Stocks Fall to Start September, Kraft Heinz Breaks Up & Why Constellation Brands Has a Beer Problem

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2:16cost. Welcome to Prof G Markets. I'm Ed Elson. It is September 3rd. Let's check in on yesterday's market vitals. The major indices all fell when markets reopened after the holiday weekend. The Nasdaq posted its first back-to-back 1 % decline since Liberation Day. Meanwhile, bond yields surged with the 30-year nearing 5%. And finally, the dollar climbed and gold reached yet another record high. One outlier we will be watching throughout the day is Google. Google stock popped as much as 8 % in after hours following a ruling on the antitrust case from a year ago. You'll remember that case found the company maintained an illegal monopoly in search.

2:59Well, now we have a remedy. U.S. District Judge Mater ruled Google can keep Chrome, but it must share its search data. It's also barred from holding exclusive contracts. We'll have more on this news tomorrow. OK, what's happening? As I mentioned in the vitals there, it was a rough start to September for Wall Street. The S &P down more than 1 % since last Thursday. the Nasdaq down 2%, bond yields surging, gold hitting a record high. A lot of uncertainty. What is spooking investors right now? Well, for starters, as we discussed yesterday, a federal appeals court ruled that many of Trump's tariffs were illegal.

3:39That raised fears that the US could be forced to refund billions in tariff revenue. On top of that, investors are bracing for a court ruling on Trump's bid to fire the Fed Governor Lisa Cook. A hearing took place last Friday, but the judge has not made a decision yet, and we will likely not hear one before Thursday. Also, there are concerns right now about America's relationship with India after Trump placed a 50 % tariff on the country, and Prime Minister Modi recently took a trip to China and met with Vladimir Putin and Xi Jinping. So a lot to unpack here. Let's bring in the one and only Scott Galloway to weigh in.

4:22Scott, first appearance back on the pod. Good to see you. How are you doing? It's good to be seeing him here in Soho, walking around on a beautiful fall day. It's really nice here. I'm glad to be in New York in September here with you at Elson. You look well-rested. So, Scott, so much has happened while you've been away. Trump tried to fire the Fed Governor Lisa Cook. The appeals court ruled the tariffs are illegal. And the U.S. basically sent India into Russia and China's arms. So much is happening. Let's just get your kind of top-line thoughts on what's happened over the past week or so. My top-line thoughts, Ed, are that we should release the Epstein files.

5:08And I just want to remind everybody that some of this is real and some of it is distraction. Yeah. Look, from the insignificant, him firing or trying to fire Governor Cook, it's, yeah, the independence of the Fed is obviously a big deal and something that every modern economy values with the exception of Trump. The markets don't seem to be that rattled by it. One, we have the wrong metrics. It's not a democracy metric. It's a metric for the health and well-being of seven companies. They quite frankly in the short run are more focused on whether they can sell AI chips into China than whether or not the Fed maintains independence.

5:52What's more interesting is the Supreme Court or the appellate court has turned away or said that some of these tariffs, specifically his invoking the Emergency Powers Act to enact these tariffs might not have been justified, although people are saying there's workarounds. But again, I think that hits more kind of mid and small businesses than it does these big companies. So again, we have a tendency to look at the market as some sort of litmus test for whether the economy and these decisions are good or bad. And it's a simple, efficient, and romantic metric. But they're really misleading because I don't think they really tell the whole story.

6:35What you brought up last is, in my opinion, the most important thing that's happened or that happened in August. And the image of 2024 will be Trump's fist pump after the failed assassination attempts. The image of 2025, in terms of importance, in my view, is the image of Modi, Putin, and Xi looking like their three brothers rising up against their dick older brother. Yep. That should send a chill down everyone's spine. about, I don't know, 20, 20, 30 years ago, George W. Bush labeled Iran, Iraq, and North Korea the axis of evil. And combined, they had about a$1.2 billion or$1.2 trillion GDP. When India, China, and Russia hook up to create trade prosperity and, quite frankly, a unified front against America who's trying to bully them around, you're talking about$20 trillion in GDP.

