Troy Bader, who became CEO in January 2018, said his company wants to ensure that devotees keep ordering their Blizzards and chicken strips, without turning off customers seeking newer products or with specific dietary needs.

“About five per cent of disposable income is spent on away-from-home dining occasions,” Bader, 54, said in an interview during Berkshire’s recent annual shareholder weekend. “Transactions in the restaurant industry have been flat, so even if wages are going up, what I have for disposable, discretionary spending is not. That’s why you’re seeing so much competition.”

Berkshire, whose 88-year-old chief executive favours the Dairy Queen vanilla orange bar, paid $590 million for the Bloomington, Minnesota-based company in 1998 (all figures US$).

Dairy Queen’s more than 7,000 locations worldwide, including about 700 in Canada and 4,500 in the U.S., recorded more than $4.5 billion of sales in 2018. Bader said 2019 has been “good so far” despite bad U.S. and Canadian weather.

“Bomb cyclones and polar vortexes don’t bode well… when 50 per cent of your sales are ice cream,” he said. Bader named McDonald’s and Chick-Fil-A as key rivals.

Labour is the fastest-rising cost for franchisees, especially when rising minimum wages, an issue on which Bader said Dairy Queen has no position, squeeze margins as customers favor such menu items as the $5 Buck Lunch. Also rising is the cost of branded candies that Dairy Queen adds to ice cream.

Bader said adapting to changing consumer habits is not a new idea.

“It’s actually evolutionary, it’s not revolutionary,” he said. “When we look at trends, you have to decide which you’re going to lead in, which you’re going to follow, and which you may not participate in at all because they may not be right for or important for your brand.”

He said Dairy Queen, despite its name, is exploring desserts for people who avoid dairy, but won’t dive into plant-based food, despite the frenzy last week when Beyond Meat Inc. went public and its stock price soared.

“If appropriate for our brand, we will move in later,” he said. “Right now, the biggest opportunity is in our chicken strips, our burgers and other products.”

Another major initiative is technology, including the creation of a single electronic point-of-sale system.

Bader, a self-described “recovering lawyer,” had interviewed with Buffett before the billionaire gave vice-chairman Greg Abel oversight over Berkshire’s non-insurance operating units. He now reports to Abel.

Buffett “was asking as many questions as we were. He wanted to know what you knew that he did not,” Bader recalled.

“What I find interesting with Greg was, he’s the same way. I’m not trying to say Greg is Warren. Nobody will ever be Warren. But he is really smart, and he is a really good study.”

— Reporting for Reuters by Jonathan Stempel in Omaha.

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Since 2013, the “acquire and cut” modus operandi worked well and made Kraft-Heinz a more profitable enterprise. The 3G Capital-Buffett duo acquired Heinz in 2013 and then acquired Kraft two years later. Cost management and rising margins were key to make these businesses profitable. But organic growth is so painfully absent, meaning Kraft-Heinz needs another deal and fast. After its epic failure to purchase Unilever in 2017, it’s back on the hunt.

For Kraft-Heinz, Campbell Soup offers a different scenario. The Kraft-Heinz and Campbell Soup deal does not make sense from a strategic perspective. For one, Campbell Soup, despite its iconic brand equity, is essentially a North American player with inside ownership. The founding family still owns a good portion of the company and would need to concede to any deal. In addition, to grow, Kraft-Heinz would need more global brands in its portfolio. Campbell Soup is a relatively small company with major issues in its primary business: soup. Soup is not a portable solution and is essentially impractical for consumers in a hurry and who want to eat something on the go. Additionally, most product lines offer unhealthy and unnatural alternatives for modern standards. This can be equated to two strikes in today’s changing food demand landscape. Campbell Soup has tried to revitalize the category in many ways but has not been successful.

The reality is that most packaged food companies would dream of seeing their top line grow one per cent yearly. As an example, Campbell Soup sales have declined for the last three years and is desperate to keep its sales stable. Kraft-Heinz sales, on the other hand, fell more than $200 million in the last year and are expected to fall even further this year.

The broader picture, however, signals troubled waters ahead as times are tough in food packaging. Campbell Soup announced recently that its chief executive, Denise Morrison, was retiring and the company would conduct a strategic renewal process for its entire portfolio. Morrison became the 15th CEO to leave the helm of a major food-processing company in two years. The turnover is painfully high.

What can make matters worse are current trade wars triggered by the United States. For now, most new U.S. related measures have been non-agricultural, commodity-centric measures. New tariffs have spared the food-packaging sector and have not forced companies to alter their global food supply chain strategy, but that could change. Like Campbell Soup, Kraft-Heinz’s dependency on North American business is acute, however, retaliatory measures against the United States could start affecting these companies over the next 18 months. That’s why time is of the essence. Kraft-Heinz not only wants to expand its portfolio and grow globally, but it also needs to hedge against Washington’s erratic trade policies.

The Kraft-Heinz and Campbell Soup deal may not happen, if only for financial reasons. For Kraft-Heinz, Campbell Soup is a relatively small player that wouldn’t make much of a difference. Its market capitalization is barely $13B U.S. This could be an interesting stepping stone for Kraft-Heinz as its looks for its next target. Rumours are rampant in food packaging. Everyone wants to grow — Kraft-Heinz most of all. It missed a US$140-billion deal to purchase Unilever awhile back and the company has not ceased to look for the next opportunity. The company’s next hit can better its position in the grocery business, closer to consumers who are slowly moving away from major national brands.

