Kraft Foods Inc. said Thursday it plans to split into two publicly traded companies, with one focusing on its international snack brands like Trident gum and Cadbury chocolates and the other on its North American grocery business that includes Maxwell House coffee and Oscar Mayer meats.
Kraft is the latest in a string of U.S. companies including rival Sara Lee Corp. to separate its business to cater to different niche markets. As companies increasingly look for ways to drive growth during a difficult economic environment, there's been a major shift from thinking bigger is always better to sharpening their strategy on smaller businesses that focus on a group of brands.
"In general, it mirrors what we have seen from other consumer brands," said Morningstar analyst Erin Lash. "In terms of what it means for the industry, we have seen some businesses over the past several years, particularly food companies, become more focused brands."
The move surprised industry watchers because Kraft, the nation's largest food maker, had long touted its scale and reach as its strength. Kraft officials said Thursday that after several years of acquisitions, sales and other changes, it became clear that the company had built two "strong, but distinct, portfolios" and the next step is to recognize the separate priorities for each.
"Simply put, we have now reached a stage in our development with a global snacks and grocery businesses in North America in which each benefit from standing on their own and focusing on their unique drivers of success," Kraft CEO Irene Rosenfeld told investors Thursday during a conference call.
The two businesses will target two very different segments of the food market. Kraft's grocery business, which sells products such as Oscar Mayer meats, Jell-O desserts and its namesake cheese, delivers estimated revenue of $16 billion. After the split, it will still be one of the largest food and beverage companies in North America.
Kraft's snack business, by comparison, will be twice the size with estimated revenue of $32 billion and will focus on high-growth international business and the convenience stores, kiosks, and other places where the small treats are sold. It already derives about 75 percent of its revenue from international markets and will put a heavy emphasis on emerging markets like China, India and Brazil that represent a major growth opportunity.
The two businesses will represent two different opportunities for investors as well. The snack business is expected to grow quickly, reinvesting its gains back in the business. The company already has been building its snack side for several years with acquisitions such as LU biscuits and its $18.5 billion acquisition of Cadbury PLC a year and a half ago.
Meanwhile, the grocery side will rely on the strength of its well-known brands in North America for slower, steady gains that are more likely to deliver dividends for shareholders.
"Clearly, our strategy is working," Rosenfeld says, "and it would be easy to leave it at that. But we believe there is a significant next step that we can now take that will put our business on an even higher trajectory."
Kraft is not the first company to switch to the less-is-more strategy. Fortune Brands Inc. announced late last year that it was splitting into three companies, keeping its liquor business led by Jim Beam bourbon, while shedding units that make Titleist golf balls, Moen faucets and Master Locks. Ralcorp Holdings Inc. said last month that it plans to spin off cereal maker Post Foods to focus on building its generic foods business.
And Sara Lee announced in January that it would split its business into two units by 2012, with one focused on coffee and the other largely focused on meat. The move was expected as the company had been selling off business units for years and slowly transforming itself from a purveyor of everything from underwear to cheesecake into a narrower business concentrated on food.
Kraft's decision, by contrast, was unexpected. Kraft's surprise news sent Kraft stock up $1, or 3 percent, to $35.
While investors reacted well to the news, analysts were skepticism about the strategy and as to whether the deal, when fully formed, will provide shareholder value. Some analysts question the split of what they see as overlapping businesses. Additionally, because the companies will both each remain large businesses after the split, they aren't smaller enough to be attractive acquisition targets like some of the businesses other companies created in their splits.
"We are surprised," said Morningstar analyst Matt Arnold. "It's definitely a change in philosophy; they used to say we will win with scale. It's tough to say if there is pressure from investors."
The deal is expected to take at least a year or more to complete as it works on the structure, management and other issues related to the tax-free spinoff. Taking that into account, the Northfield, Ill., company's current plan is for the split will be complete by the end of next year. The new company names are not yet decided.
Kraft on Thursday also announced that its second-quarter earnings climbed 4 percent to $976 million, or 55 cents per share, from $937 million, or 53 cents per share, a year ago. Revenue rose 13 percent to $13.88 billion from $12.25 billion. Analysts polled by FactSet predicted earnings of 58 cents per share on revenue of $13.08 billion.
Kraft also boosted its full-year forecasts for revenue from existing businesses and operating earnings. Kraft now anticipates so-called organic revenue to climb at least 5 percent, with operating earnings of at least $2.25 per share. Its prior guidance called for revenue to increase at least 4 percent, with operating earnings of at least $2.20 per share. Analysts expect earnings of $2.23 per share.
AP Business writer Michelle Chapman contributed to this report from New York