On Wall Street, a good sell-side analyst researches and understands the company she/he is providing opinion on and, with the benefit of that knowledge, he/she provides buy/hold/sell guidance to the company’s investors and potential investors. It is noteworthy, then, that Robert Moskow, an analyst at Credit Suisse Group AG who knows both the industry and the management team at Kraft Heinz, has a strongly worded opinion on the performance of Kraft Heinz.
How We Got Here
In 2011, Moskow opined that Kraft had become too big, bureaucratic and slow and – after making investments – it was now ready to create value for shareholders. Moskow’s opinion is that focused companies “tend to operate a lot more effectively,” which was part of the thesis behind his positive sentiment when Kraft announced its August 2011 spinoff/separation of its snack food company and its grocery company.
Kraft Heinz was formed in 2015 when Kraft Foods Group - the snack food company that had been spun off - merged with Heinz, which was owned by 3G Capital and Berkshire Hathaway. Optimism was in the air around synergies that were expected to reach $1.5 billion by the end of 2017, while management reiterated the “difficult and challenging process of integrating the two businesses.”
The Downgrade
Today, Moskow has reached a stark conclusion: the company’s culture is a key risk factor. Moskow downgraded the stock, which is down around 30% in the past year.
Moskow backed up his assessment with a few anecdotes, citing the fact that the company has chosen not to publish its turnover rate in the “Recruit, Develop and Align our People” section of its February 2018 presentation. Moreover, while being highly selective in recruiting, only 30% of MBA interns and other trainees accept summer offers.
My own research, including Glassdoor.com reveals a miserly 2.4/5 star rating out of 2,580 reviews, with only 29% of reviewers recommending the company to a friend. In this dimension, Kraft Heinz is woefully behind its peers Nestlé USA (which reports a 3.5/5 rating from 1,094 reviews and 70% of reviewers who would recommend the company to a friend) and General Mills (with a 3.7/5 rating from 1,595 reviewers and 75% of reviewers who would recommend the company to a friend.)
Is Leadership the Culprit?
Mr. Moskow is right – something is very wrong at Kraft Heinz and I suspect it has a great deal to do with leadership. Kraft Heinz (and the 3G Capital management influence) has something of a reputation for cutting costs more than it does for investment – in new products or in people. That was evident when Kraft Heinz’s plan to go after Unilever last year in a potential $143 billion deal was killed. (Presumably, buying Unilever would also buy the innovation and new markets that it was finding elusive.) One reason the deal didn’t materialize was the anticipated culture clash between Unilever’s focus on sustainability and the cost-cutting, synergy-seeking DNA of Kraft Heinz leadership.
Indeed, the employees have said as much. On Glassdoor.com, only 28% of the respondents approve of their CEO. By contrast, 100% of the Nestlé respondents (1,094 people) recommended their CEO, and 93% of General Mills’ respondents were fans of their CEO.
What 3G Capital’s operating approach reveals is a focus on driving out cost, perhaps at all costs. An enlightening read on NYTimes’ DealBook shares examples of this laser focus on cost reduction. And it isn’t hard to imagine how this manifests in every managers’ behavior. When I’m being measured by how much cost I have taken out, it’s not hard to see why I’m not going to invest in my people, or the office or a new printer. This creates an environment, despite any synergy savings, where people simply don’t want to be.
Survive | Thrive
There is a way to start clawing out of this cycle – and it starts not with costs and synergy, but with making it clear that roughly 39,000 employees have a role to play. When only 29% will refer a friend to the company, you know that they don’t believe that they can influence the solution and have an impact.
To help make sense of the dynamics of organizational behavior, we contend that individuals and organizations embody elements of being in a Survive state or a Thrive state. When we feel under siege (as an individual) we tend to focus our energy on those things that will reduce or altogether eliminate the threat – hence the apt description of being in Survive. This means I’m not focusing on how to grow, or enrich or innovate; I’m simply focused on how to survive now. I also don’t want others to be in this same situation. The intense focus on cost reduction and how this is implemented (e.g. managing people predominantly based on how much cost or how many jobs they have eliminated) while modeling behavior that sends anti-investment messages means people are doing everything they can to hold onto their jobs. They aren’t thriving – they’re just trying to survive. When you spend your day thinking about whether you’re going to be laid off, or whether you have to lay people off or whether you’re going to need to work more hours to get the job done in a place you’d rather not be – you’re in Survive.
By contrast, Thrive means that people aren’t looking over their shoulders for the next threat. Instead, they get to focus on growing the business, or themselves or both. They focus on looking for ways to make a great workplace an even greater workplace. They want to create new products that blow the competitors out of the water. They don’t want to leave. They want their friends to join. And they are proud to say that they belong somewhere. They do the things that help to build a great, high-performing culture at a company that will win.
The single biggest driver of whether you’re in a Survive or a Thrive state is leadership. Leaders set precedent and create culture by condoning – indeed encouraging – or condemning behavior. Culture isn’t some sort of black box that leaders can’t control. Leaders do have the ability to influence culture more than anything or anyone else.
But Where to Begin?
Changing culture isn’t easy. Most of the time it isn’t quick either. But with persistence and focus, it can be done – we’ve seen it. It’s time for the Kraft Heinz leadership team to think deeply about the company they are creating.
First, leaders need to want to change how work is done and how results are achieved. Once there is an acknowledgment that we want to change, we should start by articulating what the end game is and why we can and should go after this - now.
Then, double down on how you’re going to get there:
- Identify the sacred cows and kill (or nurture) them.
- Include many people in making this happen – think thousands, not dozens!
- Change how you measure and manage.
- Change what you recognize and celebrate.
- Get rid of the bad actors and promote the good ones.
- Keep at this long enough so that people who want things to stay the same know, without a doubt, that the status quo isn’t an option anymore.
I suspect that at Kraft Heinz there won’t be much pushback in changing how work is done.
I recently did some work with a financial services organization of around 43,000 employees, focused on impacting their client experience. Their leadership team acknowledged that to get a different (better) outcome with respect to how their clients viewed them, they would need to do things differently. They started out by creating a movement across the organization for all 43,000 employees, inviting them to impact the client experience and making room for every one of those 43,000 employees to bring their energy, innovation, ideas and passion to the forefront of what they do. A lot more followed, but it all started with outreach to every single one of those 43,000 employees.
Culture as Risk
When you have a well-respected analyst citing your culture as a key risk, it should be read as an overdue warning sign. Other risks might be outside of leaders’ control – a global trade agreement, for instance. But this one – this is something that leadership can, and should, work hard to turn around.
The message should be clear for any executive team. Manage your culture like you manage every other dimension of your business – with a plan, with intentionality and by making immediate course corrections. If you don’t lead your culture, your culture will lead you.
