The integration of the Cadbury portfolio in 2010 has been transformational for Kraft Foods, both in terms of category and geographic market coverage. It has significantly enhanced its presence in snack food as well as in emerging markets, which was a much needed development for the largely North America biased conglomerate. However, as a result of the acquisition, it has ended up with an enlarged but distinctly polarised portfolio.
A year later, Kraft Foods has announced the split of its operations into two independently listed companies, a process due to be completed on 1 October 2012. Kraft Foods Inc will spin off its North American grocery business under the name of Kraft Foods Group, while on the same date it will change its name to Mondelez International Inc and proceed as a global business concentrating on snacks, such as biscuits, chocolate, gum and sugar confectionery.
The overarching objectives for the newly listed companies are to allow each business to focus on its distinct growth profiles, product categories and strategic priorities. However, the divided operations are both aligned with the same growth driving trends most multinationals currently aggressively act on, creating significant competitive barrier to further expansion. The new entities also lost the advantages the large conglomerate was offering to leverage scale and infrastructure across markets and categories.
Based on 2011 results, the estimated revenue for Mondelez, with global market reach in snack food categories, will be about US$36 billion, while Kraft Foods Group, the North American grocery division’s revenue is US$19 billion.
Advantages of the split
One of the most significant advantages of the split is that the streamlined portfolios allow both companies to concentrate their resources, in terms of innovation and marketing, on key brands and categories.
Given its geographic market coverage, Mondelez is in a good position to drive strong volume growth in its identified emerging focus markets, such as Brazil, India and Russia, where volume growth prospects in snack food categories are positive. In contrast, Kraft Foods Group will have to focus more on value driven growth, through continuous innovation in the mature North American market environment.
These advantages of brand and geographic market focus are particularly relevant in comparison to Kraft’s previous strategy of driving growth primarily through focus and emphasis on five categories, 10 power brands and 10 markets. Within the new structure, growth opportunities in a wider range of categories and markets can be addressed.
Challenges to success
One of the key challenges both newly formulated companies will have to tackle is the strong competition and multinational domination in growth categories and markets, for example in the Chinese and Russian confectionery markets for Mondelez, or ready meals in the US for Kraft Foods Group.
In China, Mondelez has a 1% value share in confectionery, while market leader Mars Inc commands an 18% share. Strong international players in key markets can mean high competitive barriers to further expansion. Although, in China Kraft Foods’s entire operations will be reorganized under Mondelez, and the structural split will not weaken the companies’ competitive position; if anything, the more snack products focused business model could strengthen it.
However, in North America, Kraft Foods Inc’s current scale will be split by a 40:60 ratio between Mondelez and Kraft Foods Group. Prior to the split, Kraft Foods Inc was the largest North American packaged food company with retail value sales of US$29 billion in 2012. After the split, the company will rank third, behind PepsiCo and Nestlé. In this region, the split in scale of infrastructure would negatively impact competitive strength, both in terms of manufacturing and distribution.
The split itself will also raise logistical challenges, as well as complications to the management and development of brands under shared ownership, such as Philadelphia or Maxwell House.
The still unstable macroeconomic environment, both in Western Europe and North America, together with highly volatile commodity prices, are also contributing to a challenging operating environment for the two new launched companies.
The outlined strategies for Kraft Foods Group and Mondelez International are strong, as both new entities will invest in the key strengths of their portfolios and will be able to extend focus on key categories and brands. Kraft Foods Inc, as one large conglomerate, did not have this flexibility. However, they will have to tackle a number of challenges both in terms of competition in focus categories and operating environment in core developed markets for long term success.