FMCG

by Greg Thain

  2010

  On 19th January 2010, Kraft Foods announced the terms of its final offer for Cadbury, whose Board recommended acceptance. By early February it was all over, at a cost of around $18.5 billion. Many observers thought the price ‘full’, if not topside. Cadbury held a 10% global confectionery market share, second only to the recently merged Mars-Wrigley, and held the number one or two position in almost half of the world’s largest confectionery markets. Cadbury had only recently come into play as a realistic target for Kraft. It split from the North American beverage unit, Dr Pepper Snapple Group, in 2008, a move that had been prompted by the arrival on the scene of activist shareholder Nelson Peltz. He was also on Irene’s case, along with Heinz, Wendy’s and others.

  Irene approached the Cadbury chairman in August 2009 and, after a short but passionate defence by Cadbury, had triumphed in landing her prize. This made Kraft the world’s second-largest food and beverage company with a turnover of $49 billion. Cadbury, which contributed over $9 billion to the top line, was a chocolate and chewing gum company that fitted extremely well with Kraft’s existing Suchard-dominated chocolate business. Kraft only had to sell off two small Cadbury units in Poland and Romania for anti-trust reasons. Cadbury added two billion-dollar brands (Cadbury chocolate and Trident gum) to Kraft’s existing seven, along with another 30 worth $100 million or more. This expanded Kraft’s roster of second-tier brands to over 70.

  Perhaps the most important thing Cadbury brought to the party was its international profile. Because of its long history within the old British Empire, Cadbury had built up a dominant position in the Indian market. It had over 70% market share and was long established as one of the country’s top packaged goods companies; with exceptionally strong local management and a route to market that covered over a million retail outlets. Cadbury’s acquisition of Adams in 2004 had given it exceptionally strong chewing gum businesses in Mexico and Latin America with a solid number-two position in the US. After the Cadbury acquisition, Kraft Foods’ developing markets group accounted for nearly a quarter of the company’s sales. As Europe added another 17%, the geographic spread of the Kraft business was changing fundamentally. Of Kraft’s now global spread of 223 factories, 80% were located outside the US. This is a crucial piece of strategic information for the company to consider as it plans for the future.

  Confectionery, now run as a discrete segment, was Kraft’s largest, accounting for nearly 28% of sales, with biscuits number two at 22%. The food side of Kraft had been shorn of its growing and profitable frozen pizza business to partially fund Cadbury. DiGiorno, Tombstone and Jack’s brands in the US and Delissio in Canada were sold to Nestlé in March 2010 for $3.7 billion. Tombstone and the brands that grew out of it had been one of Kraft’s best-ever acquisitions and its departure would put more pressure on the rest of Kraft’s US foods businesses to deliver.

  Within the year, Kraft actually put up a better performance than of late, growing volume in nearly all its segments. An exception was the distinctly stale cheese unit that lost nearly another 5% of volume – it was not helped by prices going up by 3%. The US grocery unit also declined over 3%, with losses coming in almost all product categories. However, with US beverages and convenience meals both putting on over 3%, there were signs that the more disciplined approach brought in by Irene Rosenfeld was paying dividends. However, her newly expressed revised strategy left no room for doubt where the future lay: ‘. . . we are seeking to build a global snacks powerhouse with an unrivalled portfolio of brands people love. Our future is centred on three strategies: to delight global snacks consumers, to unleash the power of our Iconic Heritage Brands and to create a performance-driven, values-led organisation’.

  2011

  The 10.5% increase in sales to $54.4 billion was headlining a wearily familiar tale of mostly flat to declining volumes – up only 0.6%, more than entirely owing to the Cadbury-dominated Kraft Foods developing markets division – and increased prices, up an eye-watering 6% on average. Kraft company policy was to pass on to the consumer any and all increases in input costs with a bit added in on top just for good measure. This is a risky strategy in our view, especially in categories that have a significant private label presence - retailers may not be so keen to follow suit. The riskiness of this approach is compounded by the cutting back of an already ungenerous advertising budget of only 4.4% of sales, down by 0.2% in the year. However, twelve brands each had sales that topped $1 billion (Oreo, Nabisco, LU, Milka, Cadbury, Trident, Jacobs, Maxwell House, Philadelphia, Kraft, Oscar Mayer and Tang).

