Kraft Foods, which plans to split in two by the end of the year, this week outlined the first impact of the move when it announced plans to cut 1,600 jobs in North America. Analysts believe the split allows the US food giant to accelerate efforts to cut costs and boost margins from the new grocery business. Michelle Russell reports.
Kraft Foods gave some insight this week into how its split into two independent companies will take shape, which will result in around 1,600 job losses.
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On Tuesday (17 January), the US food and beverage group’s CEO, Irene Rosenfeld, said the company will trim corporate, sales and other positions, relocate jobs, and consolidate offices and close another. The job cuts represent around 3.4% of Kraft’s 46,500 workforce in the US and Canada. Globally, Kraft employs around 127,000.
For Rosenfeld, the cuts are all necessary if, after the split, Kraft wants to create a North American grocery company that is, as she describes, a “lean, mean, centre-of-the-store machine”.
“We’re confident that this transformational work will improve effectiveness and fuel the future growth of both companies,” Rosenfeld said on Tuesday.
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BMO Capital Markets analyst Kenneth Zaslow has estimated that the cuts should save Kraft around US$50m. “The incremental value of the spin-off is Kraft’s ability to accelerate its cost-cutting efforts, as evidenced by its announcement,” Zaslow said in a note to The Chicago Tribune.
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By GlobalDataAround 40% of the cuts will come from Kraft’s US sales team, while vacant positions will account for another 20%. The remaining 40% will affect corporate staff and various business units.
In addition, Kraft’s beverages business unit in Tarrytown, New York, and its Planters brand in East Hanover, New Jersey, will relocate to the Chicagoland area by December. Employees will have the option to transfer with their businesses. The company has not made a decision, however, on the future of its Northfield headquarters.
The reorganisation plan involves the appointment of a third-party broker to sell Kraft products to retailers. Investors may question handing over such responsibility but Lazar says much of the US food industry uses similar arrangements. “Kraft was a notable exception,” Lazar says.
He believes the appointment of Acosta may provide an “interesting ‘frenemy’ dynamic” with other grocery manufacturers. While Acosta will have a dedicated team that only handles Kraft brands in categories the company competes in, other divisions of the broker will be able to work with Kraft’s competitors.
“We expect to hear more about potential ‘frenemy’ type arrangements between KFT and companies outside of its categories, be it with other food manufacturers, which will further help with any potential scale issues Acosta may encounter as a result of using a dedicated team.”
Lazar also believes that Kraft’s productivity measures suggest there is “significant … margin and value creation” potential for the firm’s North America grocery division. Barclays Capital estimates the split could improve margins from this part of Kraft by up to 5% over two to three years.
Stifel Nicolaus analysts raised their target price on Kraft shares from $39 to $42 in a research note this week.
The increase may have been boosted by the firm’s trading update, released after the reorganisation announcement. Kraft said it forecasts a full-year 2011 net sales increase of around 10%, after ending the year with “strong momentum around the world”.
While this may have temporarily taken the edge off news of the firm’s reorganisation plans, some industry observers have questioned whether further cost-cutting measures will take place before the split is completed.
“We would not be surprised if Kraft were to announce additional incremental savings in the next few months throughout its supply chain, particularly in US manufacturing,” Zaslow said.
Stifel Nicolaus analysts echoed this, adding that Kraft should “be in a position to institute further cost-reduction activities on the manufacturing side in 2012 in preparation of the split”. The analysts believe this may include plant closures.
The full transition into two separate companies is expected to be completed by the end of the year. In the meantime, the industry will be left wondering if this is just the tip of the iceberg.
