As political season gears up for the midterm elections, you will hear an argument for tough, cost-conscious management to bring the correct results to the electorate. The argument works in politics and in the private sector. At the moment one of the best companies known for its cost cutting is 3G – a Brazilian investment firm. Warren Buffet teamed up with them in the merger between Kraft and Heinz. According to Ian McGuggan of the Globe and Mail only a couple of years ago, 3G was being applauded by analysts for their ability to slash costs and trim corporate fat. This was the best recipe for squeezing new profits from aging consumer brands.

The approach worked for a time as critics argue management focuses on streamlining operations but they have less time to spend on product development, corporate innovations and brand building. The danger is efficiency increases but sales and earnings per share do not. In the era of highly commoditized categories it is hard to grow consumer brands as Robert Moskow of Credit Suisse noted. The model is very good at cutting non-essential overhead, focusing on price realization and running an efficient plant and distribution network. The model is not so good at driving sales growth through marketing new products and strategic investments.

Linking to dividend paying stocks, the lesson to be learned is if a company goes through cost cutting hold for 2 or 3 years and then look for alternatives because the price of the stock will likely fall.

There are more questions than answers, till the next time – to raising questions.