  The highlight of the year was the performance of Kraft Foods in developing markets. It added over $2 billion in sales to jump to 27% of total company sales. Progress came in all regions, albeit aided by an extra month of Cadbury sales and a 53-week accounting year. Organic volume was up a very healthy 3.9%. Cadbury’s developing markets profile had been the primary reason for Kraft buying the British company, so this was an early vindication of the acquisition. Kraft Foods Europe, also heavily strengthened by the Cadbury acquisition, added a further $1.7 billion to the top line with volume up a more sedate 2%, which was still good considering prices had gone up by over 4%.

  Back in the US the picture was different. Volume declined across the board even as prices went up. The biggest problem area was in US beverages, where revenues declined over 6% thanks to a major bust-up with Starbucks. According to Kraft, Starbucks unilaterally decided to end their twelve-year-long agreement for Kraft to distribute Starbucks products in grocery stores. Starbucks had offered Kraft $750 million in August 2010 to terminate the partnership, but Kraft had declined and taken the matter to the courts. As things turned nasty, Starbucks alleged that Kraft failed to promote its brands aggressively in stores. Kraft contested this view, as it had extended distribution of Starbucks products from just 4,000 food stores in twelve states to over 40,000 stores in all 50 states and Canada. Annual sales had increased ten-fold to about $500 million a year. The row had been coming for a while as both Kraft and Starbucks had begun competing in the area of the Tassimo coffee system. Starbucks had withdrawn its Starbucks-branded coffee and tea discs for the Tassimo machines (for which Tassimo had exclusivity), prior to launching its own system. Just to add fuel to the fire, Starbucks launched VIA instant coffee and did not distribute through Kraft. The eventual court ruling against Kraft was a big loss that could put at risk its coffee category captaincy status with several big US retailers.

  However, this storm in a coffee cup was not going to be Irene’s problem much longer. The company announced in August 2011 that it was going to split into two. Irene would pilot the new Global Snacks Business (soon to be named Mondelēz International, Inc.) which would consist of Kraft Foods Europe, Kraft Foods Developing Markets and the North American snacks and confectionery businesses with Tang being thrown in for good measure. The North American Grocery Business (which would retain the Kraft name) would consist of the cheese, beverages, convenience meals and grocery segments along with the Planters nuts and Corn Nuts brands. At this stage there were question marks over European brands like Dairylea and Jacobs coffee, which seemed to fit into neither. Mondelēz would get around $35 billion of the sales and all of the current growth while Kraft was virtually back to where it had been before the Philip Morris acquisition.

  While there was little surprise at the splitting of a growing, international snacks and confectionery business from a static, North American cheese, meat and condiments business – it had long been advocated by the ever-present Nelson Peltz – there was some surprise expressed at the timing. Cadbury had not even been fully integrated by this point. But then, Kraft was used to major reorganisations. After all, it had done little else since 1988.

  2012

  With sales in 2012 of over $18 billion, the newly-reconstituted Kraft Foods Group was easily big enough to win a place in this book in its own right. It was larger than Kellogg’s, Heinz, General Mills and Colgate. And, although Mondelēz International claimed to be the
one carrying forward the ‘values of our legacy organisation’, the Kraft Foods Group was very much back to its roots as a US-centric cheese and cooked meats company (the two categories accounting for nearly half of the new company’s sales). As such, Kraft Foods Group was in the business of managing big customers: 25% of sales went to Wal-Mart, with another 17% going to its next four biggest customers. But the company did not come out of the demerger completely clean. There was a $650 restructuring programme to oversee, plus the ongoing court battle with Starbucks. Notably, any cash awarded to the company via arbitration would have to be handed over to Mondelēz International.

  Of course, the demerger had not magically changed any of the sector, market, or competitive dynamics facing the company. So it was little surprise that sales were down nearly 2%. One cannot help thinking that, after a good year in 2011, the company was paying for decisions taken or deferred to boost the numbers prior to the split. Trade inventory reductions were held to blame for 0.7% of the loss. Within the product sectors, all but one were essentially flat, albeit showing the usual pattern of prices up and volumes down. The outlier was beverages, down by 9%, of which only one-third could be accounted for by the loss of the Starbucks business.

