Kraft Foods’ board announced it intends to create two independent public companies: A high-growth global snacks business with estimated revenue of $32 billion and a high-margin North American grocery business with estimated revenue of $16 billion. The company expects to create these companies through a tax-free spin-off of the North American grocery business to Kraft Foods shareholders.
“As our second quarter results once again show, our businesses are benefiting from a virtuous cycle of growth and investment, which we fully expect will continue,” said Chairman and CEO Irene Rosenfeld. “We have built two strong, but distinct, portfolios. Our strategic actions have put us in a position to create two great companies, each with the leadership, resources and strong market positions to realize their full potential. The next phase of our development recognizes the distinct priorities within our portfolio. 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.”
The move is CEO Irene Rosenfeld’s second bold step in as many years to transform Kraft. The first was acquisitions, including LU biscuit from Danone and Cadbury Plc for $19 billion. Together with the strong growth of its Power Brands, have made Kraft the world’s leading snacks company and become the second-largest food company in the world, based on revenue, after Nestle SA. The reasoning from the board is that some 18 months into the Cadbury integration, the company has built a global snacking platform and a North American grocery business that now differ in their future strategic priorities, growth profiles and operational focus.
With its global snacks company, Kraft will steer brands such as Oreo cookies, Cadbury chocolates and Trident gum deeper into emerging markets. Oreo is on track for $700 million in emerging market sales this year, quadrupling in just five years, while the powdered beverage Tang now generates over $1 billion in sales, doubling over the last four years on overseas expansion, noted the Wall Street Journal.
The North America grocery business, which includes Kraft cheeses, Maxwell House coffee, Kraft macaroni and cheese, Oscar Mayer meats, Philadelphia cream cheese and Jell-O snacks, lacks the growth potential but comes with stronger margins and more reliable sales. The global snacks company will also include Kraft’s European business, and Kraft’s snacks and confectionary business in North America. The company expects to conduct the split before the end of 2012.
Kraft reported stronger than expected Q2 earnings, and raised its sales and earnings growth projections for the year. This is due to raising prices earlier and more than competitors, just in line with rapidly rising commodity costs.
RBR-TVBR observation: The effect on agencies of record for media and creative remains to be seen. However, Kraft tends to choose separate shops for different brands in different countries. So we don’t anticipate any one huge loss for AORs already in place.