Kraft Foods is going to split into two publicly traded companies, according to an announcement it made last week. This is what big companies do when businesses are under pressure to do something and all the traditional salves -- even the "new" ones that the Conventional Wisdom recommends -- aren't doing much good. Top leadership has few other tools at their disposal, so they wrangle a complex financial arrangement and wrap it in glowing language about strategy, focus, and priorities.
How will it help sell more crackers or cookies? No clue.
The announcement outlined a split that will par off Kraft's North American grocery business from its international snacks business, the former suffering slower growth and slimmer margins while the latter offers the eternal luster of emerging market expansion. Grocery generates $16 billion in revenue annually, and snacks kick in twice that (remember, Kraft bought Cadbury’s last year for $19 billion amid rancor over its financial shenanigans).
Then came a stock analyst conference call filled with the requisite babblespeak about leveraging global innovation platforms, growth in whitespace markets and instant consumption channels, deploying capabilities, and focusing on unique drivers of success.
Kraft is in trouble, just like every other business built upon consumer product brand names. Price premiums for candy, cheese, and laundry detergent alike were dependent on a lack of information -- a pause or distance, if you will, between what companies declared on behalf of their brands, and what consumers actually knew about ingredients, costs, and choices -- and it accounted for the extra "perceived value" for which consumers paid. Those days are over, for a variety of reasons, and they're not likely coming back. Consumers know too much (or think they do).
So, like P&G, Unilever, and its lesser competitors, Kraft has been doing the Dead Man Walking-thing for a while now, still talking about its brands like they're things with personalities and behaviors instead of simply words, and falling prey to a cadre of new marketers who willingly discard old ideas about selling and instead waste the company's money on talking about its brands in ways that wouldn't matter even if consumers bothered to listen.
Enter the financial geniuses.
By decoupling some brands from others, each separate company will have its own leadership, budgets, and deliverables. This will clarify the strengths and weaknesses of each business and thereby allow the stock market to accurately judge them. The bet is that the sum of those two valuations will be greater than the price the company’s stock gets today (spin-offs are regularly sold as "unlocking" hidden value). The unsaid assumption is that Kraft’s slower-growing grocery brands mask the bright future growth potential of its snacks.
What does this have to do with addressing the fundamental branding problem facing the company? Nothing. Instead, management -- which is already being praised for its bold action, and will probably make out like bandits on the back-end of the deal regardless of what happens to the businesses -- has begun a process that will take a year or more of gut-wrenching, responsibility-confusing, distraction-causing, non-customer-facing change. The various underwriters and advisors and distributors and assorted financial types who are involved in effecting such complicated transactions will also make good money.
Everyone else (i.e. the poor slobs stuck at the two companies) will be left to face the ugly reality that Kraft's brands are going to matter less over time, not more, and that’s in spite of how entertainingly its new marketing mavens spend Kraft’s money. Every brand is globa” eventually, if only by knowledge transfer in lieu of physical distribution. Consumers in emerging markets will catch on to the same disconnect that North American consumers have already discovered: there's no there there. All of the creative invention that used to argue for price premiums just no longer applies and, from the looks of this news announcement, Kraft will be no further along in figuring out what to do about it a year from now.
There'll just be two companies suffering the same problem instead of one.
(Image credit: there’ll be more work for image consultants on this)