18 months ago Kraft (KFT) acquired Cadbury for $19 billion and became the second-largest food company in the world, based on revenue (Nestle is #1). In 2007 Kraft acquired Lu Biscuits from Danone for $7.7 billion. Why all the major acquisitions? What do they do for Kraft's Business Model? According to Kraft CEO Irene Rosenfeld it’s because, “scale is a source of great competitive advantage.”
On August 4, 2011 Kraft announced yet another major shift in their business model. Another acquisition? Not even close. Actually Rosenfeld announced that Kraft would be splitting into two companies. So much for that whole, “Scale is a source of competitive advantage” strategy.
Kraft Divides into Snack and Grocery Companies
Kraft said it will divide itself into two publicly-traded companies next year: a $32 billion global snacking business and a $16 billion North American grocery business. Both companies are expected to be based in Chicago.
Excuse me, Did I Miss Something?
One moment Rosenfeld is taking over the 200 year old UK based Cadbury for $19 billion in an effort to “grow” the company and the next she announces it would be better to split the company. That’s a pretty big change of heart in a relatively short period of time.
What Do the Ex-Cadbury Leaders Think?
During the battle to acquire Cadbury in late 2009, the British group's then chairman, Roger Carr, claimed the US firm operated a "low growth conglomerate business model", as evidenced by its supposed focus on grocery brands.
Last week he told one newspaper, "The pure-play business model is a move in the right direction and one that I advocated very strongly. I am just hopeful that they call the confectionary business Cadbury. After all, that is essentially what it is - the core Cadbury business - with just a few complimentary brands added and a new Russian distribution arm."
Why All the Work?
So if Kraft’s new snack company is basically Cadbury in disguise why would they have spent all the time and effort (and money) to acquire them in the first place only to turn around and demerge 18 months later?
Before we attempt to answer that question let’s first look at Kraft’s performance over the last ten years.
Kraft’s Last 10 Years: It’s Not Easy Being Cheesy
Burt Flickinger of Strategic Resources Group pointed out that Kraft has been losing .5% to 1% market share every year for the last decade in all its core businesses, and that Kraft has “very little innovation.”
But perhaps Flickinger is wrong. Kraft may in fact be very innovative, at least when it comes to M&As. If it weren’t for all the shuffling around investors might actually focus on the fact that Kraft is not really doing anything new (outside of buying and splitting companies).
It will be interesting to see what tricks Kraft has up their sleeves still. 18 months from now will they decide that bigger is better again? Only time will tell.