’s plan to spin off its cereal and plant-based foods businesses is renewing focus on corporate breakups in the U.S. food industry.
Campbell Soup Co.
General Mills Inc.
and other food makers for years have built out their baskets of brands, acquiring newer, trend-aligned products and pushing into other supermarket segments, such as pet food. Those acquisitions have brought new growth to food companies, while the stalwart brands that built the companies have in some cases stagnated or shrunk, dragging on the overall business, analysts said.
Before the Covid-19 pandemic, sales of longtime consumer staples such as soup and cereal floundered as consumers shifted toward fresher, more convenient or healthier-seeming options. While stay-at-home orders and remote-work policies drew consumers back to nostalgic pantry staples, U.S. consumers have now returned to prepandemic lifestyles, challenging food companies to find ways to sustain growth.
As food makers battle rising costs and economic uncertainty, some could benefit by following Kellogg in breaking apart their businesses, said stock analysts and deal consultants.
“It’s hard to pivot a behemoth,” said
head of business transformation at Axiom Consulting Partners, a strategic advisory firm based in Chicago that advises companies on deals.
For nearly a century, the strategy for U.S. food makers has been to grow through deals that gave legacy brands power from scale. Since 2010, the U.S. food-and-beverage industry has done nearly 3,000 acquisitions, totaling $535 billion in deal value, according to Dealogic.
which makes Dove soap, Ben & Jerry’s ice cream and more, is already under pressure to re-evaluate its operations, with analysts saying its wide-ranging business mix is a reason why the company underperformed through the pandemic. Unilever has said it began an overhaul of its operations earlier this year.
In July, activist investor
is set to join Unilever’s board of directors, a move that analysts expect will accelerate change at the company. The Wall Street Journal reported that Unilever won’t pursue major acquisitions or sales soon.
Growing through deals has enabled food companies to strengthen relationships with retailers, and increase purchasing power, helping reduce expenses and creating opportunities for expansion, executives have said. Food makers have leaned on the cash generated by established but slower-growing brands to reinvest in acquisitions or faster-growing parts of the business.
General Mills, best known for its Cheerios cereal, also sells Progresso soup and is in the pet-food business. Pet food a few years ago became the biggest division for Mars Inc., the maker of M&Ms, candy bars and chewing gum, and Mars said this week that the head of its pet-care business would become the company’s next chief executive. Campbell now gets about half of its revenue from snacks.
In 2018, Campbell transformed itself through the purchase of Snyder’s-Lance pretzels and chips, which it combined with its Pepperidge Farm cookie and Goldfish cracker businesses. Activist investment firm Third Point LLC pushed Campbell to break up its business, arguing that more focused operations would be more attractive to investors. Campbell sold off its smaller international and fresh-foods businesses, but executives resisted a bigger split, warning such a move would be costly and risky.
Analysts since then have asked whether Campbell should further break off businesses or brands that are holding it back.
“The goal here is not ‘shrink our way further to greatness,’ ” Campbell Chief Executive
said at the company’s investor day in December, responding to an analyst’s question about potential divestitures. Mr. Clouse has maintained that Campbell’s snack brands can improve profitability and that its soup business is gaining traction among a younger crowd.
Campbell’s U.S. soup sales fell in eight of the nine fiscal years leading up to the pandemic. But the domestic soup business began showing signs of improvement in the fall of 2019 after increased investment.
Campbell said industrywide U.S. soup consumption rose 14% in the 13 weeks ended May 1 from three years ago.
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Axiom’s Mr. Sorensen said Mars, a privately held company with $45 billion in annual sales, could be a good candidate for a split. Mars’s legacy gum business, acquired through a $23 billion deal with Wrigley in 2008, has struggled for years.
Meanwhile, Mars has turned its attention to the household-pet category, with deals in pet treats and veterinary companies. In January, Mars bought pet-food seller NomNomNow Inc.
Mars didn’t immediately comment.
For other food companies, such as General Mills and Campbell Soup, Mr. Sorensen said a split could erode profitability by losing the benefits of large-scale purchasing power, shared software systems and other functions.
General Mills, which sells products as varied as cereal, soup, cookie dough and dog food, has changed how it generates over 15% of its sales compared with four years ago. It started with an $8 billion deal to buy Blue Buffalo dog food in 2018, and the company has also sold off some older brands such as Hamburger Helper.
a partner at the West Monroe consulting firm and a consumer-product-company adviser, said General Mills and other food makers will be watching Kellogg’s split and should consider similar moves. “It’s shortsighted not to,” he said. “Specialization and focus pay off.”
General Mills didn’t immediately comment.
said this week that the conglomerate model can still work in the food industry. Scale brings benefits, he said, but for Kellogg, splitting up will make its businesses more agile and allow them to aim for financial targets that fit their distinct markets.
“We’ve shifted resources into growth businesses, notably snacks and emerging markets,” Mr. Cahillane said. If cereal and plant-based foods were independent companies, they wouldn’t have to compete with Kellogg’s faster-growing brands such as Cheez-Its for marketing and innovation dollars, he said.
J.P. Morgan Securities analysts said profit margins for Kellogg’s planned snack company could decline from losing the shared services and scale the business has under the company’s current structure, plus the cash it will spend on the separations.
“We are generally skeptical of breakup transactions like these,” said J.P. Morgan Securities analyst
Write to Annie Gasparro at [email protected]
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