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The Billion Dollar Divorce: Kraft and Mondelez Two Years On

2/26/2014
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It has been two years since the world’s second largest packaged food company, Kraft Foods Inc, split to form Kraft Food Group Inc and Mondelez International. Kraft, the old-fashioned granddad of packaged food, kept a stronghold on its domestic market, with a brand portfolio consisting of US icons including Velveeta, Lunchables and Jell-O. In comparison, Mondelez set its sights on sweeter and warmer climes, becoming a much more streamlined company focusing on confectionery and snacks, and, free of its North American ties, it has been able to concentrate on faster growing markets in Asia Pacific and the Middle East and Africa (MEA). But, with the first full-year financial results in since the split, it seems neither company is faring particularly well since their famous billion dollar divorce, with both posting disappointing reports.

Chocolate versus Cheese

On paper, the spin-off made sense. Kraft has kept a wide product portfolio but become much narrower geographically. In 2013, over two-thirds of Kraft’s global sales came from chilled processed food and dairy, with sauces, dressings and condiments and sweet and savoury snacks also contributing significantly. In contrast, Mondelez has a much more narrow focus, with nearly 90% of sales coming from bakery and confectionery alone – of the nine billion dollar brands it owns (Oreo, Lu, Nabisco, Ritz, Cadbury, Milka, Trident, Halls and Philadelphia), only one, Philadelphia, sits outside these two core categories.

Retail Value Sales of Kraft Foods Group Inc and Mondelez International Inc by Region, 2013

Source: Euromonitor International

East versus West

While the division looks good in theory, things are not quite as rosy as they seem. The full-year financial results show that net revenue for Kraft fell by 0.3% in 2013, dragged down mainly by a poor performance in sauces, dressings and condiments. One of the only top 10 companies to lose value share in this category, Kraft’s sales fell by US$50 million from 2012 to 2013, with consumers either opting for more premium products than in the Kraft offer or a cheaper private label alternative.

Perhaps more disappointing were the full-year results for Mondelez. Revenue in Asia Pacific fell by 4% and this, combined with low growth in North America and Western Europe, resulted in net revenues increasing by less than 1% in 2013. Organic growth was just under 4%, lower than the company’s original guidance of 5-7%. Mondelez needs to concentrate on turning its reliance on Western Europe and North America into an advantage. By leveraging the strong brand equity it has in these regions and building the same consumer loyalty in developing regions, it should be well-positioned to take advantage of the higher growth rates, especially the 6% growth rate forecast for confectionery consumption over 2013-2018 in MEA. One of the aims of the spin-off was in part to attract more capital that could be used to increase investment in developing regions, yet only 17% of Mondelez’s global packaged food sales derive from MEA or Asia Pacific. While it might be faring better than Hershey, which has a negligible presence in both MEA and Asia Pacific, and Ferrero, which has too premium a portfolio to attract low-income consumers in developing markets, Mondelez has not been as successful as either Mars or Nestlé in establishing itself in these regions.

Proportion of Global Packaged Food Sales Derived from MEA and Asia Pacific 2013

Source: Euromonitor International

No Regrets?

The ultimate question then is this - if Mondelez and Kraft had their time again, would they still split? Tied down in North America and heavily reliant on acquisitions to maintain growth, the old Kraft was tired and a burden to the international side of the business. Despite the disappointing first-year results, the answer would no doubt still be yes.

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