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"If you can't dazzle 'em with brilliance - baffle 'em with bulls**t" - W. C. Fields
Just 18 months ago Kraft CEO Irene Rosenfeld was working very hard to convince investors she needed to grow Kraft revenues via a $19B 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 Part of her justification for the massive expenditure was an out-of-date industrial manufacturing adage, "scale is a source of great competitive advantage. " How these acquisitions provided scale advantage was never explained, but the acquisitions were concluded.
Now she wants to convince investors 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 Ms. Rosenfeld was a politician, she might be accused of being a "flip-flopper."
Ms. Rosenfeld would like to break Kraft into 2 parts. Some brands would be in a new "grocery," or "domestic" business - the name and description are far from clear (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 - depending on the prevailing description du jour. 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.")
Let's ignore the obvious questions about why Kraft made these acquisitions, and what was the long-term strategy? Instead, looking forward, the critical questions to answer 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 from Altria at the end of 2006, with Ms. Rosenfeld at the helm. At its rebirth, Kraft became a Dow Jones Industrial member. Rich in revenues and resources at the time, Kraft was valued at about $35/share. Now, 5 years and all the M&A machinations later, Kraft is valued (with optimism about the breakup value) at about $35/share! Between the two dates the company's value was almost always lower. So investors have gained nothing for their 5 years of waiting for Ms. Rosenfeld to "transform" Kraft.
Except heartburn. Maybe from too much advertising spend on Oscar Mayer b-o-l-o-g-n-a?
The big winners at Kraft have been their investment bankers.
They received enormous multi-million dollar fees for helping Ms. Rosenfeld buy and sell businesses. And they will receive massive additional fees if the company is split in two - thus their support for the transaction! Given Ms. Rosenfeld's focus on M&A as opposed to actually growing Kraft one could well assess her tenure as more investment banker than Chief Executive Officer. She didn't really do anything to improve Kraft. She just moved around existing pieces, and swapped some.
Kraft has had no growth, other than from the expensive purchased acquisition revenues. Despite its massive $50B 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? Don't feel bad, nor can anybody else.
In Kraft's historical businesses, volume declined 1.5% over the last couple of years.
Kraft has actually been shrinking, it just wasn't visible amongst all the financial machinations.. 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 is selling less, and raising prices, on products that consumers largely could care less about.
BusinessInsider.com tried valiantly to make the case "The Kraft Foods Split is the Grand Finale of an Epic Transformation." But as the author takes readers through the myriad re-organizations, in the end we realize that all these changes did nothing to actually improve the business. But they did manage to convince Kraft's largest investor, Warren Buffet of Berkshire Hathaway, to start selling shares! He has been exiting the stock ever since the push to acquire Cadbury.
The argument to split Kraft just because it has 2 portfolios makes no management, or financial, sense. 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 innovation is what's lacking at Kraft. As Burt Flickinger of Strategic Resources Group pointed out, Kraft has been losing .5% to 1% market share every year for the last decade in all its "core" businesess, and he understatedly commented that Kraft has "very little innovation." Splitting up the company is just another way to obfuscate that reality.
Markets have shifted dramatically the last 5 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 wastelines! And they want smaller portions, with more variety!
But Kraft addressed none of these shifts with new products. Instead, it kept pouring advertising dollars into traditional products, even as these were finding less and less fit with 2011 dietary needs - or consumer interest! When the most exciting thing anyone can say about a Kraft launch the last 5 years was the re-orientation of the Triscuit line (did you catch that, or did you somehow miss it?) then it's pretty clear innovation has been on the back burner. Or maybe stuck on the shelf with the Cheez Whiz.
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 Kraft (led by Ms. Rosenfeld) is "Taking action before it ever has to potentially disappoint investors in a struggle to reach overly optimistic sales growth targets."
It is clear that Ms. Rosenfeld offered no brilliance as Kraft's leader. 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 spending all those billions, and facing very little prospect of any growth, it was time for the biggest baffling bulls**t of all - to split the company up so nobody in the future can trace the value destruction!
I think Mr. Fields had it pretty right when it comes to describing the leadership of Ms. 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!!
Links:
Why Kraft as a recession hedge has been a disastrous investment
Why Kraft's efforts to buy revenues was a bad investment
The reason Kraft has not grown for over a decade
Kraft's growth stall and the reason it's value declined markedly in 2009
Kraft's value-destroying strategy of needless consistency
June, 2006 prediction that changing CEO at Kraft would not "fix" the company
Why Rosenfeld's failure as CEO was clear by 2007
