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***Berkshire Hathaway shareholders do their part, flying home from Omaha with souvenir bottles of ketchup and mustard.
But Kraft Heinz needs the rest of the country to stock up on its products, too, to pull it out of a sales slump.
The situation is bad enough to weigh a bit on Berkshire Hathaway, which owns more than a quarter of Kraft Heinz Co. and is its biggest investor. The food manufacturer’s stock has lost more than a third of its value since the last time Berkshire shareholders filled the CenturyLink Center.
The Kraft Heinz stake is just one part of Warren Buffett’s sprawling investment empire, but it’s a meaningful one.
The stake in Kraft Heinz, as it’s recorded in Berkshire’s books, adds up to about 5 percent of Berkshire’s book value, or the conglomerate’s assets minus its liabilities, Edward Jones analyst James Shanahan told The World-Herald.
Separately, Morningstar analyst Greggory Warren calculated in a January report that Berkshire’s investment in Kraft Heinz was worth $16,800 per Class A Berkshire share, about 5 percent of what he said at the time was the stock’s fair value of $330,000 a share.
Berkshire’s Kraft Heinz shares are still worth more than the $17.6 billion the stake is valued at on Berkshire’s books, but the difference has been shrinking as Kraft Heinz’s share price has tumbled more than 40 percent from its February 2017 high.
That’s on top of losses in other Berkshire stock holdings, including Wells Fargo and U.S. Bancorp.
“Taken together, that could explain the recent move down in share price for Berkshire,” Shanahan said. The stock is down about 2 percent so far this year.
The 2015 Kraft Heinz merger, orchestrated by Buffett and 3G Capital, Berkshire’s co-owner in Heinz, was a boon for shareholders as the consolidated firm slashed costs, laid off workers and pumped up profit margins.
The ruthless paring of expenses became the food industry standard, forcing competitors including Conagra Brands to do the same, even as it was controversial to some Berkshire shareholders.
Kraft Heinz shares rose further, to the February 2017 high, on talk of a takeover deal with Unilever. The company’s cost-cutting and consolidation spree could have continued — but Unilever, the European maker of Vaseline and Ben & Jerry’s, wasn’t willing.
That now has Kraft Heinz facing the prospect that has bedeviled many of the food industry’s oldest firms: how to grow sales when shoppers are eating more ready-made meals and buying food advertised as natural, while spurning packaged food brands like Kraft Heinz’s Kool-Aid, Velveeta and Maxwell House.
The company has fallen behind its peers in how much it spends to invest in its brands, said Erin Lash, analyst at Morningstar.
Comparable sales were down slightly in 2017, a year that Chief Executive Bernardo Hees said included hits and misses but didn’t live up to the company’s potential.
A Kraft Heinz spokesman said the company is now focused on profitable, long-term growth. Where it once cut, it is investing and developing new brands, thanks in part to tax law changes. One new brand you might see in stores: Just Crack an Egg microwaved breakfast cups.
And it’s using old brands to roll out new products. Look for Kraft Mayochup (that’s mayonnaise plus ketchup, to dip your fries in).
“We believe Kraft Heinz is best positioned to deal with industry changes because we have strong, iconic brands,” spokesman Michael Mullen said in a statement.
Some analysts are skeptical.
Yes, Kraft’s big brands still drive store traffic, and retailers rely on Kraft as a proven supplier, Lash said, but some of its products, like packaged meats and cheese, have become merely commodities to the consumer, who is willing to pick up a competitor’s version if it costs less, Lash wrote in a March report.
Sales growth that comes from actually selling more food products is not the company’s expertise, Credit Suisse analyst Robert Moskow said.
“We harbor serious doubts about the management team’s ability to generate sufficient product innovation to grow its collection of ‘retro’ brands in highly commoditized categories,” he said in an April report.
He said Kraft Heinz has lagged the industry in launching innovative products that made a meaningful difference in sales.
Kraft Heinz will likely find another acquisition, but there aren’t many potential targets and the potential value of a merger would be slight, Moskow said. And margins will suffer as Kraft Heinz invests more alongside the retailers that sell its products.
Part of the problem is the company’s sheer size, said Steve Hughes, founder of Sunrise Strategic Partners, a Boulder, Colorado, venture capital firm that invests in growing food brands.
In a company with $26 billion in annual sales, most new brand or product launches will barely move the needle, Hughes said. New brands will likely have smaller sales and profit margins than the cash-producing big, old brands.
“It’s a tough equation,” he said.
But others, including Edward Jones analyst Brittany Weissman, say Kraft Heinz’s share price doesn’t reflect its potential.
“While the operating environment appears challenging, we continue to believe Kraft Heinz is a good long-term growth story,” she wrote in an April report.
She said the company will be able to expand internationally and grow sales by investing in its brands and developing new products.
Kraft Heinz in March said it would invest in food startups, and launch an incubator program for new food companies that focus on natural, organic, specialty and health foods.
Buffett announced in February that he would step down from Kraft Heinz Co.’s board; remaining representatives there are Berkshire Vice Chairman Gregory Abel and Tracy Britt Cool, chief executive of Berkshire’s Pampered Chef.
Shanahan at Edward Jones expects investors will question Buffett about the Kraft Heinz investment at this weekend’s meeting. And they would likely question any future Berkshire investments with 3G, he said.(tncms-asset)0638652a-4ca1-11e8-894e-00163ec2aa77(/tncms-asset)