Analyst insight: Kraft splits operations in two
Source: Euromonitor International , Author: Ildiko Szalai
Posted: Mon August 8, 2011 5:52 pm

INTERNATIONAL. Kraft's recent announcement to split its operations into two publicly traded companies outlines a plan to create two different trading entities with distinct priorities and strengths.

This is intended to help the company achieve the next stage of its ongoing restructuring process, since its acquisition of Cadbury in January 2010.

Kraft is now bundling and spinning off its US Beverages, Cheese, Convenient Meals and Grocery segments, the non-snack categories in Canada and its foodservice operations, which are worth an estimated US$16 billion in sales in total.

The larger of the two entities, which encompasses the global snacks business, includes Kraft Foods Europe and Developing Markets and the North American snacks and confectionery business, with approximate sales of US$32 billion.

What led Kraft to spin off its North American grocery business?

Between 2007 and 2010, Kraft has undertaken a major restructuring of its packaged food operations after making two significant acquisitions: Cadbury in confectionery and Danone in biscuits. The company also sold off divisions falling outside its identified growth areas, namely its US frozen pizza and Post cereals businesses.

With the completion of the Cadbury acquisition, Kraft has clearly and consistently outlined its strategic aim to become a "global powerhouse in snacks, confectionery and quick meals". However, there remain some rather large operations that have become strategic misfits.

For example, one large but ill-fitting division is the company’s dairy operations, which has remained untouched during the recent restructuring process and only falls partially into Kraft’s present focus on snacking. That said, even after the integration of Cadbury, dairy comprises about 17% of Kraft’s overall packaged food retail value sales, equal to some US$10 billion.

Given these business units somewhat narrow geographic market reach, their limited potential to generate dynamic growth in mature markets that have also been strongly impacted by the global recession and the fact they do not sit well with the company’s current strategic priorities, Kraft has now decided to cleave them from the dynamically performing global snacks business.

Spin-off or sale?
The question remains whether carving Kraft’s extensive food and beverage portfolio in two will lead to one of the new entities being acquired by another company. Both of the new entities will encompass large and iconic Kraft brands, such as Philadelphia or Oscar Mayer in the North American grocery business and Oreo in global snacks, making them potentially attractive acquisition targets.

That said, there have been a number of recent examples across the food industry where the spin-off of an ill- fitting division has not led to a takeover by a rival. For example, Cadbury Schweppes spun off its beverages division in 2008 and the new entity, Dr Pepper Snapple Group Inc, is still an independent, publicly traded company.

More recently, Bristol-Myer’s Squibb’s infant nutrition division, which was a long anticipated acquisition target in the global baby food market, was listed independently as Mead Johnson Nutrition Company. So far no takeover attempt for Mead Johnson has been made.

Kraft has given itself a rather long timeframe to complete the splitting of its operation, with the current deadline being the end of 2012.

Although the current plan does not indicate an intention to sell any operations, but rather outlines the spinning off the North American grocery business to Kraft shareholders, the possibility of a future sale cannot be ruled out entirely.

Opportunities and challenges for the new entities
The major competitive strengths of both new Kraft entities continue to centre on the strong brand equities within their respective portfolios, their established consumer base and their operational infrastructure.

Although the North American grocery business will face challenges in terms of sustained and significant growth in a currently sluggish market, it is still large and affluent enough to generate a strong revenue stream. Meanwhile, the global snacks business will have to continue expanding into both new and existing markets in order to remain globally competitive over the long term.

Note: Ildiko Szalai is Senior Food Analyst at Euromonitor International.

For more information about Euromonitor International, please visit www.euromonitor.com

 

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