Big Food gets leaner with divestitures and breakups as consumers turn away from packaged snacks

Big Food is slimming down.

As each consumers and regulators push again towards ultra-processed meals, the businesses that make them have been splitting up or divesting iconic manufacturers. Final 12 months, Unilever spun off its ice cream enterprise into The Magnum Ice Cream Firm. Kraft Heinz is making ready to interrupt up later this 12 months, undoing a lot of the merger cast greater than a decade in the past by Warren Buffett’s Berkshire Hathaway and personal fairness agency 3G Capital. And Keurig Dr Pepper is planning the same break up after it finishes its acquisition of JDE Peet’s.

In 2024, almost half of mergers and acquisitions exercise within the client merchandise business got here from divestitures, in line with consulting agency Bain. Over the following three years, 42% of M&A executives within the client merchandise business are making ready an asset on the market, a Bain survey discovered.

After all, the development is not confined to simply the patron packaged items business. Industrial corporations like GE and Honeywell have pursued their very own breakups in recent times. It is occurring too in legacy media; Comcast spun off lots of its cable property into CNBC proprietor Versant, whereas Warner Bros. Discovery is planning to spin off its cable networks later this 12 months as Netflix acquires its streaming and studios division.

“In most of the areas that we’re seeing such a exercise, there are numerous very fierce aggressive pressures which can be making it tougher to function,” mentioned Emilie Feldman, a professor at The Wharton Faculty on the College of Pennsylvania.

The squeeze on packaged meals and beverage corporations comes from decrease demand, which has led to shrinking quantity for a lot of of their merchandise. To turn round their companies and win again traders, they’re relying on dumping underperforming manufacturers.

February will deliver each quarterly earnings reviews and shows on the annual CAGNY Convention, providing traders extra alternatives to listen to about meals executives’ plans for his or her portfolios. Corporations to observe embrace Kraft Heinz, which may share extra particulars on its upcoming break up, and Nestle, which is contemplating promoting off a number of manufacturers in its portfolio.

For greater than a decade, consumers have been shopping for fewer groceries from the interior aisles of the grocery retailer, as an alternative specializing in the outer aisles with recent produce and protein. The pandemic served as the exception, as many consumers returned to the manufacturers that they knew. Nevertheless, worth hikes and “shrinkflation” as life eased again to regular largely erased that shift in habits.

Extra not too long ago, regulators, emboldened by the “Make America Wholesome Once more” agenda espoused by Well being and Human Providers Secretary Robert F. Kennedy Jr., have put each extra strain and a much bigger highlight on processed meals. And the rise of GLP-1 medication to fight diabetes and weight problems have meant a few of meals corporations’ key consumers have misplaced their urge for food for the candy and salty snacks that they used to eat.

As a share of total spending, the patron packaged items business has held onto its market share. However the greatest corporations are shedding clients to upstart manufacturers or private-label merchandise, in line with Bain accomplice Peter Horsley.

On common, about 35% of huge client merchandise corporations’ portfolios are in classes with greater than 7% development, Horsley mentioned. For comparability, over half of private-label manufacturers are in high-growth classes, like yogurt and practical drinks, and for rebel manufacturers, it is even increased.

For Big Food, the outcome has been slowing — and even declining — gross sales, adopted by inventory declines. In some instances, activist traders push for corporations to focus extra on their core choices and to dump so-called distractions.

“You are seeing a variety of strain from a valuation standpoint, particularly for these publicly traded corporations,” mentioned Raj Konanahalli, accomplice and managing director of AlixPartners. “One method to reset expectations is to actually type of focus extra on the core choices and dispose or divest the slower, capital-intensive or non-core companies.”

Whereas getting greater helped meals corporations develop scale, enter new markets and develop their gross sales, it additionally made their companies far more complicated, in line with Konanahalli. Change into too large, and it turns into too troublesome to make selections rapidly or to resolve how and the place to speculate again into the enterprise.

To make certain, a few of these divestitures and breakups observe offers that appear to have been ill-advised from the beginning. Look no additional than the merger of Keurig Inexperienced Mountain and Dr Pepper Snapple Group in 2018, to type Keurig Dr Pepper.

“Frankly the shock to us was the choice again in 2018 when Keurig Inexperienced Mountain acquired the Dr Pepper Snapple Group in an $18.7 billion deal to create Keurig Dr Pepper within the first place,” Barclays analysts Patrick Folan and Lauren Lieberman wrote in a notice to purchasers in August when the breakup was introduced. “On the time, it was seen as each odd and a really left discipline deal with the questionable logic of mixing espresso and [carbonated soft drinks].”

(When the merger was introduced in 2018, Lieberman mentioned on a convention name with executives from each corporations that she was nonetheless “scratching my head” in regards to the logic of the deal for each gamers).

Shares of Keurig Dr Pepper have risen 37% because the merger. The S&P 500 has climbed 150% over the identical interval.

