What Does the Kraft Foods Split Mean for Its Coffee Businesses?

While Kraft has not stated directly their future intentions, for obvious competitive and regulatory reasons, they have provided some intriguing hints. Euromonitor is just reading the tea leaves, or in this case, the coffee beans.

What Kraft has already said

Kraft has stated the goal of the break-up of the company is to enhance investor value in the short term as quickly as possible. The break-up will create two separate companies with very different business models.

The North American company will be slow growth but generate a rich dividend for investors. The focus of this company will be on distributing products that are sold in the centre of the grocery store. Coffee is a good strategic fit with this strategy in North America.

Outside North America the company will focus on the high growth categories of confectionery and snacking. Presumably this means that more profit will be reinvested in the business to grow at a faster pace for the investor looking for profitability growth.

These products are primarily sold in the front of the grocery store and are available for immediate consumption. While outside the US, as discussed in part two of this series, Kraft’s coffee brands have good growth prospects, coffee does not look like it fits too well with the distribution aspect of this business model.

Potential contenders for Kraft’s international coffee business

The list of interested parties may be long and distinguished. Three companies that come immediately to mind are Nestlé, Sara Lee and Tata Global Beverages. Nestle may be the most likely because of its financial strength. While a good strategic fit for both Sara Lee and Tata, they may not have the financing for a deal.

Although Nestlé is the retail leader in coffee based on both value and volume, they do not have a mid/premium priced trademark. Nestle has an economical instant coffee business, Nescafé, and super-premium pod business, Nespresso and Dolce Gusto, with nothing in between. Kraft’s fresh coffee business could prove highly incremental by filling a missing mid-level tier in Nestlé’s coffee portfolio.

For Sara Lee, Kraft’s portfolio expands their geographic footprint. A big benefit for Sara Lee is that Kraft generally is strong where Sara Lee is weak. Even in Western Europe, where Kraft/Sara Lee would be #1 in both value and volume sales (beating Nestle), the two companies are strong in different countries.

A third potential bidder for Kraft’s coffee business is Tata Global Beverages. The company has been looking to expand in the beverage arena. Kraft’s international coffee would complement their mainly tea business.