The deal Berkshire Hathaway and Brazilian private equity firm 3G have made to merge Kraft and Heinz might turn out to be less than a stroke of genius, Peter Morici, professor of business at the University of Maryland, tells Newsmax TV
Berkshire, of course, is led by Warren Buffett.
"It's a big deal for the U.S. economy," Morici TELLS Newsmax TV's "MidPoint" show. "It's indicative of where we're going in the food sector. The old line manufacturers, like Kellogg, Campbell Soup, Heinz and now Kraft have bloated cost structures — or at least Heinz did it until 3G got a hold of them."
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Berkshire and 3G bought Heinz in 2013.
In the past, "people routinely bought their [Kraft and Heinz] products, and they ate processed foods," Morici explains. "But more and more consumers are turning away from the kind of stuff that Kraft sells. Warren Buffett may be off on this one."
And why is that?
"He's noted for his love of junk food and serving big beef steaks — politically incorrect meals — at his board meetings," he notes. "But Americans aren't downing Velveeta cheese anymore. So the real news here is going to be how much can they squeeze down costs?"
Jobs will be eliminated. "Maybe more at Heinz than at Kraft, at least in proportional terms, because Heinz is in Pittsburgh and Kraft is in Chicago," Morici argues.
"Where would you locate a major international agricultural food processing company? The answer is Chicago. So Pittsburgh is going to be the big loser in this."
He compares the food companies to General Motors before the 2008 financial crisis. "Too many layers, too many people pointing and frankly products that are tired, worn out, brands that no longer sell. I mean who do you know that feeds their kids Velveeta cheese?"
Kraft and Heinz make "products that you knew as a child, but you don't eat anymore," Morici asserts. "They made the point that just about everybody has a Kraft product in their household. Yes they do. But by and large Americans are turning to more wholesome foods."
The companies simply haven't adjusted to the changed environment. "I'm at a loss to see how Kraft is any different than AT&T," which hasn't adapted well to the end of its old monopoly over phone service, he states.
"Kraft has had its hands at getting into wholesome foods and it's not doing very well," Morici insists. "By and large their market share is declining."
So what's the outlook for Kraft going forward?
"There's a future for Kraft in cutting costs for a while, and that's what Warren Buffett will reap," he contends. "Look for these guys to shape up these companies, then sell them off to some unwitting investor thinking they have a bargain, and in reality they will have the declining empire."
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