# 3G Capital _We were very successful for many years, but the past five not as much. We did not give enough emphasis to the marketing side, to the creating of products, and to innovation._ --- ## The model Jorge Paulo Lemann, alongside Marcel Telles and Carlos Alberto Sicupira, built 3G Capital into one of the most influential private equity firms of the past three decades. Their formula appeared simple: acquire underperforming companies, impose rigorous cost discipline, install an ownership culture, and compound the results. The track record was extraordinary. They transformed a single Brazilian brewery into AB InBev, now the world's largest beer company with 30% global market share. They turned a struggling Burger King into a profitable franchise machine. They partnered with Warren Buffett to acquire Heinz. Then they merged Kraft with Heinz, and the model broke. Understanding what worked and what didn't - and where the boundary lies - is more instructive than either celebrating the successes or condemning the failures. --- ## Zero-based budgeting 3G's signature practice is zero-based budgeting (ZBB). Every expense must be justified from zero each year. Nothing carries over automatically. Every line item faces scrutiny. "Costs are like nails," Lemann says. "You continuously have to cut it." At AB InBev, ZBB achieved EBITDA margins above 40% - far higher than marketing-heavy competitors. At Burger King, it helped restore profitability to a chain that had lost its way. The discipline forced managers to question every assumption about what spending was necessary. The practice has genuine merit. Many organisations accumulate expenses through inertia - costs that made sense once but no longer do, subscriptions nobody cancelled, headcount that grew because budgets allowed it. ZBB forces active decisions rather than passive continuation. But ZBB is a tool, not a strategy. The question is what you cut and what you protect. 3G's application often failed to make that distinction. --- ## Ownership culture Beyond cost discipline, 3G installed what they called "partnership culture" - their approach to [[Designing the organisation]]. Top employees received significant equity stakes, transforming them from professionals into owners. "Professionals build their resumes," Lemann observed. "Owners build businesses." The partner model aligned incentives. Managers who owned meaningful stakes thought longer-term and acted with more accountability. The meritocracy was aggressive - strong performers were rewarded rapidly, weak performers were removed quickly. 3G also sought a specific profile in hiring: PSDs - "poor, smart, with a deep desire to get rich." The idea was that hunger and ambition mattered more than credentials or experience. Young talent received responsibility early and rose fast if they delivered. This culture genuinely worked in certain contexts. At AB InBev, it created operational intensity that competitors couldn't match. At Burger King, it attracted executives willing to make difficult decisions. The ownership model reduced agency costs and created alignment between managers and shareholders. The limitation was [[The identity constraint]] at work: the culture selected for operational efficiency, not innovation or brand-building. The people who thrived were cost-cutters and optimisers. The people who understood consumers, products, and marketing often didn't fit. --- ## What worked: beer and burgers AB InBev is 3G's clearest success. Beer is a business with powerful local distribution advantages, strong brands, and relatively stable consumer preferences. Cost discipline enhanced already-strong competitive positions. The industry consolidated around AB InBev because competitors couldn't match its efficiency. The acquisition strategy was disciplined: buy brewers with strong local brands, impose operational rigour, extract synergies from distribution and purchasing. The model worked because the underlying businesses were fundamentally sound, and efficiency genuinely mattered. Burger King was different - a turnaround, not a consolidation play. When 3G acquired it in 2010, the chain was struggling against McDonald's and needed consistent leadership. 3G provided discipline and direction. Franchisees benefited from a more focused corporate parent. The brand recovered. Restaurant Brands International, which combined Burger King with Tim Hortons and later Popeyes, has delivered reasonable results. System-wide sales now exceed $45 billion across 32,000 restaurants. The franchise model limits operational complexity - 3G provides capital allocation discipline while franchisees handle local execution. --- ## What failed: Kraft Heinz Kraft Heinz was the decisive test of whether 3G's model could work in consumer packaged goods. It couldn't. The deal combined Heinz (acquired in 2013 with Berkshire Hathaway for $23 billion) with Kraft Foods (merged in 2015 in a deal valuing the combined entity at nearly $50 billion). 