Business

10.28.13

McDonald’s Ditches Heinz To Keep Burger King Out of Its Business

McDonald’s announced it will no longer serve Heinz ketchup after the condiment company hired Burger King’s former CEO. Daniel Gross on the Brazilian business boom that’s behind all of the burger joint drama.

This may be the most high-profile corporate divorce case since Rupert Murdoch and Wendi Deng broke up. McDonald’s announced on Sunday it is ditching Heinz ketchup.

There’s less—and more—than meets the eye. The less part? McDonald’s says it only uses Heinz ketchup in the Pittsburgh and Minneapolis markets. So this isn’t a major business disruption for either party. The more part? The relationship between American business icons is being torn asunder by a strange and interesting wrinkle in globalization: the advent of Brazilian investors as major forces in the U.S. market.

A little background. McDonald’s and Heinz are both corporate American royalty. Heinz traces its lineage to 1869 and first started making ketchup in 1876. And while they’re both based in the Midwest (Chicago for McDonald’s and Pittsburgh for Heinz), and while few companies have done more than McDonald’s to promulgate the use of sweet, salty, processed tomato goop around the world, the two firms haven’t had all that much to do with one another over the years.

So why the split? McDonald’s cited “recent management changes” at Heinz.

Heinz has indeed undergone significant management changes. Earlier this year, it was bought for $23 billion by legendary investor Warren Buffett and Brazilian private equity firm 3G. Most Americans have heard of Buffett, and he’s one of the least objectionable corporate personalities around. Few people have heard of 3G Capital, which is based in Brazil and has only made two acquisitions to date.

Founded by Jorge Paulo Lemann, a Harvard graduate, 3G is following in the footsteps of highly sophisticated Brazilian investors and managers, many of them who were educated in the U.S. They have prospered during Brazil’s boom, gained sophistication in an array of markets and are using their balance sheets and knowledge to push into new markets. To Brazilian investors, American companies with global footprints are extremely appealing. The trend started in 2008, when InBev, run by Carlos Brito, a Brazilian executive, acquired Anheuser-Busch for $52 billion (PDF). Brazilian meatpacking company JBS bought Pilgrim’s Pride, a chicken processor. And Marfrig bought Keystone Foods, a major distributor to the fast food industry. “Look out for the Brazilians and the Indians,” the chief executive officer of a consumer products company told me when I wrote about this trend in 2010. A few years later, his company was sold to a Brazilian company.

3G made a splash in the fall of 2010 when it bought Burger King—the perennial Pepsi to McDonald’s Coke. And, having set up shop at Burger King’s headquarters in Miami, the Brazilians are moving aggressively to remake the company. They’re assaulting (get it?) McDonald’s head-on by introducing new French fries, for example.

After the deal to buy Heinz closed in February, 3G installed a new chief executive officer: Bernardo Hees. Hees, 43, had spent much of his career at the huge Brazilian logistics company ALL. But 3G brought him to the U.S. to run Burger King as chief executive officer in 2010.

And therein lies the problem. Heinz is now essentially owned and managed by the same crowd that owns Burger King. What’s more, the company’s new CEO is the guy who used to run Burger King, which his bosses continue to own. Now, Heinz may be only a minor supplier to McDonald’s. But when you do business with McDonald’s (or any large company) as a supplier, you inevitably gain some intelligence about how the company is doing and how it operates. You learn how much the company is willing to (or able to) pay, and how long it takes to make payments. You might learn how much it is ordering, which might give some insight into sales. And you might be able to glean some advance knowledge of new product launches or marketing campaigns. For example, a company that sells vegetables to McDonald’s that suddenly starts getting lots of orders for spinach, cucumbers, and avocados, might surmise that the company is poised to introduce a McCobb Salad.

Now, any information that Heinz could gain about McDonald’s from supplying a small amount of ketchup is probably irrelevant in the broad scheme of things. And so the move does come off as slightly paranoid. But these are businesses in which every iota of operating margin makes a difference, and in which every percentage of market share represents billions of dollars in sales. In hypercompetitive industries, it’s simply intolerable to let your counterparts get even the most fleeting peek behind the curtain.