Kraft Foods’ decision to divide itself in two will benefit the company’s retail sales strategy and its perception among investors, chairman and CEO Irene Rosenfeld said today (4 August) as she defended the surprise move.
Earlier today, the US food giant announced plans to split and create a North American grocery business and a global snacks company.
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Speaking to analysts after the split was announced, Rosenfeld said selling grocery and snacks products to retailers needed different strategies and the spin off would allow Kraft to pursue different strategies.
In 2007, Kraft drew up a sales strategy in the US called ‘Wall-to-Wall’, which has made a single sales rep responsible for almost all its product portfolio.
Rosenfeld said today that the strategy enabled Kraft to “leverage scale across the portfolio” and added there was “no question” that benefited the business. “It was generating revenue growth of one percentage point versus the control stores,” she said.
However, Rosenfeld admitted implementing the strategy was complex. “The focus of our grocery business needs to be on a low-cost, warehouse selling system for centre-of-the-store products. It’s very much focused on shelf management.”
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By GlobalDataThe snacks business, Rosenfeld said, would need a different sales strategy focused on direct sales delivery, which is focused on impulse merchandising and immediate consumption.
“The differences of those two businesses allows us to create two very effective selling capabilities that will optimise the performance of both parts,” Rosenfeld said. “They have very different go-to-market strategies. The difference between a much more stable, off-the-shelf, shelf management approach to our grocery businesses as distinct from hot-zone, end-aisle merchandising, impulse purchasing of our snacking businesses.”
Analysts also asked what benefits the move would have for investors. Rosenfeld argued that the split would allow what she called “Grocery Co.” to return more cash to investors and “Snack Co.” to “captalise on its growth”. Investors will be able to better understand the “growth drivers” in Kraft’s business and how it uses cash. That improved clarity would provide a financial benefit to the business.
“We’ve never been able to get credit for the tremendous snacking portfolio that we have within the company,” she claimed. “The opportunity as we separate these two businesses for that to be much more visible and for investors to see the incredible profile that our global snack business has will serve us well.”
The 2007 acquisition of Danone‘s biscuit business, which included the Lu brand, and the 2010 takeover of Cadbury had, Rosenfeld insisted today, created a company with “two strong but distinct portfolios”.
Citigroup analyst Dave Driscoll asked Rosenfeld if Kraft had been considering a division of the company “all along” after the company acquired Cadbury.
“We’ve been evaluating this for quite some time. A transaction of this magnitude cannot be pulled off overnight,” Rosenfeld said. “As we acquired Lu and Cadbury and we began to put these businesses together and we continued to look at our strategic plans for the combined company, it was clear that we had very different businesses in the portfolio and we believed that there could be great value created by unlocking those two businesses to push through their own unique strategic priorities.”
Shares in Kraft, which also raised its 2011 sales and earnings targets today after what it called a “strong” second quarter, were up 2.68% at US$35.22 at 14:07 ET.
