Kraft Heinz, Kellogg breakups show Big Food is getting smaller
Kraft Heinz has announced plans to split into two separate companies, reversing a 2015 megamerger overseen by billionaire investor Warren Buffett.
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Big Food is weakening.
As both consumers and regulators push back against ultra-processed foods, the companies that produce them are either splitting up or divesting from iconic brands. Last year, Unilever’s He transferred his ice cream business to The Magnum Ice Cream Company. Kraft Heinz It is set to exit at the end of this year, largely unraveling the merger between Warren Buffett’s Berkshire Hathaway and private equity firm 3G Capital more than a decade ago. And Keurig Dr Pepper JDE plans a similar spin-off after completing its acquisition of Peet’s.
Nearly half of merger and acquisition activity in the consumer products sector in 2024 will come from divestitures, according to consulting firm Bain. 42% of M&A executives in the consumer products industry are preparing an asset for sale in the next three years. Bain research to create.
Of course, this trend is not limited to the consumer packaged goods industry. Industrial companies such as GE and Honeywell have pursued their own disintegration in recent years. This happens in legacy media too; Comcast transfers most of its cable assets to CNBC owner versantWarner Bros. Discovery plans to spin off its cable networks later this year when it acquires Netflix’s streaming and studio divisions.
“In many of the areas where we see this type of activity, there are very intense competitive pressures that make it difficult to operate,” said Emilie Feldman, a professor at the Wharton School of the University of Pennsylvania.
The pressure on packaged food and beverage companies is due to reduced demand, resulting in shrinking volumes for many products. To turn their business around and win back investors, they rely on divesting from underperforming brands.
February will feature both quarterly earnings reports and presentations at the annual CAGNY Conference, offering investors the opportunity to learn more about food executives’ plans for their portfolios. Companies to watch include Kraft Heinz, which may share more details about its upcoming spin-off, and Nestle, which is considering selling multiple brands in its portfolio.
Dr. Pepper cases are on display at the Costco Wholesale store in San Diego, California, on April 27, 2025.
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decrease in sales
For more than a decade, consumers have been purchasing less food from the inner aisles of grocery stores, focusing instead on the outer aisles containing fresh produce and protein. The pandemic has been an exception, as many consumers have returned to brands they know. However, as life returned to normal, price increases and “downsizing” largely erased this change in behavior.
Recently, encouraged by the “Make America Healthy Again” agenda espoused by Health and Human Services Secretary Robert F. Kennedy Jr., regulators have placed both greater pressure and increased attention on processed foods. And rise GLP-1 drugs to combat diabetes and obesity mean some food companies’ key consumers are losing their appetite for the sweet and salty snacks they used to eat.
The consumer packaged goods industry maintained its market share as a percentage of overall spending. But the biggest companies are losing customers to startups or private label products, according to Bain partner Peter Horsley.
On average, about 35% of the portfolios of large consumer products companies are in categories growing more than 7%, Horsley said. By comparison, more than half of private label brands are in fast-growing categories like yogurt and functional beverages, and the percentage is even higher for insurgent brands.
The result for Big Food was slowing or even declining sales and subsequent stock declines. In some cases, activist investors are pressuring companies to focus more on their core services and get rid of so-called distractions.
“You’re seeing a lot of pressure from a valuation standpoint, especially for these publicly traded companies,” said Raj Konanahalli, partner and managing director at AlixPartners. “One way to reset expectations is to really focus more on core offerings and divest or divest slower, capital-intensive or non-core businesses.”
While expansion has helped food companies build scale, enter new markets and increase sales, it has also made their businesses much more complex, Konanahalli says. If you get too big, it becomes very difficult to make quick decisions or decide how and where to invest in the business.
Of course, some of these divestitures and departures follow deals that appeared ill-advised from the start. Look no further than Keurig Green Mountain and Dr Pepper Snapple Group merged in 2018 to form Keurig Dr Pepper.
“Obviously, what came as a surprise to us was that Keurig Green Mountain acquired Dr Pepper Snapple Group in 2018 in an $18.7 billion deal to create Keurig Dr Pepper,” Barclays analysts Patrick Folan and Lauren Lieberman wrote in a note to clients in August, when the separation was announced. “At the time, the questionable logic of combining coffee and coffee was seen as both strange and a deeply left-wing deal. [carbonated soft drinks]”
(When the merger was announced in 2018, Lieberman said in a conference call with executives from both companies that he was still “scratching my head” about the logic of the deal for both players).
Keurig Dr Pepper’s shares are up 37% since the merger. The S&P 500 is up 150% over the same period.
