About a decade ago a Brazilian private equity firm called 3G Gapital made waves in the US when it spent billions to buy Americas most notable food brands including Kraft, Heinz, Burger King, Oscar Mayer and Budweiser.
Following the acquisitions the new owners relentlessly cut costs including mass layoffs to create greater efficiency and profitability. The companies single minded ability to improve profit margin‘s through cost cutting sent ripples throughout the entire food industry. A decade later 3G‘s strategy appears to have failed. Earlier this week craft Heinz wrote down the value of its Kraft an Oscar Meyer brands and other assets by $15.4 billion and disclosed an investigation by the federal securities and exchange commission into their accounting practices. In after hours trading shares fell nearly 28%.
While they were paying attention to the expense line and the bottom line, they failed to pay attention to what it might take to grow the top line revenue. During that time consumer tastes have changed. Consumers are seeking healthier alternatives, more organic food, and many younger consumers have shifted away from beer towards drinking cocktails. Through a series of acquisitions 3G bought its way into the beer market and owns 40% of the volume of beer consumed in the United States. They completely missed the microbrewery threat to their business. Maintaining a healthy business requires adapting your product offer to your customers tastes.
Real estate is a business like any other business. It is the same as selling beer, and ketchup, and hotdogs. Even in housing customer tastes do change over time.
If you fail to invest in developing product that is going to be at the forefront of customer demand this year and next year, you will find yourself on the slow road to obsolescence.
Putting a fresh coat of paint on that 1950s bungalow is just like putting a new label on the can of Budweiser. For the loyal consumer of Budweiser, the new label maybe eye-catching. But if your customers have shifted to craft beers or cocktails, the new label won’t do it. You will be playing catch-up in the market at best, or possibly bankrupt at worst.
So what do today’s tenants want? They want certain amenities in a rental property, or an office building.
Your customers don’t want 6 inch floor tiles. They want large rectangular 12 x 24 floor tiles. They don’t want laminate counters. They want natural stone like granite or a semi synthetic stone like quartz.
They don’t want ornate colonial style trim on the windows and doors. They want clean lines that are crisp and modern.
They may tolerate the old stuff, but that doesn’t mean they want it. I will tolerate Heinz Ketchup, but my taste has shifted towards other brands that have more vinegar and less sugar. You see the folks at Heinz never asked me. I had been buying Heinz ketchup for years. But then one day, my taste changed. I wanted a more natural ketchup. I never gave them the feedback. There was no way for them to know I had stopped buying Heinz. The folks at Heinz were busy looking internally for ways to save money. They eliminated single sided printing to save paper. They cut the corporate jet that the Heinz family used to use. Profits were growing, so everything looked good. All of a sudden they woke up one day and discovered that Victor and thousands like me had stopped buying Ketchup and Oscar Meyer hot dogs.