3G Capital’s playbook for success
3G Capital is a clear winner in aligning business model and operating model. Over the past years, 3G Capital has successfully invested in and grown renowned companies, creating value and giving shareholders significant returns on investment.
“3G Capital is a global investment firm focused on long-term value, with a particular emphasis on maximizing the potential of brands and businesses.”(1) Over the past years, the firm has successfully invested in and grown renowned companies such as Burger King and H.J. Heinz Company, creating value and giving shareholders significant returns on investment. 3G Capital’s strong track record has been praised by Warren Buffett, who has repeatedly invested alongside the firm and described it as a perfect partner.
In my point of view, 3G Capital is a clear winner in aligning business model and operating model in each of its portfolio companies.
The firm’s business model is “to identify and invest in opportunities that are well-positioned for profitable, long-term growth and success across a variety of different sectors and regions.”(1) This strategy is common in the private equity industry; however, very few have been able to transform companies and industries like the partners at 3G Capital have. In this post, I would like to describe a few specific features of the operating model that set the firm apart and are designed to sustain its competitive advantage.
As an investment firm, 3G Capital’s main asset is its people. The firm’s “core management philosophy focuses on developing and retaining top tier talent.”(1) “We’re constantly trying to train new people and we’re constantly telling everybody that the newer people should be better than the old people,” Jorge Paulo Lemann, 3G Capital’s founding partner, once told Fortune. The management team strives to look for “owners”: hard-working and driven people eager to gain responsibility and grow fast in their careers.
The firm “operates as a true partnership with strong meritocracy, and therefore, there is significant alignment of interests.”(1) To name a few “success stories”, Bernardo Hees (CEO of The Kraft Heinz Company) and Daniel Schwartz (CEO of Restaurant Brands International) are some of the partners who have grown from within the 3G system. By developing and investing in talent, 3G Capital is able to retain a loyal and connected group of people that drive the firm’s success.
The organizational structure is lean and the potential for impact is huge. The firm takes a hands-on approach: it places its people in key management positions at each of the acquired companies, “empowers them to deliver results and continuously raises the bar for its teams.”(2) People work in “progressive open office environments to encourage collaboration and faster decision-making.”(3) In fact, there is transparency and cooperation across all levels of the firm. Formal controls and weekly performance reviews based on hard data keep people accountable and focused on achieving results.
The compensation structure and reward system are also aligned with the firm’s business model. 3G Capital usually pays salaries in line with the industry, but the upside potential in stock-options and bonuses is significant. This results-oriented approach has managers rewarded by performance and not by seniority. Thus, the firm has effectively fostered a culture that acknowledges people for their hard work and pushes aside those who do not keep up with the pace. Having motivated people with the right mindset is a big part of 3G Capital’s success.
3G Capital differs from most other private equity firms in its investment approach: the firm focuses on a single investment (or very few) at a time, allowing for effective transfer of knowledge & experience from one business to another. The firm usually takes its key people from one operating company to the next one (e.g. Hees was CEO of America Latina Logistica and Burger King before becoming CEO of Kraft Heinz). Then, 3G Capital’s people use a “playbook” that has successfully worked in the past (i.e. shift in corporate culture, cost cutting initiatives, zero-based budgets, focus on profit) to diligently maximize each investment’s potential. Finally, the firm truly holds its investments for the long term, using the acquired companies as platforms to pursue further deals and accelerate growth (e.g. Burger King merged with Tim Hortons and Heinz merged with Kraft).
To sum up, 3G Capital is a unique investment firm that has managed to fully align its business model and operating model to create and capture value in every single one of its enterprises. By attracting, training and retaining top talent, keeping its people engaged in a meritocratic partnership, giving its teams the formal structures & systems to take on challenging tasks, aligning compensation & incentives, and transferring its knowledge & expertise, 3G Capital is able to successfully implement its strategy.
Sources:
(1) 3G Capital website.
(2) Heinz Company job details description.
(3) Heinz Company culture description.
Other reference materials:
Fortune (http://fortune.com/2015/03/25/3g-capital-heinz-kraft-buffett/)
Bloomberg Markets (http://www.bloomberg.com/news/articles/2011-10-18/billionaire-dethrones-kings-in-beer-to-burgers-as-batista-model)
The Wall Street Journal (http://www.wsj.com/articles/investment-firm-3g-capital-eyes-next-targets-1420601873)
The New York Times’ Dealbook (http://dealbook.nytimes.com/2014/05/05/a-q-a-with-the-author-of-a-buffett-praised-book-on-3g-capital/?_r=0)
Dream Big by Cristiane Correa (http://www.amazon.com/DREAM-BIG-Brazilian-Sicupira-Anheuser-Busch-ebook/dp/B00JUWYGDQ/ref=asap_bc?ie=UTF8)
While I’m very curious about the operating model described above and I agree that it does a great job of identifying driven people and helping them collaborate, I question whether we know enough to declare the “3G model” as a whole a success. While the businesses 3G invests in are generally more recession-resistant than the average company, I imagine there’s still significant risk that in a recession, the company’s stock price would decline, leading to employees not receiving the incentive compensation that keeps them working so hard. I would then wonder whether 3G can retain all these people, or whether they’d go to a competitor where they’d make similar base money but not work as hard.
I also think it’s worth delineating the potential for continued performance between firms where significant M&A is still an option (i.e. Restaurant Brands) and those where anti-trust concerns will likely limit future M&A (i.e. AB-InBev post SAB Miller). If 3G has already stripped out costs from the core business and any acquired targets, and they can’t acquire more targets, organic growth is the only major lever left. Is there significant evidence that companies like AB-InBev can grow organically, given the overall low growth nature of their end markets and off-trend positioning within them? I believe per-capita US consumption of Budweiser has declined by over 40% over the last decade…
Thanks for the post. I agree with Danny’s comment that it is early to call 3G model a success. I wonder if a focus on cutting costs when times are good will leave them limited levers to pull when we slip into our next recession. What is clear though is that their “zero-based budgeting” approach is becoming an industry standard among activist investors with Nelson Peltz and Bill Ackman employing the strategy this year as well. http://blogs.wsj.com/moneybeat/2015/03/25/on-zero-based-budgeting-activists-at-knee-of-3g/ Presidential candidate Carly Fiorina has even argued to apply this strategy to the federal budget. It will be interesting to see if over the coming years this approach will be a standard bearer for successful business / operating model alignment. I wonder if you could apply this effectively to more capital intensive industries such as manufacturing where fixed costs take a much bigger slice of the pie.
Thanks for your comments. Btw, very interesting to know that many others are applying the ZBB approach.
I agree with both of you that the partners at 3G need to prove themselves in their most recent investments and I agree that their model may not be applied in all industries (i.e. technology). However, it is hard to deny that, by using a unique playbook, 3G has been extremely successful in terms of creating substantial value for shareholders over the years.
As a matter of fact, from the time they acquired Heinz to the point of the merger with Kraft, they were able to reduce leverage and improve EBITDA margins from 18% to 25%. In addition, affiliates of 3G’s partners are meaningful shareholders of AB-InBev since 1989. We have seen many ups and downs in the market, but the point is: they started with a single beer company in Brazil and now, after the takeover of SABMiller, they have a dominant presence world-wide with nearly 30% market share. In my point of view, that is a very successful story. Over the years, AB-InBev’s stock performance has significantly outperformed the market (220% vs. 126% since June 2009): http://finance.yahoo.com/echarts?s=BUD+Interactive#{“range”:”max”,”allowChartStacking”:true}
In any case, I understand that past performance does not guarantee future results so I am also eager to see how these most recent investments will turn out for them. They surely have a lot of work to do now.