To sell or not to sell
According to Feldman, like many industries, the packaged food industry has gone through cycles of expansion and contraction. For example, Kraft launched a snack business that includes Oreo. mondelez In 2012, just three years before its merger with Heinz.
But expanding through acquisitions in recent years has required more complex thinking and execution.
“If you go back to those glory years before 2015, the rules of the game in consumer products seem pretty simple, at least if you’re a global company,” said Bain’s Horsley. “You bought another company that was relatively similar to yours. You integrated it together, unlocked cost synergies… and that gave you good growth in both revenue and profit. But the rules of the game have changed.”
Around 2015, new startups like Chobani or BodyArmor began stealing market share from legacy brands. As a result, food giants needed to be more careful about what they bought and how they managed their portfolios, according to Horsley.
For a cautionary tale, look no further than Kraft Heinz, which was formed through a mega-merger in 2015. Investors initially welcomed the deal, but their excitement faded as the combined company’s U.S. sales began to lag. What followed was a subpoena from the Securities and Exchange Commission regarding accounting policies and internal controls, along with damage to many of its iconic brands, including Kraft, Oscar Mayer, Maxwell House and Velveeta.
With the benefit of hindsight, analysts and investors attributed much of Kraft Heinz’s downward trend to the draconian cost-cutting strategy imposed after the merger. The company’s leadership was too focused on cutting costs and not enough on reinvesting in its brands, especially at a time when consumer tastes were changing.
Since Kraft Heinz began trading as a single company, its shares have lost 73% of their value.
But not everyone thinks getting rid of underperforming brands will benefit shareholders.
“If you don’t fix the underlying talent, it doesn’t matter how many brands you sell or don’t sell,” RBC Capital Markets analyst Nik Modi said. “They’re not addressing the core problem. It’s just something to make investors happy because it looks like they’re making a change.”
One of the splits that Modi agrees with is that of Kellogg, which will split into snack-focused Kellanova and cereal-centric WK Kellogg in 2023. Last year, chocolate maker Ferrero bought WK Kellogg for $3.1 billion, while Mars closed its $36 billion acquisition of Kellanova.
From Modi’s perspective, the separation created more value for shareholders than the merged business did. Kellogg’s fast-growing snacks business was much more viable as an acquisition target without the inclusion of its stagnant cereal division. Additionally, the two strategic buyers are both private companies that do not need to worry about sharing quarterly earnings with the public.
Some investors are hoping for the same outcome for Kraft Heinz.
“The view that many people have is that the best way to create value is to split the companies and hope that you can create a Kellanova 2.0 where both assets are acquired at some point and value creation happens,” said Peter Galbo, an analyst at Bank of America Securities.
Kraft Heinz hired Kellogg’s former CEO and then Kellanova as CEO. After leaving the company, Cahillane will serve as chief executive of Global Taste Elevation, a spinoff of fast-growing brands such as Heinz and Philadelphia.
Kellogg Company President and CEO Steve Cahillane accepts the Salute to Greatness Corporate Award at the 2020 Salute to Greatness Awards Gala held at the Hyatt Regency Atlanta on January 18, 2020 in Atlanta, Georgia.
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However, according to Galbo, acquiring either company as a result of the Kraft Heinz split would be a fairly large acquisition, which would reduce the likelihood of both being acquired. The resulting uncertainty about the value created by the separation may be why the company’s largest shareholder, Berkshire Hathaway, is preparing to exit its 27.5% stake in Kraft Heinz.
Food sales are increasing
A month into the new year, the divestment trend is unlikely to slow down.
on tuesday General Mills announced He said he sold his Muir Glen brand of organic tomatoes to focus on his core brands. And last week Bloomberg reported Nestle has prepared its water unit for sale; Swiss giant too reportedly It is considering divesting luxury coffee brand Blue Bottle and underperforming vitamin brands.
If Big Food were to make any acquisitions, the deals are more likely to involve “insurgent brands,” according to Bain. The firm noted that acquisitions valued at less than $2 billion over the past five years represented 38% of total consumer product transactions, up from 16% in the period from 2014 to 2019. For example, last year PepsiCo Acquired prebiotic soda brand Poppi for $1.95 billion and Everything He bought LesserEvil popcorn for $750 million.
Konanahalli said it is more difficult to make larger deals due to the current regulatory environment. Buyers may not be strategic players, but rather private equity firms with plenty of cash on hand. For example, in January L Catterton acquired a majority stake in start-up Good Culture.
But a splashy divestiture or acquisition may not be the answer to a food group’s problems or a surefire way to boost its stock price. Sometimes good old-fashioned elbow grease can work even better.
“Just because the wind seems to be blowing in your side, that doesn’t mean you can’t work hard and turn things around,” said AlixPartners’ Konanahalli.