Like many industries, the packaged meals business has gone via cycles of growth and contraction, in line with Feldman. For instance, Kraft spun off a snacking enterprise that features Oreos into Mondelez in 2012, simply three years earlier than it merged with Heinz.

Nevertheless, in recent times, increasing via acquisitions has required extra refined considering and execution.

“Should you return to these glory years of pre-2015, the foundations of the sport in client merchandise felt pretty easy, no less than in case you’re a world firm,” Bain’s Horsley mentioned. “To procure one other firm that was comparatively much like you. You built-in it collectively, you pulled out the price synergies … and then that gave you good top-line and bottom-line development. However the guidelines of the sport have modified.”

Round 2015, upstarts like Chobani or BodyArmor started stealing market share from legacy manufacturers. In consequence, meals giants wanted to develop into extra considerate about what they had been buying and how they had been managing their portfolios, in line with Horsley.

For a cautionary story, look no additional than Kraft Heinz, fashioned by a mega-merger in 2015. Traders initially cheered the deal, however their enthusiasm waned as the mixed firm’s U.S. gross sales started lagging. Then got here write-downs of lots of its iconic manufacturers, like Kraft, Oscar Mayer, Maxwell Home and Velveeta, along with a subpoena from the Securities and Change Fee associated to its accounting insurance policies and inner controls.

With the advantage of hindsight, analysts and traders have blamed a lot of Kraft Heinz’s downward spiral on the brutal cost-cutting technique imposed after the merger. The corporate’s management was too targeted on slashing prices and not sufficient on investing again into its manufacturers, notably at a time when client tastes had been altering.

Since Kraft Heinz started buying and selling as one firm, shares have tumbled 73%.

However not everyone seems to be bought that eliminating underperforming manufacturers will profit shareholders.

“Should you do not repair the underlying functionality, it does not matter what number of manufacturers you promote or do not promote,” RBC Capital Markets analyst Nik Modi mentioned. “They are not addressing the foundation downside. It is simply one thing to make traders joyful as a result of it looks like they’re making a change.”

One breakup that Modi agrees with is that of Kellogg, which break up into the snacks-focused Kellanova and cereal-centric WK Kellogg in 2023. Final 12 months, chocolatier Ferrero snapped up WK Kellogg for $3.1 billion, whereas Mars closed its $36 billion acquisition of Kellanova.

From Modi’s perspective, the breakup created extra worth for shareholders than the mixed enterprise did. Kellogg’s high-growth snack enterprise was far more viable as an acquisition goal with out the sluggish cereal division connected. Plus, the 2 strategic patrons are each privately held corporations that do not have to fret about sharing quarterly earnings with the general public.

Some traders are hoping for a similar end result with Kraft Heinz.

“The view that many have had is one of the best ways to create worth is break up the businesses and hope which you could create a Kellanova 2.0 the place each entities get acquired sooner or later down the road, and that is the place worth creation occurs,” mentioned Peter Galbo, analyst at Financial institution of America Securities.

Kraft Heinz employed Steve Cahillane, the previous CEO of Kellogg and then Kellanova, as its chief government. As soon as the corporate separates, Cahillane will serve as chief government of International Style Elevation, the placeholder title for the spinoff with high-growth manufacturers like Heinz and Philadelphia.

However buying both firm ensuing from the Kraft Heinz break up can be a reasonably large acquisition, making it much less possible that both is snapped up, in line with Galbo. And the ensuing uncertainty in regards to the worth creation from the breakup is possibly why Berkshire Hathaway, the corporate’s largest shareholder, is making ready to exit its 27.5% stake in Kraft Heinz.

A month into the brand new 12 months, it is unlikely that the divestiture development will decelerate.

On Tuesday, Common Mills introduced that it’s promoting its Muir Glen model of natural tomatoes to concentrate on its core manufacturers. And final week, Bloomberg reported that Nestle is making ready the sale of its water unit; the Swiss big can be reportedly contemplating offloading upscale espresso model Blue Bottle and its underperforming vitamin manufacturers.

And if Big Food is making any acquisitions, the offers usually tend to contain “rebel manufacturers,” in line with Bain. During the last 5 years, acquisitions with a price of lower than $2 billion represented 38% of whole client merchandise offers, up from 16% within the interval from 2014 to 2019, the agency mentioned. For instance, final 12 months, PepsiCo purchased prebiotic soda model Poppi for $1.95 billion and Hershey snapped up LesserEvil popcorn for $750 million.

Larger offers are tougher to return by due to the present regulatory atmosphere, Konanahalli mentioned. Patrons won’t be strategic gamers, however as an alternative personal fairness corporations with loads of money readily available. For instance, in January, L Catterton purchased a majority stake in cottage cheese upstart Good Tradition.

However a flashy divestiture or acquisition won’t be the answer to a meals conglomerate’s woes — or a surefire method to raise the inventory worth. Typically, good old style elbow grease can work even higher.

“Simply because it looks like the wind is blowing your approach, it doesn’t suggest which you could’t put in some laborious work and turn issues round,” AlixPartners’ Konanahalli mentioned.