In May last year, Enrique Abeyta stood in front of an audience of investirs and told them to short Kraft Heinz, Anheuser-Busch InBev and Disney. At the time, Kraft Heinz had already fallen from $79 to $58, and BUD, from $125 to $97.

“I would be short all three of these stocks in good size, especially after they bounce a little bit, because they are really oversold,” said Abeyta, whose talk was titled, “Social Distortion – The wave of digitally enabled disrupters that will humble the industry giants.”

Ten months later, both companies linked to 3G Capital are trading well below those levels.

Abeyta’s main thesis is not exactly new: technology has broken entry barriers and will structurally pressure margins in the consumer packaged goods (CPG) industry. What’s new is that Abeyta thinks the process is just beginning.

In his talk, Abeyta praised Jorge Paulo Lemann, who days earleir had confessed to feeling like a ‘terrified dinosaur’, but said that the mere acknowledgment of the problem would probably not be able to change the fate of Lemann’s companies.

“If Jorge Paulo Lemann called me today, I would tell him four things,” Abeyta told the Brazil Journal.  “1. You’re screwed. Accept it. 2. Create an SPV (Specific Purpose Vehicle) and bet on the downfall of your competitors’ stocks. At least take some advantage. 3. Create a $1 billion venture fund and embrace disruption radically. The next $20 billion brand will come out of there. 4. Finally, start selling your assets. Transfer your problems to others.”

For Abeyta, the challenges faced by big brands offers “a generational short opportunity”.

Sporting a ponytail, badly trimmed gray beard and tattoos, Abeyta does not look like a financial-market guy. But it was his record of 25 years on Wall Street that gave him a unique perspective on what is happening with the world’s major consumer brands.

Born to a Uruguayan mother and a Mexican-American father, Abeyta began his career as a Lehman Brothers banker covering telecom, media and technology. He then moved to the buyside, where he founded two hedge funds (Stadia Capital and 360 Global), which raised $ 2.5 billion from investors. Both funds invested primarily in media, with a focus on short selling.

“The cost of manufacturing, distribution and marketing fell massively,” Abeyta says of the ongoing disruption.

In the beer market, for example, you had to invest in a factory, hire master brewers, buy a fleet of trucks, and spend millions on advertising. Now, production is outsourced to a white label, and with just a few dollars a niche brand can talk directly to its target audience on social networks. “Small businesses today have access to marketing and distribution of large companies.”

The story of 3G’s value creation — buying a big brand and cutting costs to generate high equity returns — worked for ten years, “but they sailed in the direction of a storm they did not forsee. They overleveraged the ship in search of returns and lost their flexibility.”

Abeyta thinks Kraft Heinz has not yet reached bottom: “It will still drop significantly. I would say about 30-50%, but it can take time.”

He says the major CPG brands will remain in the market, but with much smaller stakes. “They will probably lose another 15 to 30 percent of their current market share,” says Abeyta. “The issue is the return on investment: the new players expect smaller returns — and that will impact incumbents’ margins.”

Two years ago, Abeyta left Wall Street to embark on the intersection of media and technology, and chose a market where disruption has already done its damage: niche media brands.

Its digital media holding company, Project M, is buying niche titles that survived the disruption, have a loyal and highly engaged audience, but which have not been able to reinvent themselves on the internet.

Its first acquisition was Revolver — perhaps the largest heavy metal media brand in the US, which has been on the market for 17 years and whose readers range from 18 to 65. Project M has also made a joint venture with Inked Magazine, a reference in tattooing.

Abeyta uses the printed magazine as a starting point. His goal is to make money on advertising, merchandising and events. Since Project M acquired Revolver, redesigned its website and invested in social media engagement, its audience grew more than 1,000% to 1.5 million unique visitors per month, with highly engaged consumers willing to buy posters and T-shirts and attend events.

“There are 100 million heavy metal fans in the world who spend $ 5 billion a year consuming heavy metal.”
Project M started with $ 5 million in seed money — $1.5 million put in by Abeyta — and is trying to raise another $10 million to $20 million.

The plan includes launching Spanish and Portuguese versions of the Revolver website, and entering other niches with strong engagement, such as country music, craft beer and drum and guitar magazines.  But what about cannabis?

“There’s an insane amount of capital flowing into the cannabis space, but when you look at the market today, it’s probably not as big as the combined tattoo and heavy metal markets,” says Enrique. “I’ve seen funds and companies invest at least $100 million to create cannabis-focused media companies, but in rock and roll and tattooing, there’s just our company.”

“Plus, our audience also smokes weed, so we can also make money selling advertising to cannabis players.”

Regarding his degree of certainty about the future of the big brands, Abeyta says: “Stepping away from the market made me a better investor, because I now focus on the things I see and really believe, instead of being distracted by all the noise.”
This story ran originally in Portuguese on Brazil Journal.