Food & Beverage

After brutal year, Kraft Heinz taps AB InBev's Miguel Patricio to replace CEO Bernardo Hees

Key Points
  • Kraft Heinz CEO Bernardo Hees is stepping down on June 30.
  • He will be replaced by Miguel Patricio, who worked as chief marketing officer at beer giant AB InBev.
  • Patricio says Kraft Heinz Chairman Alexandre Behring approached him about the new CEO role a few months ago.
Kraft Heinz names Miguel Patricio as new CEO
Kraft Heinz names Miguel Patricio as new CEO

Kraft Heinz CEO Bernardo Hees will step down on June 30, marking the embattled company's most significant executive shakeup since its formation four years ago.

Hees, 49, will be replaced by Miguel Patricio, who worked for two decades at beer giant Anheuser-Busch InBev, including as chief marketing officer from 2012 through last year.

Hees leaves at a critical time for Kraft Heinz, which is struggling to boost sales in the slow-growing food industry and facing questions from investors about the business model created by its second-largest shareholder, private equity firm 3G Capital, which focuses heavily on cutting costs, sometimes at the expense of brand investment. Shares of Kraft Heinz, which are down roughly 20 percent this year, rose 2 percent on the news in premarket trading, giving it a market capitalization of $40 billion.

"I bring very different profile [than Hees]," said Patricio, referring in part to his background in marketing. "My profile can help the future. It's not about liking what happened, it's about understanding the future. We need to lead, not follow."

"We think this change at the helm is a good sign for investors because it demonstrates that the company is very serious about pivoting its priorities toward growth rather than just cost cutting," wrote analysts at Credit Suisse Monday morning.

The incoming CEO said his focus will be on improving Kraft Heinz's speed, organic growth, brand building and making the company more consumer focused. He would not comment on what mistakes he believes Kraft Heinz has made, and noted it was "very natural" for Hees to step down after six years on the job, two of which he spent leading Heinz.

In February, Kraft Heinz delivered a trifecta of bad news: It reduced its dividend by 36 percent, wrote down its brands by $15 billion and disclosed an investigation by the Securities and Exchange Commission into its accounting and procurement practices.

That announcement sent Kraft Heinz's stock careening, wiping $16 billion off its market capitalization in one day. The company's share price is less than half what it was when it was created by 3G and Warren Buffett's Berkshire Hathaway in 2015 through the merger of H.J. Heinz and Kraft Foods.

Bernardo Hees, chief executive officer of Kraft Heinz Co.
Christopher Dilts | Bloomberg | Getty Images

Patricio told CNBC that Kraft Heinz Chairman Alexandre Behring approached him about becoming CEO a few months ago. He declined to say whether Behring approached him before or after Kraft Heinz's devastating earnings announcement.

Patricio, 52, said he met with all the members of the board, who voted for him unanimously. Kraft Heinz's board includes former Kraft Foods CEO John Cahill and Berkshire Hathaway board member Gregory Abel.

Hees decided to move back to 3G Capital to focus on other projects after completing his six-year stint at Kraft Heinz, a spokesman for the company said.

"I want you to know I have tremendous confidence in the future of the company," Hees wrote in an email to employees Monday that was obtained by CNBC.

"It was my honor to lead this organization for the past six years, and I will forever be proud to say I am part of the Kraft Heinz family."

Kraft Heinz's head of strategic projects, Eduardo Pelleissone, is also leaving the company to pursue other opportunities, effective June 30, a company spokesperson confirmed. Pelleissone previously worked as executive vice president of global operations and, before that, at Heinz as its head of operations.

3G partner no longer at the helm

With the departure of Hees, one of the companies most closely associated with investment firm 3G Capital will no longer be run by a 3G partner. 3G Capital, a private equity firm with Brazilian roots, made its name rolling up some of the most iconic American companies into consumer giants. Hees has been at the forefront of those efforts, sitting as chief executive of Burger King Worldwide, H.J. Heinz and later Kraft Heinz.

