Just 18 months ago, Kraft CEO Irene Rosenfeld was working very hard to convince investors that she needed to grow Kraft with a $19 billion acquisition of Cadbury. This was after her expensive acquisition of Lu Biscuits from Danone. Part of her justification for the massive expenditure was an out-of-date industrial manufacturing adage, "Scale is a source of great competitive advantage." But how these acquisitions provided scale advantage had never been explained.
Now, she wants to convince investors that Kraft needs to be split into two companies, saying the acquisition trail has left her with "different portfolios." (Quotes from the Wall Street Journal: Activists Pressed for Kraft Spinoff) For some reason, scale is now less important than portfolio focus. And the scale advantages that justified the acquisition premiums are now unimportant?
If Rosenfeld was a politician, she might be accused of being a 'flip-flopper.' Remember John Kerry?
Rosenfeld would like to break Kraft into two parts. Some brands would be in a new 'grocery' or 'domestic' business (Oscar Mayer, Cool Whip, Maxwell House, Jell-O, Philadelphia Cream Cheese, Kool Aid, Miracle Whip is a partial list). The rest of the company would be a 'snack' or 'international' business. Although the latter would still include the North American snacks and confectionary brands (More detail in the Wall Street Journal: Kraft: Breaking Down the Breakup).
We will ignore the obvious questions about why the acquisitions, if your strategy was to split up the company. Instead, looking forward, the critical questions to have answered would be: How will this break-up help Kraft grow? And what is the benefit for investors, employees and shareholders of this massive, and costly, change?
Kraft was split off from Altria at the end of 2006, with Rosenfeld at the helm. At its rebirth, Kraft became a Dow Jones Industrial member. Rich in revenues and resources, at that time, Kraft was valued at about $35 per share. Now, five years and all the M&A machinations later, Kraft is valued (with optimism about the break-up value) at about $35 per share! Between the two dates, the company's value was almost always lower. So, investors have gained nothing for their five years of waiting for Rosenfeld to 'transform' Kraft.
The big winners at Kraft have been their investment bankers. They received enormous multi-million dollar fees for helping Rosenfeld buy and sell businesses. And they will receive massive additional fees if the company is split in two. In fact, given her focus on M&A as opposed to actually growing Kraft, one could well assess Rosenfeld's tenure more as an investment banker than as a chief executive officer. She didn't really do anything to improve Kraft. She just moved around the pieces, and swapped some.
Kraft has had no growth, other than from the expensively purchased acquisition revenues. Despite its massive $50 billion revenue stream, what new innovation, what exciting new product, can you recall Kraft introducing? Go ahead, take your time. We can wait.
What's that you can't think of any? Nor can anybody else.
In Kraft's historical businesses, volume declined 1.5 per cent over the last couple of years. The company has been shrinking. According to Crain's Chicago Business in Kraft's Rosenfeld's About Face Spurred by Dwindling Options, the only reason revenues grew in the base business was due to rising commodity prices, which were passed along, with a premium added, in retail price increases to consumers! A business doesn't have a sparkling future when it keeps selling less, and keeps raising prices, on products that consumers largely could care less about.
When was the last time you asked for a Velveeta sandwich? Interestingly, Tang now seems to have outlived even NASA and the American space programme. Have you enjoyed that sugar-laden breakfast delight lately? Or when did you last look for that special opportunity to use artificial ice-cream (Cool Whip) in your dessert?
BusinessInsider.com tried valiantly to make the case in The Kraft Foods Split is the Grand Finale of an Epic Transformation. But as the author takes readers through the myriad re-organisations, in the end we realise that all these changes did nothing to actually improve the business and managed to tick off Kraft's largest investor, Warren Buffet of Berkshire Hathaway, who has been selling shares!
The argument that Kraft has two portfolios as a justification for splitting the company makes no sense. Every investor is taught to have a wide portfolio in order to maximise returns at lowest risk. That Kraft has multiple product lines is a benefit to investors, not a negative!
Unless the leaders have no idea how to use the resources from these businesses to innovate, and bring out new products building on market trends and creating growth! And that's the one thing most lacking at Kraft. It's not a portfolio issue; it's a complete lack of innovation issue! As Burt Flickinger of the Strategic Resources Group pointed out, Kraft has been losing 0.5-1 per cent market share every year for the last decade in its 'core' business, and he understatedly commented that Kraft has "very little innovation."
Markets have shifted dramatically in the last five years and food is no exception. People want fewer carbs and fewer fats. They want easily prepared foods, but without additives like sugar (or high fructose corn syrup), salt and oil that have negative long-term health implications for blood pressure, heart disease and diabetes. Also, they don't want hidden calories that make ease of preparation a trade-off with their waste lines! Further, most families have changed from the traditional three times per day standard meals to more grazing habits, and from large portions to smaller portions, with greater variety.
But Kraft addressed none of these shifts with new products. Instead, it kept pouring advertising dollars into the traditional foodstuffs, even as these were fitting less and less with 2011 dietary needs or consumer interest! When the most exciting thing anyone can say about a Kraft launch in the last five years is the re-orientation of the Triscuit line (did you catch that or did you somehow miss it?), it is then pretty clear that innovation has been on the backburner. Or maybe stuck in the shelf with the Cheez Whiz.
It is clear that Rosenfeld offered no brilliance as Kraft's leader. Uninspiring to consumers, investors and employees. She made very expensive acquisitions to create the illusion of revenue growth; financial machinations that hid declines in the traditional business, which suffered from no innovation investment. After all that money was thrown around, and facing very little prospect of any growth, it was time for the biggest baffling bulls**t of all split the company up, so that nobody can trace the value destruction!
Andrew Lazar at Barclay's Capital Plc. gave a pretty good insight in another Crain's Chicago Business article Kraft Jettisons U.S. Brands so Global Snack Biz Can Fly Higher. He said that Kraft (aka Rosenfeld) is "taking action before it ever has to potentially disappoint investors in a struggle to reach overly optimistic sales growth targets."
Yes, I think Fields had it pretty right when it comes to describing the leadership of Rosenfeld and her team at Kraft. They have been unable to dazzle us with any brilliance. The question is whether we'll be foolish enough to let them baffle us with their ongoing bulls**t. What Kraft needs is not a break-up. What Kraft needs is new leadership that understands how to move beyond the past, tie investments to market needs and start Kraft growing again!
This week most people don't really care about Kraft. After the US debt ceiling crisis, followed by the Friday night announcement of the US debt downgrade, the news has been dominated by mostly economic, rather than company, items. The collapse of the DJIA has been a lot more important than a non-value-adding split-up of a single component. And that is unfortunate, because the leadership of Kraft has been playing chess games with company pieces, rather than actually doing what it takes to help a company grow. But with the right leadership, Kraft may create the jobs everyone so desperately wants.