Overcoming a Regressing Economy
July 14, 2008 - As prices continue to rise, and consumer spending decreases, what are consumer goods (CG) companies doing to tighten their own belts? Two trends of late -- divesting and acquiring brands -- seem diametrically opposed, but each strategy affords opportunity. On the one hand, selling an underperforming or misaligned brand enables a company to concentrate on its core brands. While on the other hand, acquiring and expanding a product portfolio can increase revenue and market share.
Brand Concentration
It may be hard to embark on an idea, build it up and give it away, but historical data tends to show that concentration on the products that bring most revenue is essential to maintaining growth.
Kraft Foods Inc. announced a definitive agreement in 2007 to merge its Post cereals business into Ralcorp Holdings Inc., a company in private-label and frozen bakery products. The transaction was deemed tax-efficient and worth approximately $2.6 billion to Kraft and its shareholders. The Post cereals business had net revenues of about $1.1 billion in 2006 and includes such popular cereals as Honey Bunches of Oats, Pebbles, Shredded Wheat, Selects, Grape Nuts and Honeycomb. The brands in this transaction are distributed primarily in North America.
"This is a transaction where everyone wins -- Kraft, Ralcorp, our respective shareholders and employees," says Irene Rosenfeld, Kraft Chairman and CEO. "Ralcorp has an excellent opportunity to continue building the Post brands, which have been known and loved by consumers for generations. Kraft shareholders will benefit from the future value created by combining the Post brands with Ralcorp. And Kraft is taking yet another step in the transformation plan that we laid out in February to restore the company to reliable growth."
The Kraft spin-off was aimed to benefit both companies in many ways, but what was the No. 1 benefit for Kraft? It will better enable the company to focus its resources on its growth strategy. On June 25, 2008, Kraft commenced its exchange offer related to the split-off transaction of its Post cereals business.
Along the same lines, Del Monte Foods Company plans to sell its StarKist brand and seafood business to Dongwon Enterprise Co. Ltd. for $363 million, subject to a working capital adjustment. Rick Wolford, chairman and CEO of Kraft called it a "significant step in the realignment of our portfolio toward higher margin, higher growth businesses."
Wolford believes that this action will immediately help improve Del Monte's margin structure, eliminate a source of earnings volatility and reduce its debt leverage. The company also recently announced a sharpened strategy targeted to accelerate growth by investing a faster growing, value-added, higher margin branded businesses, supported by recent marketing-centric organization realignment.
Wolford continued, "Given the unique dynamics of our seafood business, including its heavy dependence on a single input cost and participation in a comparatively lower growth category, StarKist was no longer an ideal fit for Del Monte, given our sharpened strategic focus going forward. That said, StarKist is clearly an extraordinary business with very strong brand recognition and a loyal consumer base, which make it an attractive asset for Dongwon."
Last month, The Procter & Gamble Company (P&G) announced the signing of a definitive agreement to merge the Folgers coffee business into The J. M. Smucker Company in an all-stock reverse Morris Trust transaction valued at approximately $3.3 billion, including the assumption of an estimated $350 million of Folgers debt.
"Strategically, P&G has exited certain categories in order to focus on our core businesses and enhance the growth profile of the portfolio," said A.G. Lafley, chairman of the board and CEO of P&G. "The structure and terms of this transaction deliver on the goals we stated for the separation of the coffee business from P&G. This transaction maximizes the after-tax value of the coffee business for P&G shareholders and minimizes earnings per share dilution."
Acquiring Help
Brand Concentration
It may be hard to embark on an idea, build it up and give it away, but historical data tends to show that concentration on the products that bring most revenue is essential to maintaining growth.
Kraft Foods Inc. announced a definitive agreement in 2007 to merge its Post cereals business into Ralcorp Holdings Inc., a company in private-label and frozen bakery products. The transaction was deemed tax-efficient and worth approximately $2.6 billion to Kraft and its shareholders. The Post cereals business had net revenues of about $1.1 billion in 2006 and includes such popular cereals as Honey Bunches of Oats, Pebbles, Shredded Wheat, Selects, Grape Nuts and Honeycomb. The brands in this transaction are distributed primarily in North America.
"This is a transaction where everyone wins -- Kraft, Ralcorp, our respective shareholders and employees," says Irene Rosenfeld, Kraft Chairman and CEO. "Ralcorp has an excellent opportunity to continue building the Post brands, which have been known and loved by consumers for generations. Kraft shareholders will benefit from the future value created by combining the Post brands with Ralcorp. And Kraft is taking yet another step in the transformation plan that we laid out in February to restore the company to reliable growth."
The Kraft spin-off was aimed to benefit both companies in many ways, but what was the No. 1 benefit for Kraft? It will better enable the company to focus its resources on its growth strategy. On June 25, 2008, Kraft commenced its exchange offer related to the split-off transaction of its Post cereals business.
Along the same lines, Del Monte Foods Company plans to sell its StarKist brand and seafood business to Dongwon Enterprise Co. Ltd. for $363 million, subject to a working capital adjustment. Rick Wolford, chairman and CEO of Kraft called it a "significant step in the realignment of our portfolio toward higher margin, higher growth businesses."
Wolford believes that this action will immediately help improve Del Monte's margin structure, eliminate a source of earnings volatility and reduce its debt leverage. The company also recently announced a sharpened strategy targeted to accelerate growth by investing a faster growing, value-added, higher margin branded businesses, supported by recent marketing-centric organization realignment.
Wolford continued, "Given the unique dynamics of our seafood business, including its heavy dependence on a single input cost and participation in a comparatively lower growth category, StarKist was no longer an ideal fit for Del Monte, given our sharpened strategic focus going forward. That said, StarKist is clearly an extraordinary business with very strong brand recognition and a loyal consumer base, which make it an attractive asset for Dongwon."
