Sylvain CharleboisLast week, Warren’s Buffett’s Berkshire Hathaway added Kraft to its stable of storied brands, which already includes Dairy Queen, Mars, Coca-Cola, Burger King, Heinz and Tim Horton’s.

Buffett’s latest blockbuster transaction creates the fifth largest agrifood company in the world, with more than US$28 billion in sales.

Thanks perhaps to the multi-billionaire’s legendary sweet tooth, some observers have suggested that Buffett aims to build the perfect snack foods portfolio. While this may be so, what is certain is his acumen concerning the business of food. And his timing could not have been better.

First and foremost, Buffett admires strong American brands. In his own charming, idiosyncratic way, he only purchases a food company if he genuinely likes the product as a consumer. Of course, he is also always looking for a bargain.

However, his deal with Kraft is hardly a giveaway: Berkshire will own a quarter of the new company by paying a hefty price of 25 times expected 2015 earnings which, by Buffett’s standards, is far from dirt cheap.

This deal, though, is first and foremost about cost cutting: Buffett once quipped that costs are like fingernails – they need to be trimmed regularly. His approach with large brand-managing conglomerates seems work, at least for his shareholders. Kraft is now expected to suffer the same fate as other companies he has acquired: layoffs, plant closures, and complete strategic overalls.

With four facilities in Canada, some communities are about to live through what Leamington Ont. experienced a few years ago with the closure of its Heinz’s plant.

Brand-centric companies business model has long reached its tipping point. In the case of Kraft, brands like Velveeta, Cheez-Whiz and Jell-O have not evolved along with the needs of consumers, but not for the lack of ideas and marketing ingenuity. It is restructuring, as Buffett well knows, that often leads the way to food innovation.

In his world, operating budgets to support brands must be earned every single year, not granted as entitlements based on past glories. Buffet’s approach runs radically counter to the methods of the so-called traditional food industry, but it has worked with many of the food companies he has purchased in the past, so it wouldn’t be surprising if Kraft experiences the shift in culture.

Despite the strength of the American Greenback, the new company may still go ahead with a major global reshaping of its assets. 3G Capital, Buffett’s sidekick in these deals, fully supports this approach.

Most importantly, however, Buffett’s strategic purchases of food companies have a lot to do with predictability: snack food brands aren’t impacted by recessions, wars or any other undesirable market failures. They are addictive, and can rely on a loyal customer base as consumers continue to eat their favourite snacks regardless of national or international conditions. Cash flow then becomes as reliable as Kraft Peanut Butter on toast is tasty. With scale, which is exactly what Buffet is getting out of the Heinz-Kraft acquisition, cost cutting measures can leverage better returns and deliver higher dividends. Dividend income is, of course, Buffett’s proverbial Kool-Aid.

Those weaving conspiracies that Buffett is taking over the entire food industry can relax. These mergers may actually allow regional, local products a chance at precious shelf space in grocery stores because cost cutting at Kraft may give way to brand offloading, leaving more space for other labels.

In Canada, there has been a palpable increase in local procurement by major food retailers seeking to cater to consumers looking for unique products. As there seems to be a collective effort to recognize the heterogonous nature of our food marketplace, more consolidation in processing may actually represent a silver lining for smaller players.

Buffett’s influence on what and how we eat will intensify, but national food retailers like Loblaw, Sobeys and Metro, which have arguably aged better than many Kraft brands, are clearly winning the battle on market relevancy.

That, of course, is not going to stop Buffett any time soon, however. He may not appear to be the ideal role model for adopting healthy eating habits, but he is undoubtedly a significant investor in the food business, and many consider his taste for snack food companies far from satiated.

Count on more deals involving this hungry tycoon.

Sylvain is a Troy Media contributor. Why aren’t you?

Dr. Sylvain Charlebois is senior director of the agri-food analytics lab and a professor in food distribution and policy at Dalhousie University.

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