Analyst: No certainty Kraft split will unlock fresh value

By Elaine Watson

- Last updated on GMT

The snacks division will include 'three towers of power': candy and confectionery; cookies and crackers; and salted snacks
The snacks division will include 'three towers of power': candy and confectionery; cookies and crackers; and salted snacks

Related tags: North american grocery, Kraft foods

While the boss of Kraft Foods believes the whole of the business is worth less than the sum of its parts, it is by no means obvious that cutting it up and rearranging it will transform its growth prospects, according to one analyst.

Edward Jones analyst Matt Arnold was speaking to FoodNavigator-USA following Kraft’s decision to divide itself into a $32bn global snacks powerhouse (Cadbury, Trident, Oreos) and a higher margin but slower-growing $16bn North American grocery division (Philadelphia, Oscar Mayer, Maxwell House, Jell-O).

He said: “While it could ultimately improve focus in each of the two businesses, the separation could also bring short-term disruption to the company and fail to lead to any unlocking of value.”

Huge mindset shift

He added: “It’s a huge mindset shift. They used to talk about winning with scale in an attempt to unlock value and now they say that they will unlock value by breaking up.

“There have been multiple attempts to get this company on a better track and create more value, but I’m skeptical that this is going to be the catalyst to unlock that value.”

While the Cadbury deal had given Kraft access to faster growing markets in Europe and developing countries, the whopping $19.6bn bosses had paid to secure it meant there was a ”very low margin for error” ​when it came to unlocking the potential in the deal, he added.

“The business case is that the global snacks business should be valued as a best-in-class CPG asset like Wrigley before it was acquired by Mars, or Mead Johnson now. But do Nabisco and Cadbury have the same growth projections?”

On a more practical level, a further strategic upheaval coming so soon after the integration of Cadbury was also likely to cause disruption within management teams “as everyone works out who is going where​”, he said.

Meanwhile, Kraft’s share price remained “within a stone’s throw of where it was when they IPO-ed 10 years ago​”, he pointed out.

Q2 figures: North America volumes down 1.5 percent

While Kraft’s second quarter results were slightly above market expectations, volumes in North America were down 1.5 percent in the second quarter, with all of the growth coming from price increases.

But Kraft could not continue to charge what it liked for meat, cheese and coffee as private label competition intensified and the firm would “need to carefully manage its price gap to private label in these categories to maintain its market shares” ​in the US,​ predicted Arnold.

Similarly, while consumer spending at US restaurants had dipped, traffic would return, and Kraft would have to come up with more inspiring offerings in the grocery aisles to remain relevant in future, he argued.

Sparkling innovation

However, the proposed new structure would help to focus minds, Burt Flickinger, md Strategic Resources Group, told FoodNavigator-USA.

While Kraft’s unit volume declines in the US outpaced those of key customer Walmart (which posted a 1.1 percent decline in same store sales in the US in the first quarter) its North American grocery business could be fixed with innovative products and greater marketing and advertising support, he said.

“The business has really been milked for profitability in the past, but there are real opportunities to grow brands such as Capri Sun and to work with agencies to build the next generation of consumer demand.”

Meanwhile, splitting into snacks and groceries would not reduce Kraft’s leverage with key customers, he insisted.

The businesses are still huge in their own right, but what matters is category scale, so the fact that they are splitting meat and confectionery makes no real difference because they are talking to two different buyers anyway.”

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