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Why
Kraft Is Splitting Into Two Companies
Kraft Foods CEO Irene Rosenfeld is going
to break up the food giant into two separate companies
by separating its snack foods lines from its grocery
brands. The snack food company will be a high growth,
international business while the grocery company will
focus on the North American market.
The company says it will create these
companies through a tax-free spin-off of the North
American grocery business to Kraft Foods shareholders in
a transaction that will not be completed until late in
2012.
Kraft's Rosenfeld has been instrumental in developing
its snacks business in part by the acquiring LU biscuit
from Danone and Cadbury. She expects that the snacks
company will include the current Kraft Foods Europe and
developing markets units and the North American snacks
and confectionery businesses. The non-snacks component
of the business would include mostly powdered beverages
and coffee. As an independent company, global snacks
would have estimated revenues of approximately $32
billion while the grocery company will have estimated
sales of $16 billion.
Ever since Kraft's acquisition of Cadbury in 2010 some
analysts have been predicting such a split. While some
reports claim that the move is in reaction to mass
retailers like Wal-Mart and Target Corp. expanding their
grocery sections the primary reason for the move is
because the capital requirements of these two business
are quite different.
The company's snacks lines including
Cadbury chocolates, biscuits, Oreo cookies, Tang, etc.
are popular in fast-growing developing markets where
Kraft feels it can significantly expand sales. The rest
of the business is anchored by more mature North
American grocery brands (Jell-O, Maxwell House,
Philadelphia Cream Cheese, Miracle Whip and Oscar Mayer
meats) that offer high-margins but where growth will
come more slowly. According to CEO Rosenfeld, the snacks
business needs lots of spending to grow and expand
whereas the North American grocery business will be a
"lean, mean center-of-the-store machine."
In short, it all comes down to capital requirements.
Kraft has come to see that it is running two different
businesses and each has different needs, different
strategies and different growth prospects. The grocery
company will grow slowly but will return cash to its
investors and the snack company will grow faster. The
move will allow each company to access capital in ways
that make sense for the business needs while allowing
investors to choose between placing their bets with
either a slower growth, dividend-paying company, or a
higher-growth, company.
Kraft is the second major food company to announce such
a split this year. Sara Lee Corp. announced in January
that it would split its business into two units by 2012,
with one focused on coffee and the other largely focused
on meat.
Published: August, 2011
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