Last month, The Procter & Gamble Company (P&G) announced the signing of a definitive agreement to merge the Folgers coffee business into The J. M. Smucker Company in an all-stock reverse Morris Trust transaction valued at approximately $3.3 billion, including the assumption of an estimated $350 million of Folgers debt.
"Strategically, P&G has exited certain categories in order to focus on our core businesses and enhance the growth profile of the portfolio," said A.G. Lafley, chairman of the board and CEO of P&G. "The structure and terms of this transaction deliver on the goals we stated for the separation of the coffee business from P&G. This transaction maximizes the after-tax value of the coffee business for P&G shareholders and minimizes earnings per share dilution."
Acquiring Help
In June 2008, the Campbell Soup Company acquired the Wolfgang Puck soup business from Country Gourmet Foods. Separately, Campbell entered into a master licensing agreement with Wolfgang Puck Worldwide Inc. for the use of the Wolfgang Puck brand on soup, stock and broth products in North American retail locations, with an option to extend the brand into other related categories and channels. Wolfgang Puck is known for its organic soup brands in the United States.
Douglas R. Conant, Campbell's president and CEO, says, "We intend to strengthen and grow our business by pursuing strategic acquisitions and partnerships that complement our focus on our core categories of simple meals, baked snacks and healthy beverages. As the world's leading soup company, Campbell must expand its role in the organic segment of the market. Combining Wolfgang's brand and reputation with Campbell's distribution and marketing capabilities creates the opportunity for significant growth."
In April of this year, PepsiCo acquired V Water, a brand of vitamin water from the UK. Both companies made a commitment to build a strong balanced beverage portfolio.
Garrett Quigley, the general manager for PepsiCo UK and Ireland, believes that V Water provides PepsiCo with a strong platform for expansion into a fast-growing market and reflects PepsiCo's global commitment to transforming its portfolio of products and extending its range of healthier beverages. Quigley continues, "The UK is a key market for us, and we are extremely excited about developing a relationship with V Water in the UK, which will enhance and contribute to the long-term growth of the V Water brand."
PepsiCo also announced that it reached an exclusive bottling agreement with Britvic plc to manufacture, sell and distribute the V Water products in Great Britain. Britvic is PepsiCo's exclusive bottler in Great Britain for the Pepsi, 7Up and Gatorade brands. The addition of the V Water brands to the portfolio further strengthens a close and long-standing PepsiCo-Britvic relationship.
In the press release announcing the acquisition, PepsiCo says that its transformation strategy is focused on launching and acquiring new products that reflect consumer demand for healthier, nutritious food and drink. The purchase of V Water follows PepsiCo's recent announcement of plans to acquire Russia's largest juice company, Lebedyansky, and the 2007 purchases of U.S.-based Naked Juice and Sandora, the leading juice company in Ukraine.
Decisions, Decisions
In a struggling economy, more and more companies are seriously re-evaluating the performance of their product portfolios. Many of the companies that show steady sales, or even growth, are those that are making quick and crucial decisions to either divest or acquire brands and businesses. Companies like P&G, Kraft, Del Monte, Campbell Soup Company and PepsiCo have all taken action based on what's best for their bottom lines. And, as hard as it is to accept change, it will be interesting to see what this means for those acquired and divested products in the future when the economy is back on the rise.
Douglas R. Conant, Campbell's president and CEO, says, "We intend to strengthen and grow our business by pursuing strategic acquisitions and partnerships that complement our focus on our core categories of simple meals, baked snacks and healthy beverages. As the world's leading soup company, Campbell must expand its role in the organic segment of the market. Combining Wolfgang's brand and reputation with Campbell's distribution and marketing capabilities creates the opportunity for significant growth."
In April of this year, PepsiCo acquired V Water, a brand of vitamin water from the UK. Both companies made a commitment to build a strong balanced beverage portfolio.
Garrett Quigley, the general manager for PepsiCo UK and Ireland, believes that V Water provides PepsiCo with a strong platform for expansion into a fast-growing market and reflects PepsiCo's global commitment to transforming its portfolio of products and extending its range of healthier beverages. Quigley continues, "The UK is a key market for us, and we are extremely excited about developing a relationship with V Water in the UK, which will enhance and contribute to the long-term growth of the V Water brand."
PepsiCo also announced that it reached an exclusive bottling agreement with Britvic plc to manufacture, sell and distribute the V Water products in Great Britain. Britvic is PepsiCo's exclusive bottler in Great Britain for the Pepsi, 7Up and Gatorade brands. The addition of the V Water brands to the portfolio further strengthens a close and long-standing PepsiCo-Britvic relationship.
In the press release announcing the acquisition, PepsiCo says that its transformation strategy is focused on launching and acquiring new products that reflect consumer demand for healthier, nutritious food and drink. The purchase of V Water follows PepsiCo's recent announcement of plans to acquire Russia's largest juice company, Lebedyansky, and the 2007 purchases of U.S.-based Naked Juice and Sandora, the leading juice company in Ukraine.
Decisions, Decisions
In a struggling economy, more and more companies are seriously re-evaluating the performance of their product portfolios. Many of the companies that show steady sales, or even growth, are those that are making quick and crucial decisions to either divest or acquire brands and businesses. Companies like P&G, Kraft, Del Monte, Campbell Soup Company and PepsiCo have all taken action based on what's best for their bottom lines. And, as hard as it is to accept change, it will be interesting to see what this means for those acquired and divested products in the future when the economy is back on the rise.