dropped from school menus last year owing to falling demand.

Then came another blow. Weight-loss drugs such as Ozempic and Wegovy started becoming popular. People using them were eating less, especially cutting down on snacks and sugary foods. That also chipped away at Kraft Heinz’s sales.

Add all these issues up and you’ll see why sales started falling. For context, back in 2015, when the merger happened, Kraft Heinz had annual revenues of more than $28 billion. By 2024, that number had dropped to about $26 billion. The stock price also took a beating. What was once billed as the creation of one of the world’s largest food companies ended up looking like a poor investment.

And that’s exactly why Kraft Heinz now wants to reverse course. The plan is to split back into two companies — one focused on sauces, spreads and seasonings, and the other on groceries and packaged staples. The hope is that, by separating, each business can focus on its own strengths and challenges.

For example, the sauces business could push more into innovation and premium products, while the grocery business could focus on keeping costs low and staying competitive. Each company would have its own management team, its own strategy, and its own budget. This simpler setup could also make it easier to respond to changing consumer preferences — whether it’s reducing sugar in juices, removing artificial colours or launching preservative-free hot dogs.

Of course, this isn’t going to magically solve everything overnight. But the company believes that this move will “unlock shareholder value”. In other words, investors will be able to judge each company separately, without the baggage of the other weighing it down.

Still, there’s some irony here. Ten years ago, Kraft and Heinz were independent companies and thought they’d do better together. Now, they believe they’ll do better apart.

So yeah, whether this new bet pays off is something only time will tell.

Until then…

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