A Good Deal on Pizza

12 Jan , 2010  

Last week Nestle announced that it was buying Kraft’s pizza division for $3.7 billion. 

Since that time a number of people have commented that the deal was not a smart one for Nestle. I disagree completely; I think the deal is a brilliant move by Nestle.

Nestle is the clear leader in frozen meals in the United States; Nestle runs circles around the other main players, Heinz and Conagra. 

By purchasing Kraft’s pizza division, Nestle does two things.  First, Nestle can build profits by capitalizing on the growth of pizza and reducing costs by integrating the two businesses.  Second, Nestle eliminates a potential threat.

The real long-term risk for Nestle is that another strong competitor emerges in frozen foods in the United States.  If Kraft had acquired Heinz, for example, then there would be a meaningful challenger to Nestle in frozen.  Similarly, if Conagra bought Kraft’s pizza division then Conagra would be a viable challenger.

By purchasing Kraft pizza Nestle essentially eliminates the risk of a significant competitor emerging.  Nestle can now leverage scale and mass to own the frozen foods segment and steadily build profits.

The deal is strategic, long-term and very smart indeed, at least for Nestle.

One Response

  1. scott orn says:

    Totally agree. The value of eliminating the threat + profits of target business make it smart. This is why Google paid so much for YouTube a few years back. Video Search could have disrupted Google’s core Search franchise.

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