7:36And more importantly, you're talking about a set of skills and assets that are really formidable, specifically capital and technology out of China, innovation in the largest emerging middle class and consumer population out of India, and energy and a willingness to kill their own and throw them at a war from Russia. And so this is scary. That is a true, I won't call it an axis of evil, but an axis of counterbalance to what has been kind of 50-year hegemony for the U.S., which we have enjoyed and gotten really used to. And the last thing I'll say, because I know I'm joining on here, it was totally unnecessary.

8:15Yet again, another own goal. We'd have a fantastic relationship with India, or a good relationship with India, and they were increasingly important as the two swing votes in the modern world are the kingdom and India. And that is, they're the most important places that weren't assigned a team yet. And I would argue the kingdom is actually going more capitalist, which I think is a good thing. And India was ours to lose because not only are they English-speaking or a lot of English speakers, more PhDs anywhere in the world, a democracy, but we have this incredible connective tissue of our education institutions.

8:55And that is the best and brightest minds in India often end up at our finest elite institutions. I know this firsthand. Asalat Damodaran, Dasantar, Rune Singarajan, our dean at NYU Stern, wonderful man, Ragu Sundaram. You know, we get the best and brightest out of India, and it creates empathy, mutual affection, trade. There's just a general goodwill between the two nations. And what have we done? We've started playing hardball with them to no effect, announced these 50 % tariffs. That is forcing and turning enemies, natural enemies, into allies such that they can be a more formidable counterweight to your presence.

9:36Nixon said the last thing you'd want to do is China to go party with Russia. So what do we do? We figure out a way to throw India into Russia in China's hands. As we've said before, deals are happening. Deals are getting done. It's just they're not really involving us. Well, there's an immense amount of global trade taking place. There was a really important summit that happened. Unfortunately, we weren't involved. It's literally as if Trump went to chat GPT and said, how do I fuck up our prosperity in as elegant a way economically and geopolitically with just head of my ass own goals? Too much, Ed?

10:10Too much? It's what the Brits did in 2016. That's exactly what the UK did in 2016. They searched that exact entry into Google, not chat GPT. before you go scott uh can we just get a quick update on your summer we haven't heard from you all of august what happened i don't remember much of it it was a lot of a lot of time with kids and edibles one of those things was a good time um yeah i had a wonderful august and as did you i heard you went to sardinia you you euro douche fabulous person trying to impress your girlfriend yes sir yes sir sardinia all you're complaining about is how expensive it is welcome Welcome to my world.

10:53Welcome to my world. Time's four, my man. It's expensive, man. Fabulous. See, the good news is when I was your age, I just went to Irish bars and to Club Med at Mazelan for like$800 for a week. Anyway, I had a great summer. I'm going to have to switch up my lifestyle. Okay, good stuff. It's good to hear from you. We'll check in with you later this week. Thanks, brother. After the break, a food giant is breaking up. If you're enjoying the show, give Prof G Markets a follow.

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13:46We're back with Profit Markets. Kraft Heinz is breaking up. The food giant has announced plans to split into two separate companies by 2026. One business will focus on higher growth products like Heinz condiments, Philadelphia cream cheese and Kraft mac and cheese. The other will house slower growth staples like Oscar Mayer, Velveeta and Lunchables, products that are still iconic but no longer drive meaningful growth. The stock closed down 7 % on the news. So this is a classic example of what we call the conglomerate tax. We've talked about this on the show before, this idea that the more types of businesses and the more types of assets you house under one corporation, under one stock, the less of a premium you will receive on that stock, the lower a multiple.

14:36As Scott has put it, it's not your job to diversify. It's my job to diversify. It's the job of the investor, not the board. And so what we often see is that the stocks that cover too much ground, the stocks that are too diversified, they often don't get these great multiples. And so that is probably the view of the board here. If we split Kraft Heinz into two pure play businesses, one for high growth, the other for low growth, then we'll get a lot more traction on that high growth business and perhaps a better premium. For context, this company has been trading at one and a half times sales. about 10 years ago, they were trading at four times sales.

