Kraft is a rather interesting case in shareholder value. For years management has failed to generate organic growth, so they’ve chosen the easier growth route of acquisitions, mergers, divestments and more mergers. And through it all, shareholders have been rewarded with lucrative stock gains.
The history of mergers and acquisitions at Kraft is a long one. I’ll keep it simple by starting in 1990 with the General Foods merger. General Foods was the first big catch, then came Tombstone Pizza, Nabisco, Jacobs Suchard, Danone Biscuits and Cadbury. The company attributed its phenomenal growth to astute brand building.
There is truth to this, but for the record, the brand building referred to was not Kraft’s doing. This good work was performed by the brand builders of the acquired companies. The strategic health of Kraft brands continues to be tenuous. Nonetheless, sheer size provides huge economies of scale throughout their operation, especially in production, overheads, distribution and marketing. The consequence of clout is a tremendous competitive edge in the marketplace.
Then in 2013, the giant decided to divide the company into two autonomous entities — Kraft and Mondelez. The rationale for this move was strategic focus. Who can argue with that?
Once again the shareholders made a very nice gain. Today, the focus strategy has fallen by the wayside in favor of size. The combined business of Heinz and Kraft can realize synergies and significantly cut costs, but this is not in the best interest of the brands or the employees.
If you are a shareholder, you are jumping for joy. But over the long haul, without brand equity growth, shareholder value will turn downward and shareholders will be left holding the bag of neglected brands.
Within three years you’ll see the focus rational rear its head once more. In the interest of shareholder value, Kraft will not abandon its core competency — and that’s not food. It’s mergers and acquisitions.