A year on from an announcement that stunned the industry, Kraft Foods has revealed the formal split of its business in two will take place this autumn.
From 1 October, Kraft Foods Group – a company focusing on grocery sectors in North America like dairy and deli meats – and Mondelez International, a strangely-named second company that will market snacks brands like Cadbury and Oreo worldwide will begin trading as independent businesses.
The rationale for the move is to provide more focus on both the slower-growing but higher-margin Kraft Foods Group and the more buoyant Mondelez. Resources can be allocated more effectively, the argument goes, and shareholders will benefit from the additional value that will be created.
However, in recent months, there has been some concern at the decline in margins in recent years at what will be Kraft Foods Group. With the new company unlikely to generate significant top-line growth, the fall in margins has posed concerns over its profitability. Remember, of course, the recent challenge seen in the US grocery sector where, in a number of categories, consumers have reacted to recent price increases from manufacturers and bought less food.
Kraft reported its half-year results on Friday and said its North American grocery business had seen its bottom line improve in the six months to the end of June. Facing higher input costs, the company that will be Kraft Foods Group increased prices and, those moves, combined with cost control, helped profits, Kraft said. The North American grocery business in fact saw margins improve in the second quarter year-on-year thanks to overhead savings and the new company is expected to continue to focus on cost savings.
But of course cost is only one part of the profit equation. What about sales? In the first half of 2012, Kraft’s North American volumes fell but the company actually withstood the impact of price increases in some categories. Dairy volumes fell but inched up in convenient meals and grocery, a creditable performance given the trends seen across the sector.
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“Even -2.4 drop on North American volume is better than what we’ve seen from most other food names too,” Barclays Capital analyst Andrew Lazar tells just-food.
Meanwhile, the economic woes in Europe could be a point of concern for investors in Mondelez. On a reported basis, Kraft posted lower sales and operating income from its European business for the second quarter. However it filed an increase in sales on an organic basis and a rise in adjusted operating income, which an upbeat Kraft chief (and soon-to-be Mondelez boss) Irene Rosenfeld called “strong results”. In developing markets, key to Mondelez’s future growth, Kraft said first-half sales were up over 9%, with operating profit almost 16% higher.
Next month, Rosenfeld, alongside Tony Vernon, who will be CEO of Kraft Foods Group, will present more detailed plans for both companies at the Barclays Back-to-School Conference in the US. “Both teams are ready to hit the ground running at launch,” Rosenfeld said on Friday. Its competitors in North America and overseas will be watching with interest.