Warren Buffett. Picture: REUTERS/KEVIN LAMARQUE
Warren Buffett. Picture: REUTERS/KEVIN LAMARQUE

New York — Warren Buffett has warned investors to stay in their circle of competence when it comes to bets. But now, more than 30 years after Buffett started ploughing money into Coca-Cola, the rules of the consumer-product game have changed. 

Coca-Cola and Kraft Heinz, companies that claim Buffett’s Berkshire Hathaway as their largest shareholder, have shown in the past two weeks just how hard it is to navigate shifting consumer tastes. Coca-Cola shares slumped last week amid a lacklustre profit forecast. On Friday, Kraft Heinz fell to a record low after announcing a $15.4bn writedown of the goodwill value of assets including the Kraft and Oscar Mayer trademarks.

“This is something that is more of a long-term problem, a major shift in consumer taste and sentiment,” David Kass, a professor of finance at the University of Maryland’s Robert H Smith School of Business, said in an interview. “Very few people saw this coming, including Warren Buffett and including 3G Capital.”

Buffett’s Kraft Heinz investment has come under pressure as he is set to release his annual letter. He was a key part of Kraft Heinz’s formation, teaming up with private equity firm 3G to orchestrate the merger of Kraft Foods Group and HJ Heinz in 2015, and has remained a large shareholder since, with a stake valued at more than $11bn on Friday.

But the challenges faced by Kraft Heinz and Coca-Cola raise questions about the attractiveness of those investments amid a sea change in the industry. Even Buffett himself has recognised that customers might want different products these days.

“The consumer votes every day, and some things are affecting the consumer, like a feeling that other things are healthier,” as well as prices, Buffett said in a 2018 interview with CNBC. “There’s still a huge loyalty factor, but it is not as strong as it was five or 10 or 20 years ago.”

With Kraft Heinz, Buffett again made a bet on household names he grew up loving, such as Oscar Mayer. But much has changed over the years, with consumer tastes shifting away from processed food such as Velveeta towards organic options.

Buffett has said a strong brand is “really potent stuff”, but Kraft Heinz acknowledged on Thursday how out of step some of its brands are with Thursday’s announcement.

“That sort of strikes at the core of a consumer-products company – you’re as good as your brand,” Cathy Seifert, an analyst at CFRA Research, said.

Now Kraft Heinz is left trying to soothe investors through cost-cutting and the sale of assets to pay down debt. It also cut its dividend 36% to preserve cash. It is all part of a plan to deleverage so it can get back to making more acquisitions, a key part of Berkshire and 3G’s strategy for Kraft Heinz.

Buffett may love drinking Coke, but he is part of a shrinking minority. Fizzy drinks have been under siege for a decade from health advocates around the world, who blame it for helping increase obesity rates. In response, Coca-Cola has diversified its portfolio by pushing further into categories such as juice, coffee and water.

But, in the most recent quarter, its ties to fizzy drinks continued to weigh on results. Coca-Cola shares plunged the most in more than a decade on February 14, after the company issued an underwhelming profit forecast. That has put even more pressure on CEO James Quincey to make good on the company’s $5.1bn purchase of UK coffee chain Costa in January. But this shift is not a slam dunk because the coffee category is highly competitive.

In the short term, Kraft Heinz’s announcement stings. Barclays analysts cut their estimate in half for Berkshire’s fourth-quarter operating earnings, to $1,726 from $3,522 per Class A share.

In some ways, Berkshire has been tilting away from investing in some iconic consumer-brand companies. In 2018 the company piled even further into financial institutions and technology stocks, a move that might also be influenced by investing deputies Todd Combs and Ted Weschler.

And Buffett’s bet on Kraft Heinz is not a total wash. In 2016, he pegged the cost of his Kraft Heinz investment at $9.8bn, putting the per-share cost at about $30. With today’s drop, the value of his shares still stands at $11.4bn. In addition, Berkshire has collected $2.3bn in dividends since 2016, putting the total return on the investment at 41%.