3G applied its standard playbook: ZBB, headcount reductions, synergy extraction. Within five months, Kraft Heinz laid off more than 5,000 people - over 10% of total staff. Advertising spending dropped to 2.4% of sales, well below the 3.5-5.5% range for peers. R&D fell 22% in a single year, to just 0.3% of sales versus 1% for competitors. Veteran marketers with decades of experience were shown the door. In February 2019, the consequences arrived: a $15.4 billion writedown of the Kraft and Oscar Mayer brands, an SEC investigation into accounting practices, and a 27% single-day stock decline. The combined market cap, which had approached $70 billion at the time of the merger, fell below $32 billion. Goldman Sachs asked the uncomfortable question: "We think it is fair to ask if 3G has created any value since Kraft and Heinz merged." 3G exited Kraft Heinz entirely in 2023. Lemann stepped down from the board in 2021. --- ## Where the boundary lies The Kraft Heinz failure wasn't random. It was a classic [[Execution trap]] - a problem that looked like inefficient execution but was actually about industry structure. The failure revealed where the 3G model works and where it doesn't. **Cost discipline works when costs are genuinely excessive.** AB InBev and Burger King had bloated cost structures that efficiency could improve without damaging competitive position. Cutting waste released value. **Cost discipline fails when it starves the sources of value.** Consumer packaged goods companies live or die by brand relevance. Marketing and R&D aren't fat - they're what keeps products in shopping carts as consumer preferences evolve. Private-label alternatives and health-focused competitors were taking share. Kraft Heinz needed more investment in innovation, not less. **The model works in stable industries with durable advantages.** Beer has strong local distribution moats and relatively predictable demand. Fast food franchising has limited operational complexity at the corporate level. These businesses reward efficiency. **The model fails in industries facing disruption.** Consumer food was shifting toward fresh products, health consciousness, and private-label alternatives. Kraft Heinz's legacy brands needed renovation, not optimisation. 3G's culture didn't attract people who understood these dynamics. **Efficiency is easier than growth.** ZBB can extract costs from any business. Growing brands, developing products, and winning consumers requires different skills. 3G selected for the former and neglected the latter. --- ## Lemann's own assessment To his credit, Lemann has been relatively candid about what went wrong. "The big dream we had for Kraft Heinz didn't pan out the way we expected," he said in 2019. "It's not possible any more to build something in the food business like we did in the beer business." He acknowledged specific mistakes: "We did not give enough emphasis to the marketing side, to the creating of products, and to innovation - we bought well-known brands and didn't feel that we had to renovate. We were comfortable with the market share we had, and basically we didn't give the consumer enough attention." More revealingly, he admitted a failure in talent: "We didn't attract the people to our culture that know how to deal with the information you need nowadays to become a consumer-centric company." The PSDs who thrived in 3G's meritocracy were operators, not marketers. The culture that worked for beer didn't work for packaged food. The model had boundaries that 3G crossed. --- ## What remains useful Despite Kraft Heinz, several elements of 3G's approach remain genuinely valuable. **Cost scrutiny as discipline.** ZBB applied thoughtfully - questioning inherited expenses, requiring justification, resisting budget inertia - is healthy for any organisation. The failure mode is applying it indiscriminately, cutting investment alongside waste. **Ownership alignment.** Partner models that give managers meaningful equity stakes genuinely reduce agency costs. People who own what they manage think differently than those building resumes. **Meritocracy over credentials.** Promoting talented people quickly, regardless of tenure or pedigree, creates energy and surfaces capability. The risk is optimising for a narrow definition of talent. **Operational intensity.** Some businesses genuinely benefit from more rigorous management. AB InBev outexecuted competitors for decades through superior operational discipline. The question is knowing when these tools apply and when they don't - [[Economics vs playbooks]]. 3G applied them everywhere; they only worked somewhere. --- ## The uncomfortable question Lemann describes himself as a "terrified dinosaur" facing accelerated disruption and innovation. The phrase is telling. 3G's model was built for a different era - one where efficiency advantages compounded, where brands were more stable, where operational discipline was rarer and therefore more valuable. The world has changed. Consumer preferences shift faster. Private-label alternatives multiply. Digital marketing requires different skills than television advertising. Efficiency is now table stakes, not competitive advantage. This doesn't mean cost discipline is obsolete. It means cost discipline is necessary but not sufficient. The companies that compound now are those that combine operational rigour with genuine innovation - that protect their sources of value while eliminating genuine waste. 3G built extraordinary value at AB InBev. They destroyed extraordinary value at Kraft Heinz. The difference wasn't luck or timing. It was understanding where efficiency creates value versus where it consumes it. That boundary - between productive discipline and destructive starvation - is the lesson worth preserving. ---