Last year Kraft Foods (KFT) announced that it would split into two separate companies in order to provide better value to stockholders. One of these two companies would be a global snack company with brands such as Oreo and the other would be a North American grocery company with brands such as Oscar Mayer. In 2011, two-thirds of Kraft's total revenue came from the snack brands whereas only one-third of the revenue came from the grocery business. Furthermore, many brands that joined Kraft's portfolio with Cadbury PLC, the British food and beverage company acquired by Kraft earlier will be part of this split.
With the split up, both companies will have a separate CEO, board of directors and departments of their own. This will allow each company to focus on its unique strengths, weaknesses, opportunities and threats in order to maximize growth and value to shareholders. The split will be completed by the end of this year if everything goes as planned.
The new global snacks company will be named Mondelez International. Mondelez is a combination of "Monde" and "delez," words that reportedly mean "delicious world." The stock symbol for this company will be MDLZ. The North American grocery company will retain the Kraft Foods name. This company's new stock ticker is not announced yet. Also, it is not clear whether the new company will continue to be a part of Dow Jones Industrial index.
Even after the name change, Kraft's snack products aren't expected to go through a name change. Mondelez is only going to be a corporate name, and it won't be on packaging of most of the brands. Retaining the existing brand names is a good move, as the company has worked hard over many decades, spending billions of dollars to build its brand names, and it would have been a bad idea to scratch brand names that took a lot of resources and time to build.
It can take a lot of resources for a company to build its brand name over a period of time. A company will usually have to invest in advertisements, packaging, strong products, and reliable supply chain for a long time before its brands are well-recognized all over the world. A significant portion of many large corporations' market value stems from their brand name.
The North American grocery company will enjoy higher margins but a slower rate of growth. In contrast, the global snacks company will have much lower margins but much faster growth. Both companies will continue to expand their portfolios through acquisitions, and Mondelez will pay a royalty to use certain Kraft products. The North American company will announce new cost-cutting measures to increase its margins further, and pay much higher dividends than the global company.
One of the main drivers of growth for the North American grocery company will be its beverages division. The company's existing beverage products include Crystal Light, Capri Sun and MiO. Currently, Kraft's beverages generate annual revenue of $1.5 billion, and these brands enjoy an annual growth rate near double-digits. The market for beverages in the U.S. is about $115 billion annually. This means there is plenty of market share for Kraft's beverage division to gain.
Mondelez will see strong growth using the company's 5-10-10 strategy. This strategy calls for the company to strongly focus on 5 categories, 10 power brands and 10 countries at a time. For example in 2011, Cadbury category saw a growth of 30% and the company's top 5 categories saw a combined growth of 12%. Among the power brands, Oreo brand achieved a growth of 50%, whereas Club Social and TUC achieved growth of 35%. In total, the company's top 10 brands achieved a growth of 17% in combination. In countries, Kraft products saw the highest growth in China with 30% and Brazil with 15%. The top 10 countries saw a growth of 12% in combination. The company's growth strategy will focus not only on strong markets and brands, but also discontinuing brands that aren't successful in order to make sure that resources are allocated for the most profitable projects only.
Kraft has always been a solid company and it will continue to be so for a long time. Those looking for a growth company may find good value in Mondelez and those looking for stable income in the shape of dividends may find better value in Kraft Foods Group. The current Kraft stockholders should keep both companies after the split as it will expose them to a portion of growth and a portion of stability.
Disclosure: I am long KFT.