Given the climate, chances are that rumours of acquisitions will continue for some time. Few can tell what is likely to happen. What is certain though is that fewer players will remain in the sector in a few years from now. This has given smaller, more regional players new hope. As the giants fade away, a new crop of food companies is emerging and that’s not necessarily a bad thing. Consumers are now looking for something different, something major players seemingly cannot deliver.

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Mars plans to combine Wrigley with its chocolate business, putting M+Ms, Snickers, Skittles, Lifesavers, Starburst fruit chews, Doublemint and Extra gum and Altoids mints under one roof.

In 2008, Berkshire invested in Wrigley when it acquired $2.1 billion of preferred stock and $4.4 billion of bonds in connection with privately held Mars’ $23 billion purchase of the chewing gum maker (all figures US$).

The bonds were repurchased in 2013, and Berkshire expected Mars to redeem half of the preferred stock, which carries a five per cent dividend, by early January. Mars will instead redeem all of it. Terms were not disclosed.

“I have enjoyed all of Berkshire’s experiences with the Mars family and management and wish them the very best,” Buffett said in a statement. “Both Mars and Berkshire have profited from our investment and that’s the way it should be.”

The global confectionery business, worth $183 billion last year according to Euromonitor International, has struggled as more consumers move toward healthier foods, prompting some retailers to reduce shelf space for processed and sugary snacks.

“We are grateful for the strong and productive partnership we have with Warren Buffett and Berkshire Hathaway,” Mars CEO Grant Reid said in a statement. “Sole ownership of Wrigley provides us with an opportunity to rethink how we simplify our chocolate and Wrigley businesses.”

Mars, the world’s largest candy maker ahead of rivals such as Mondelez International and Hershey Co., expects to combine its chocolate and Wrigley businesses during 2017 into Mars Wrigley Confectionery, with about 30,000 employees.

The combined business will be based in Chicago, Wrigley’s longtime home, and led by Martin Radvan, Wrigley’s president and a 30-year veteran of Mars. Mars is based in McLean, Virginia.

In Canada, Mars operates three manufacturing plants in southern Ontario in segments including packaged foods, pet foods and confectionery. Wrigley announced last year it would shut down its lone Canadian plant, a gum facility in Toronto, this spring.

Known for his taste in less-than-healthy food, Buffett has made Berkshire the largest shareholder of Coca-Cola, and helped Brazil’s 3G Capital take over Kraft Heinz and Restaurant Brands International Inc., which owns Burger King and Tim Hortons. Berkshire also owns See’s Candies.

But unwinding the Mars stake will deprive Berkshire of a $105 million annual income stream from the preferred stock.

The investment was one of several that Buffett’s Omaha-based conglomerate made during and soon after the financial crisis in brand name companies seeking to shore up their finances, and win the billionaire’s imprimatur.

From 2008 to 2011, Berkshire invested well over $20 billion in high-yielding securities from Bank of America, Dow Chemical, General Electric, Goldman Sachs Group, Swiss Re and Wrigley.

But many have been repurchased, forcing Buffett to find other ways to invest Berkshire’s $72.7 billion of cash.

He lost $720 million of annual income in June when Kraft Heinz, in which Berkshire still owns a 26.8 per cent stake, redeemed preferred stock. The Wrigley notes had thrown off an 11.45 per cent coupon.

— Reporting for Reuters by Jonathan Stempel and Chris Prentice in New York and Gayathree Ganesan in Bangalore.

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Shares of Kraft — which operates 35 plants in Canada, the U.S. and Puerto Rico — were up more than 38 per cent near $85 in morning trading (all figures US$).

The deal would provide Heinz with access to Kraft brands, which it says are in 98 per cent of North American households and include well-known names like Oscar Mayer and Jell-O.

The international presence of Heinz, whose Canadian holdings include two processing plants in Ontario, provides an opportunity to sell Kraft’s brands overseas.

Kraft stockholders would get one share in the combined company, to be called the Kraft Heinz Co., and a special cash dividend of $16.50 for every share held.

Heinz shareholders will own 51 per cent of the combined company and Kraft shareholders the rest.

Packaged-food makers such as Kraft are battling sluggish demand as consumers shift to products perceived to be healthier.

Kraft has overhauled its senior management over the past few months and has said it will develop products to meet changing consumer preferences.

However, “the board saw the 3G opportunity as more compelling,” Kraft CEO John Cahill, who will be vice-chairman of the combined company, said on a conference call.

The combined publicly traded company is expected to save about $1.5 billion in annual costs by the end of 2017. It will have eight brands worth over $1 billion each, the companies said.

Kraft Heinz will be led by Heinz CEO Bernardo Hees and have revenue of about $28 billion, about half that of market leader PepsiCo in 2014.

Berkshire Hathaway will own more than 320 million shares in the combined company, which will have about 1.22 billion shares outstanding, Buffett told CNBC.

“We will be in the stock forever,” he said.

Brazilian private equity firm 3G Capital and Berkshire Hathaway acquired Heinz for $23.2 billion in 2013.

The Kraft deal is unlikely to face antitrust hurdles as there is little overlap in products, analysts said.

Kraft’s products include cheese, processed meats, packaged meals and Maxwell House coffee, while Heinz makes ketchup, sauces and frozen foods.

Kraft is 3G Capital’s fifth major deal in the food and beverage industry since 2008, when it engineered a takeover of Anheuser-Busch by brewer InBev.

3G Capital also controls Restaurant Brands International, formed when its Burger King business bought Canadian coffee and donut chain Tim Hortons.

— Sruthi Ramakrishnan and Anjali Athavaley report for Reuters from Bangalore and New York City respectively. Writing for Reuters by Lisa Von Ahn.

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