No more business cards for you! Inside the new HeinzSeptember 18, 2013: 12:26 PM ET
It's been more than three months since Heinz sold itself to Warren Buffett and 3G, a secretive private equity firm that also controls Anheuser-Busch and Burger King. Now 3G is making radical cuts at the $11.6 billion ketchup king. An exclusive excerpt from an upcoming Fortune feature.
By Jennifer Reingold, senior editor
FORTUNE -- As the 60 or so most senior executives of the H.J. Heinz Company walked through the grand entrance to the Four Seasons San Francisco in June, they knew that this year's Chairman's Leadership Conference would be like no other. Typically an exercise in team building and strategic goal setting—familiar to C-level types at Corporate America's largest companies—the event had a standard agenda: a mix of meetings and market discussions, a wine tasting in Napa Valley, and a motivational talk from the outgoing CEO of 15 years, Bill Johnson.
Yet Johnson's speech was not a forward-looking call to action but more of a nostalgic sojourn through his 30-year Heinz career, an emotional farewell to both the corner office and the company he had run. That's because just 10 days before the offsite, Heinz had closed the largest food-company transaction in history, a deal to sell itself to famed investor Warren Buffett's Berkshire Hathaway and Brazilian-owned private equity firm 3G Capital for $28 billion. Johnson had already handed the CEO crown to Bernardo Hees, former chief of Burger King, another 3G investment. With so much uncertainty in the air, the executives wondered whether an offsite even made sense. The Brazilian owner was known for ruthless cost-cutting and each executive knew his or her tenure at Heinz might be nearing its end.
But Hees decreed that the meeting go on as planned, perhaps because there was another purpose to the event. After Hees spoke about his dream for the new Heinz—to make it the most efficient company in the food world—many of its leaders experienced that efficiency first-hand. Later that day, about half of the executives were summoned, in 15-minute increments, to a conference room where the new CEO calmly informed them whether they had a place at the new company or whether their Heinz career was over. "You couldn't dream it up, it was that weird," says one attendee.
When the purge was over, 11 of the top 12 executives were gone, replaced, in many cases, by people they had managed, or by executives who had previously worked at other 3G-owned companies. Easing the sting was the fact that, due to change in control stipulations, they were ushered out with full vesting of their stock options and retirement accounts. Johnson left with a package worth an astounding $212 million.
The newly jobless group was invited to hear speakers and tour Alcatraz along with their now former colleagues. "The bar was open," says a Heinz executive who lost his job—and the scene was like a wake, both sad and celebratory at the same time.
The survivors were told a jet would be waiting for them Wednesday morning. They would fly back to Pittsburgh to begin work for the new Heinz—a company with new leadership, yes, but also a new $18 billion debt load, some of it in preferred stock with a 9% dividend owed quarterly to Buffett. (Buffett says through an assistant that he is leaving the operations of the company to 3G and that his job was simply to provide financing. He is, however, on the board, along with Tracy Britt, another Berkshire representative).
What is this new Heinz? So far, according to testimony from current and former executives, it is a place in which every cost, no matter the size, is attacked and reduced or eradicated. That applies to human costs as well; in August, Heinz announced the layoffs of some 350 of the 1,200-strong full time staff at Heinz's Pittsburgh headquarters and a total of 600 across North America. The move was expected given that 3G has put in place a similar approach at the other companies it has owned or founded, including Burger King, AB InBev, Brazilian logistics company America Latina Logistica (ALL) and retailer Lojas Americanas. Says Michael Mullen, Heinz's senior vice president of corporate and government affairs: "The difficult actions we are taking now will better position the company to support and fund our next chapter of growth while further strengthening our world-leading brands. Our new organizational structure will simplify, strengthen and leverage the Company's global scale, while enabling faster decision making, increased accountability, and accelerated growth." (Hees of 3G declined to comment.)
The layoffs were only the beginning. Heinz's corporate jet is being sold, the aviation department shuttered, and the company's two corporate buildings are being combined into one. Individual offices are being done away with altogether. Instead, even top executives including Hees now work only inches from each other at white industrial tables with one shared filing cabinet per table. They are encouraged to wear shirts with the Heinz logo imprinted on them. They must stay at hotels at the level of Holiday Inn when traveling, and are expected to work even longer hours than they already did. It is an approach borrowed from the likes of Wal-Mart, but refined over the course of many years.
On some level, 3G's rejection of the frippery of the C-suite lifestyle is a welcome one in this age of growing inequality. Yet Heinz was already viewed by analysts and competitors as a relatively lean, hard-working enterprise. (It was only seven years ago, for example, that the company went to the corporate equivalent of a health spa, with some trimming and toning courtesy of activist investor Nelson Peltz.)
Three months into the new regime, the company is so micromanaged that, according to an internal document, "monthly tracking of printer use by employee(s) should be implemented" with a limit of 200 copies per month, and directors and above are allowed only 100 business cards per year. "Mini-refrigerators," it reads, "are not permitted." Executives are now doing the jobs of both their former bosses and direct reports, and, according to several of them, expect more layoffs to come. There may be, however, an incentive: 3G has typically offered lavish stock options, which vest only after five years, to executives at its portfolio companies.
The question is whether Heinz, under 3G, will become a newly invigorated version of capitalism at its most efficient—or whether it will take the cult of cost-cutting so far that it harms Heinz's ability to compete and produce the products that have made it a market leader for so long. "Right now, they're in the middle of a transplant," says one former executive. "It's a whole new model on top of a living organism and the question is will they reject it or not?"