In those roles, Hees helped implement 3G's aggressive approach to cost-cutting and budgeting that served to carve out industry-leading margins and to fund its acquisitions. He oversaw Kraft Heinz as it extracted roughly $1.7 billion in savings from merging the two food companies. The company helped support those savings by slashing its research and development department, limiting trade spending and tightening marketing dollars, analysts say. It also laid off thousands of employees, including those with years of marketing experience in the consumer goods industry.

But as Kraft Heinz's sales have stalled, analysts have wondered whether 3G cut too deeply and quickly, starving brands of investment needed for growth. They have questioned whether that approach works without deal-making to give the company needed fat to cut. Kraft Heinz has not done a major acquisition since its 2015 merger.

Those questions have carried over to other companies affiliated with 3G Capital, like Patricio's former employer, AB InBev — the beer company was created by the founding principals of 3G Capital. While not a portfolio company of 3G Capital, it shares a 3G affinity for cost-controls and acquisitions.

Where there is transformation, there is opportunity.
Miguel Patricio
Incoming CEO of Kraft Heinz

After halving its dividend last year to pay down debt, AB InBev had its own executive shakeup. It announced in March it was bringing back two former AB InBev executives to join the board.

Patricio, a native of Portugal, said he has no affiliation to 3G, stressing he has new perspective to share in the CEO seat at Kraft Heinz.

"I bring a very different background with my experience in consumer food," he said.

During his run at AB InBev, Patricio oversaw brands including Budweiser and Stella Artois, accelerating their organic sales growth up to the high single digits, nearly a third of the company's organic growth in 2018. In his final year as chief marketing officer, AB InBev was the most awarded brand owner at the Cannes Lions awards for advertising and creative communications.

One of those awards was for a print campaign promoting the company's Budweiser brand, which had viewers Google images of rock stars drinking Budweiser that the company could not afford to license.

Patricio's prior roles at AB InBev include stints as president of Asia Pacific for four years and president of North America for two years. He also had positions at Philip Morris International, Coca-Cola and Johnson & Johnson.

"Kraft Heinz needs to rebuild the foundations in R&D and consumer insights that made it one of the best CPG marketers to work for in years past," the Credit Suisse analysts wrote. "Patricio comes to Kraft Heinz with a private equity '3G perspective,' but we think he will have a mandate to pursue these objectives."

The food industry, though, is more fragmented and diverse than the beer sector, an attribute Patricio said does not worry him.

"Consumer goods are consumer goods," he said, adding, "Where there is transformation, there is opportunity."

Still, there is ample upheaval. Upstart food brands sprout up seemingly daily, catching consumers' attention and stealing market share from all legacy companies from General Mills to Kellogg. Retailers, under their own competitive pressure, are also squeezing Big Food's once prized profit margins and filling their shelves with their own products, undercutting legacy brands on price.

Kraft Heinz has iconic brands, like Philadelphia cream cheese and Heinz ketchup, that still have global appeal and dedicated spots in pantries and refrigerators. The Heinz brand has grown 26 percent over the past six years, according to Nielsen.

But it is also saddled with others, like Maxwell House coffee and Oscar Mayer meats, that have seemingly lost touch with consumers and struggled to compete against cheaper store-owned competitors.

Kraft Heinz under Hees said it was weighing divestitures of brands that gave it "no competitive edge" as it looks to bring its leverage down to three times earnings before interest tax depreciation and amortization, rather than the four times at which analysts say it is currently pegged. It has $3 billion of debt that will be due in 2020, which may have to be refinanced.

Maxwell House coffee and Breakstone's cottage cheese and sour cream are among those Kraft Heinz is evaluating, CNBC has reported.

Patricio declined to comment on potential divestitures or acquisitions.

Regarding how he will define success at Kraft Heinz, he said he will look at both the top and bottom-line, without giving specific targets.

"It's like sports, either you win, or you do not."

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