15:15Having said all of that, this is a very striking move for this company because it essentially reverses their original strategy. And that is in 2015, Kraft and Heinz were separate companies and they merged together. It was one of the biggest food mergers in history, a$46 billion deal. It was orchestrated by none other than Warren Buffett and that created Kraft Heinz. The thesis was to cut costs, boost margins, and use scale to grow. And for a while, that worked. The stock peaked at$93 in 2017. However, it didn't last. Consumers shifted away from processed foods, and Kraft Heinz didn't really adapt.

15:56Growth stalled, innovation slowed, and in 2019, the company took a$15 billion write-down in the value of its two most iconic brands, Kraft and Oscar Mayer. But Buffett later admitted that he overpaid for this Kraft deal. And he said it was, quote, wrong in a couple of ways. The stock has since shed more than half of its value. And now they are unmerging. So lots to unpack here to help us understand this breakup and what it means for the company. Let's bring on Robert Mosko, Managing Director at TD Cohen. Robert Mosko, thank you very much for joining me on Prof G Markets. Well, thank you for having me.

16:36So Kraft Heinz is unmerging. The stock has fallen 7 % on that news. Maybe just give us a breakdown. Why are they unmerging here? And what does this mean for the company, Robert? They're unmerging because, especially in a very challenged packaged food environment, what they're seeing, and I think a lot of other companies, is that companies that try to gain scale through breadth are not succeeding as well as those that have focused on depth. And depth means a handful of categories where you have really strong market share. Kraft has a lot of brands that have a lot of market share, but so many categories, it must be 30 or 40 different categories across the grocery store.

17:26And this ends up making you vulnerable to many different issues at once, commoditization, private label, premiumization. So their idea is, let's go back a lot closer to what Kraft and Heinz look like pre-merger and see if focusing, have one business that's more on shelf-stable condiments and flavors, which is a little bit faster growing. And then that'll be the growth business. The North America grocery business will be slower growth, but focus more on capital efficiency and cash flow. This isn't the first demerger I've seen. And I agree with it strategically, but the devil's in the details. Yeah, I guess part of the idea here being that growth business, that will be seen as more of a growth stock.

18:20Perhaps it'll receive a better premium, higher multiple than it's receiving right now. But the stock did fall 7%. I'm wondering what you think that says Were you surprised at all by the market's reaction? What do you think the market is telling us? Well, there's a tactical reason for this. I think it has to do with Berkshire's interview or a quote that CNBC reported that Berkshire is not happy with the decision to split up the company. They do not think it creates value, and they've communicated to the company as such. What we have written in the past is that we're pretty certain that Berkshire will exit its stake.

18:59so if they don't agree with the strategic merit of this of this split you you might take the view that they'll be exiting sooner than later i was going to ask you how much weight because i saw those those buffett comments too he called this decision disappointing uh in his message to cnbc and one of my questions was how much weight does buffett's words carry um it sounds like a lot i I mean, moving the stock by 7%, I'm sure that's largely because of their huge position in the company. But that's quite striking, though, that Buffett's comments alone could be moving the stock this much. Well, I don't think he's telling us something that the street doesn't already know.

19:42The street has been knowledgeable about the likelihood of this split happening for a while. what the market is reacting to is the possibility that he's going to sell quickly. And he owns 27.5 % of the stock. That would create an enormous overhang. And you can't just put all those shares into the market. It would have to clear at a lower price than the current stock. Now, he also said he didn't want to do that to shareholders, but I'm not sure how both of those things can happen at the same... If he's going to get out of this, it's going to create short-term disruption at a minimum. Yeah. Just in terms of the breakup itself, who stands to gain the most from this breakup?

20:25Do you think that we'll see an improvement in terms of the brand side, in terms of the consumer side? Do you think that the shareholders will ultimately be rewarded over the long term? I'm sure the bankers putting this together are probably making some money off of this. But who are the winners here? Well, I work for a bank, so I'm not going to comment on that part. But I will say that it is very difficult to see a clear path to operational improvement from just splitting up the business. it it's not a cure-all for the litany of problems facing the craft brands many of these problems are structural in nature um they probably lost the most share in their categories among the big cpg companies that i i follow uh and and a lot of times their categories are slowing as well so um i i think that the way that investors could still win is if the the more attractive business, which is global taste elevation, which is condiments and flavorings.

