The food industry is in flux, with major players shedding weight and breaking up. But is this the right move? Big Food's Dilemma: Divest or Die?
In a surprising turn of events, Kraft Heinz is undoing its 2015 mega-merger, orchestrated by Warren Buffett, by splitting into two separate entities. This move is part of a broader trend in the consumer goods industry, where companies are slimming down and divesting iconic brands. But why the sudden change of heart?
The Consumer Pushback: As consumers increasingly shun ultra-processed foods, the demand for packaged snacks has taken a hit. This shift in preferences has forced companies to reconsider their portfolios. Unilever spun off its ice cream business, and Kraft Heinz is preparing for a breakup, undoing the merger with Berkshire Hathaway and 3G Capital. Even Keurig Dr Pepper is planning a split after its acquisition of JDE Peets.
The Numbers Don't Lie: According to consulting firm Bain, nearly half of M&A activity in the consumer products industry in 2024 involved divestitures. And the trend continues, with 42% of executives planning to sell assets in the next three years. But it's not just the food industry; industrial giants like GE and Honeywell have also pursued breakups.
Competitive Pressures: Emilie Feldman, a professor at The Wharton School, attributes these moves to fierce competition. "Many spaces are seeing competitive pressures that make it harder to operate," she said. The squeeze on packaged food and beverage companies is real, with lower demand and shrinking volume.
The Race to Win Back Investors: To turn things around, companies are dumping underperforming brands. Kraft Heinz and Nestle are among those making moves, with Kraft potentially sharing more details on its split and Nestle considering selling multiple brands. But is this the right strategy?
The Shrinking Sales Conundrum: Consumers have been buying fewer groceries from inner aisles, opting for fresh produce and protein. The pandemic was an exception, but price hikes and 'shrinkflation' reversed the trend. Regulators, inspired by the 'Make America Healthy Again' agenda, are also cracking down on processed foods. And the rise of GLP-1 drugs has reduced the appetite for sweet and salty snacks.
Market Share Woes: While the consumer packaged goods industry has maintained its market share, big companies are losing customers to upstart brands and private labels. Bain's Peter Horsley highlights that large companies have less exposure to high-growth categories compared to private labels and insurgents.
Activist Investors' Push: With sales and stock declines, activist investors are pushing for a focus on core offerings. Raj Konanahalli from AlixPartners explains, "You're seeing pressure from a valuation standpoint... One way to reset expectations is to focus on core offerings and divest slower businesses." But is this a quick fix or a long-term solution?
The Downside of Mega-Mergers: Some divestitures follow ill-advised mergers, like Keurig Green Mountain's acquisition of Dr Pepper Snapple Group in 2018. Analysts questioned the logic of combining coffee and soft drinks. And while Keurig Dr Pepper's shares rose post-merger, it underperformed the S&P 500.
The Expansion-Contraction Cycle: The packaged food industry has seen cycles of growth and contraction. Kraft's spinoff of a snacking business in 2012 is an example. However, recent expansions require more strategic thinking.
The Changing Rules of the Game: Bain's Horsley notes that the pre-2015 era was simpler for consumer products companies. But with upstarts like Chobani and BodyArmor gaining market share, food giants must be more selective in acquisitions and portfolio management. Kraft Heinz's mega-merger in 2015 is a cautionary tale, with initial enthusiasm fading due to lagging sales and brand write-downs.
The Cost-Cutting Conundrum: Analysts blame Kraft Heinz's downward spiral on post-merger cost-cutting, neglecting brand investment. RBC Capital Markets' Nik Modi argues that selling brands doesn't address the root problem. He supports the Kellogg breakup, which created more value by separating high-growth snacks from sluggish cereals.
The Kraft Heinz Conundrum: Some investors hope for a similar outcome with Kraft Heinz, aiming for a split and eventual acquisition of both entities. The company hired Steve Cahillane, former CEO of Kellogg and Kellanova, to lead the charge. But the size of the resulting companies may deter potential buyers, causing uncertainty.
The Divestiture Trend Continues: General Mills is selling its Muir Glen brand, and Nestle is preparing to sell its water unit and potentially upscale coffee and vitamin brands. Bain suggests that acquisitions now favor insurgent brands, with smaller deals becoming more common. Private equity firms are also active buyers, as seen with L Catterton's investment in Good Culture.
The Way Forward: While divestitures and acquisitions can be strategic, they aren't always the solution. AlixPartners' Konanahalli advises that hard work and strategic focus can also turn things around. So, will Big Food's divestitures pay off, or is it a temporary fix? Share your thoughts in the comments below!
