When the former Kraft Foods split into two in late 2012, many analysts and investors predicted that both pieces would be takeover targets.
The new Kraft Foods Group succumbed on March 25, gobbled up by seasoned cost-cutters 3G Capital, a Brazilian private-equity firm, and Warren Buffett’s Berkshire Hathaway, in a deal valued at $48 billion. CEO Irene Rosenfeld is doing everything she can to make sure the same thing doesn’t happen to her chunk of old Kraft, Mondelez International.
Kraft Foods CEO John Cahill, less than three months into the job, threw up his hands and decided if someone else
could wring more profit out of his Northfield-based company, let them. 3G and Buffett promise to do just that, estimating that they’ll save $1.5 billion in annual costs by 2017. Rosenfeld, on the other hand, is taking on the cost-cutting herself.
Even that may not save her company, however. Kraft’s merger with ketchup king H.J. Heinz, which boosted Kraft’s share price by more than a third, “puts additional pressure not just on Mondelez, but on all of its packaged-food peers,” says Erin Lash, an analyst at Morningstar. “They’ve got to improve their own profitability and make their operations more efficient.”
Like Kraft, Deerfield-based Mondelez, which spirited off with the vast majority of the former Kraft’s global brands, struggled out of the gate as an independent company, disappointing investors with underwhelming results.
To get back on track, Kraft poured money into reinvigorating old brands like Jell-O and Planters nuts, while Mondelez set aside its growth plans to focus on corporate austerity after sales slowed in once-red-hot emerging markets such as Brazil and Russia. In a recent speech to business leaders in Chicago, Rosenfeld explained her pivot as a response to when the company’s “best-laid plans (went) to hell in a handbasket.”
Pressured in part by Trian Fund Management and activist investor Nelson Peltz, who now has a spot on its board, Mondelez implemented an initiative called zero-based budgeting, which forces managers to justify all spending each year versus basing costs on the prior year’s levels.
The approach, which has led to cuts in travel budgets, curtailed use of company vehicles and less spending on information technology, appears to be paying off; in 2014, Mondelez reduced overhead expenses as a percent of revenue by 0.7 percentage points. While that’s about a third of the way toward Rosenfeld’s goal, analysts are quick to point out there’s a long way to go.
“The management team there is more on the hot seat than just about any of the other” consumer packaged-goods companies, says Robert Moskow, an analyst at Credit Suisse. “Their underperformance over the last few years on the margin side has been much bigger than their peer group. Every board member and member of the management team has to double down on their pre-existing efforts to reduce costs.”
Rosenfeld also has ordered a restructuring and upgrading of Modelez’s production facilities and supply chain and altered its organizational structure to be more agile. The company has made acquisitions to enhance its product portfolio, including a deal to buy a Vietnamese snackmaker aimed at bolstering its Asian business and a pact to acquire Schiller Park-based Enjoy Life Foods, a health-focused snack-food manufacturer known for allergen- and gluten-free offerings.
But realizing gains from such measures takes time, and it’s unclear how long investors are prepared to wait, particularly after Kraft’s rich tie-up with Heinz.
The chasm between Mondelez’s adjusted operating margin, which is hovering near 14 percent, and that of its competitors, some of which boast margins in the mid-20 percent range, “is so enormous that if they can’t make progress toward closing that gap, someone else is going to start making noise to say that they can,” Moskow says.
If 3G and Berkshire succeed in making Kraft more profitable, as investors expect, it will likely spur another round of agitation by activist investors and board members at other companies to bring in new management teams.
“Shareholders see what happened with Kraft’s stock price and they’re going to start asking, ‘Well, what are you doing? What’s your strategy? What’s your next big move?’ ” says Bruce Cohen, a senior partner at consulting firm Kurt Salmon in San Francisco, which counts private-equity firms and consumer packaged-goods companies as clients.
For Mondelez, that may mean more cost-cutting and bolt-on acquisitions that broaden its geographic reach or serve as entrees into new market segments.
Just as likely, analysts say, it and other packaged-foods companies could become the next takeout candidates. “When Buffett invests in a sector, it gives a sign that the sector is ripe for acquisitions,” says David Turner, an analyst at researcher Mintel. “This will flag up other opportunities.”
As recently as two years ago, Mondelez was under pressure by Peltz to sell itself to beverage and snacks giant PepsiCo in a bid to improve both companies’ performance. After Rosenfeld gave him a board seat, he backed off.
Next time around, it might not be so easy.
By Peter Frost