21:31And that possibly could come into play. A strategic acquirer could emerge. What I've written is that McCormick could be one of those suitors. This would be an extraordinarily big deal for them. So it's unclear whether that will actually play out. But I think another important reason for them to do this is that it is no secret that when kellogg uh split up their company two years ago uh strategic acquirers emerged for both assets right so um that's not to say that that'll happen again but uh certainly it must be a a potential scenario at least for one of the businesses yeah you mentioned some of those those secular trends um that have been affecting the business and the stock is down more than 30 % this year.

22:27What are those issues that the company is struggling with? I mean, we've seen a movement away from processed food potentially, and perhaps that's been part of the sort of macro trend that we're seeing with the consumer. There's been a lot of talk, of course, about Ozempic and how that may affect a lot of these packaged food brands. What are the big problems for Kraft Heinz right now? Um, well, price sensitivity among, uh, their consumers is high. Uh, they cater to a lot of lower income consumers who are unfortunately feeling the, the biggest brunt of, uh, inflationary pressure. You know, it, it, it hurts them more than it, it hurts the rest of the population, um, and Kraft, along with a lot of other food companies have raised prices 30 % plus, um, during the course of the pandemic.

23:18And then lower income consumers had their SNAP benefits cut. Other subsidies have been reduced as well. So their purchasing power went down. But I think the bigger, more insidious issue is the things that Kraft does really well is taking commodity meat and cheese and turning into something very convenient for the consumer, which is heavily processed, but you charge a premium for that convenience factor. And a lot of these types of foods are just coming under more and more scrutiny from the Make America Healthy Again movement, just moms who are reading ingredient labels more carefully, dads too, me.

24:05And there's a backlash against these types of foods that Kraft Brands is kind of like right in the bullseye of. Yeah. I'm glad you say that because that is something that we've been talking about on the podcast a lot. And we view it the same way is that there's just a change in consumer habits. I guess my final question would be then, in what sense does breaking the company up address that? Do you think that that is part of the strategy here? Or is this mostly a financial play for the purposes of, as you say, a potential acquisition at some point? Or does this address those issues? Operationally, they can say that it's going to address these issues, and they have said that, that more focus is the answer.

24:59But in my view, I think that solves 15 to 20 percent of the problem at best. I think that the real intention here is to make one or maybe even both of these assets up for sale for a strategic bidder. And again, I think it's following a playbook that Kellogg played.

25:27That was Robert Mosko, Managing Director at TD Cohen. This all goes back to that great Jim Barksdale quote, which we love to repeat on this podcast. The former CEO of Netscape, he said, quote, there's only two ways I know of to make money, bundling and unbundling. And that's exactly what we're seeing here. We had the bundling back in 2015. We bundled Kraft and Heinz together. And 10 years later, we are now entering the unbundling phase. We are going to unbundle the two companies. But this does raise this bigger question, which is, what does any of this actually solve? And Robert kind of hinted that there in this interview.

26:10I mean, you merge to find synergies, and then you unmerge to find focus. You merge, you unmerge, you bundle, you unbundle. But does any of this actually solve the problem? Does any of this sell more Lunchables? Does it sell more mac and cheese. I don't know. But I would imagine that somewhere in between all of these financial engineering strategies, somewhere you have to think the customer kind of gets forgotten. I think Warren Buffett put it best yesterday. He was asked what he thinks about the unmerger, and he said, quote, it certainly didn't turn out to be a brilliant idea to put them together, but I don't think taking them apart is going to fix it.

26:55The stock is down 7%. We'll see how it trades throughout the week but I think that we can say that right now the market agrees with it.

27:10Constellation Brands fell more than 6 % after the company slashed its full-year outlook. The company which distributes beer brands like Modelo and Corona and Pacifico in the US, they now expect to see a decline of 4 % to 6 % in net sales this year. They had previously expected that sales would remain roughly flat. In a statement, the CEO said, quote, we continue to navigate a challenging macroeconomic environment that has dampened consumer demand and led to more volatile consumer of purchasing behavior since our first quarter of fiscal 2026. So Constellation Brands, the distributor of all your favorite beer brands, they are selling a lot less beer and they expect that to continue into the future.