Defensive Strategy

Kraft’s Big Split

4 Aug 2011  

Kraft Foods today announced plans to split the company, spinning off the North American grocery businesses. The company has about $48 billion in revenue today. After the transaction there will be two companies, a global snacks business with about $32 billion in revenue and a grocery business with $16 billion in revenue.

The move makes enormous sense. At the core, Kraft management is recognizing a few truths.

First, some businesses simply can’t grow very quickly. When I was at Kraft, there was a relentless focus on profit growth. As one executive proclaimed, “There are no bad businesses, just bad brand managers.” But driving substantial profit growth on mature brands like Miracle Whip and Kraft BBQ is far easier said than done; it is hard to increase consumption, boost prices or reduce costs.

Kraft is wisely recognizing that some businesses can grow quickly and others can’t, and a company focused on fast growth should build a portfolio of brands that are able to deliver that.

Second, expanding brands globally is a challenge. On the surface, taking U.S. grocery brands to other countries is an obvious opportunity. In reality, however, this isn’t an easy task. There are existing brands in the different countries; these
brands will defend. Breaking into a new country is very difficult, especially when the move involves a behavior change.

In the split announced today, Kraft is acknowledging that its North American grocery brands are not destined for global success. The concept that Cadbury sales representatives would manage to build Miracle Whip sales in Vietnam or Romania is far-fetched

Third, you can only focus on a few things. Kraft in recent years has embraced the snacks and candy business. The grocery business was clearly a relatively unimportant part of the mix. This has a big impact on staffing, career planning and resource allocation. Working on a grocery business today at Kraft must be a discouraging task.

After the split, Kraft will have companies focused on each business group. This should help both parts perform better.

The split announced today makes enormous sense; Kraft’s executives have recognized some difficult truths and made a smart decision.

1 Response

  1. […] The split began being discussed last April when Kraft announced it saw no global future for its grocery business. Instead, the company would split into a global snacks business, expected to generate $32 billion in revenue, and a grocery business with expected revenue landing around $16 billion. […]

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