Kraft Foods: going separate ways

Kraft Foods: going separate ways

FMCG SUPPLIER NEWS

Financial Mail - Aug 19th 2011, 11:38

Last week Kraft Foods announced its intention to split into a global snacks business with estimated sales of US$32bn and a US grocery business with 

Kraft Foods’ decision to split its business into two separate units is motivated by two things: a desire to cash in on strong growth in developing markets and — as a trade union suggests — to pay off some of the debt incurred in high-profile acquisitions in recent years.

Last week the company announced its intention to split into a global snacks business with estimated sales of US$32bn and a US grocery business with turnover estimated at about half that figure.

French biscuits brand LU , bought from Danone in 2007, and UK chocolate brand Cadbury, acquired last year for almost $20bn, will be flagships of the global business, which includes well-known labels such as Oreos, Trident gum and Tang powdered drinks.

It will cash in on sales growth in the second quarter of almost 14% in developing markets.

This growth owes a lot to rapidly expanding volumes, but the turnover increase of just 4% in the North American market was driven solely by price hikes as volumes in the region fell 1,5% in the second quarter.

And though Kraft-owned brands often trade at a premium, Matt Arnold, an analyst with Edward Jones, has said it now needs to manage the price gap carefully to maintain market share as competition intensifies.

Kraft’s share price has increased 15% since the Cadbury deal, but the world’s leading snacks company will have noticed that those of more closely focused US competitors such as Hershey and Sara Lee are up nearly 60%.

Making the announcement, Kraft CEO Irene Rosenfeld said: “The global snacks business has tremendous opportunities for growth as consumer demand for snacks increases around the world.

“The North American grocery business has a remarkable set of iconic brands, industry-leading margins and the clear ability to generate significant cash flow.”

She said the two businesses now “differ in their future strategic priorities, growth profiles and operational focus” and would benefit from being run independently.

It has been recognised for years that growth in the demand for food will come mainly from developing countries, where strong economic growth and sharply increasing disposable incomes are forecast.

A joint report by the Organisation for Economic Co-operation & Development and the UN’s Food & Agriculture Organisation two years ago said world demand for food would grow 40% in two decades, with the lion’s share coming from developing countries.

It also predicted sharp growth in disposable incomes in the developing world.

Kraft has not given names for the two spin-off companies but says it aims to launch them next year.

Ildiko Zsalai, an analyst at Euromonitor, has said Kraft’s rationale for the split is to prevent its slow-growing North American businesses from weighing down its booming business in emerging markets.

UK trade union Unite has sought assurances from Kraft about jobs and production in the wake of the announcement. General secretary Len McCluskey told Confectionery News that Kraft might be seeking to pay off debts incurred by its acquisitions.

“Kraft is built on acquisition and debt. It is a long time since it profited through innovation. So we are forced to ask whether this latest move is a way of paying off some of that debt.

“We want strong pledges from the company that the split won’t jeopardise jobs and production in the UK.”

Kraft last week announced a better-than-expected 13% rise in quarterly revenue to $13,88bn, lifting its outlook for the year. Second-quarter profit was $976m, 4% up on the year-earlier period.