  Over on planet Mondelēz International, $35 billion came in sales. Over 80% came from outside North America (45% from developing markets). There was a very different flavour. Operating in the much sexier categories of biscuits (27% of sales), chocolate (another 27%) and gum and candy (15% of sales), and with no customer anywhere accounting for over 10% of total sales (the five largest accounting for only 15%), the company had much more freedom to be creative. Unfortunately, this extra latitude failed to apply to the writers of the company strategy. They, it appeared, were trying for a record: the highest use of generic, management-speak phrases.

  Mondelēz International, in case we had forgotten, was a global snacks powerhouse, on a mission to Create Delicious Moments of Joy. But its five-point strategy had a sense of the obvious about it:

  Unleash the Power of Our People (We would love to see just one company set out to ‘Restrain and focus our team’)

  Transform Snacking (What this actually referred to was the old standby of Make Big Brands Bigger)

  Revolutionize Selling

  But although this sounds promising, the strategy eventually spelt out revealed proposals that were a little more prosaic: ‘we plan to expand and further develop best-in-class sales and distribution capabilities across our key markets in both developing and developed markets. And:

  Drive Efficiency to Fuel Growth (As everyone does)

  Protect the Well-being of our Planet (As everyone does)

  This new company with its new model and new strategy needed to be good because the shareholders’ barrel of funds was being scraped deep to create it. Slightly over $1 billion had already been spent on the spin-off. Another near billion was earmarked for the newly announced 2012–2014 restructuring program. Both these were on top of the $1.3 billion already spent integrating Cadbury. While this last programme was claimed to have exceeded its savings targets a year early, one hoped there was enough fat left to pay back the 2012–2014 effort.

  After all the hoopla of the spin-off and the countless hours spent crafting The Strategy, it would have been nice to see some early unleashing of the claimed potential. A 2.2% decline in top-line sales was not what the doctor had ordered. To be fair, the company made progress, although more by raising prices than by driving volume growth, but all the gains and more were wiped out by foreign currency movements. Mondelēz International, like many another global company, treats currency movements its reports as a perfectly acceptable excuse for flat or flattening top-line sales (while often and conveniently glossing over their impact when they boost the top line). But the company was deliberately constructed as US-based and, although it reports in US dollars, it has over 80% of its sales outside of the US. So currency movements are a fact of life, not an act of God. Buying Mondelēz International shares could effectively become a bet on the movement of the US dollar against a global basket of currencies over time. If the dollar is in for a prolonged good run, Mondelēz International is not.

  2012 represented the only year in its existence that Mondelēz International would report the results of a company that operated in over 160 countries, across multiple categories in the three somewhat unhelpful buckets of: developing markets, Europe and North America. For 2013, the company would reorganise itself into five regions: Asia Pacific, Eastern Europe, Middle East & Africa, Europe, Latin America and North America. Whether Mondelēz International would report these new regions for very long became questionable by mid-2013. Nelson Peltz was in the business press, touting a merger between Mondelēz International and PepsiCo, with the soft drinks component being spun off to create what would presumably now be a global snacks super-powerhouse.

  What Is Its DNA?

  We are going to go out on a limb here and say that Mondelēz International Inc. has not quite found for itself a DNA that is truly distinctive. The sequence of colossal mergers, acquisitions and splits since 1988 has created the most modern of companies: one built and remodelled more by Philip Morris and Wall Street than by a definable management culture, although the Irene Rosenfeld stamp is surely visible. But how much of that stamp is ingrained enough to survive her eventual replacement remains unknown. Mondelēz International is now a cohesive organisation with a clear focus, but, as we noted above, the form and function of its DNA has not yet truly emerged.

  Summary

  The story of Kraft Foods/Mondelēz International is unique, at least for the companies we have been describing in this book. No other company has been through such a prolonged period of major upheaval. It has been progressively combined and re-combined with other long-established packaged goods giants, each with their own histories, competencies and operating cultures. In many ways, however, we believe this uniqueness will fade over time, not because Kraft will become more like other companies but because other companies will become more like Kraft. As retailers get ever larger and more powerful, and in the absence of a laser-accurate niche focusing, size has become a crucial strategic component for the large FMCG companies. Be big or be unique.

  Looking to the future, more mergers, takeovers and splits are inevitable and the Kraft Foods/Mondelēz International experience will provide a valuable pointer as to whether sheer size can generate supplier-strength as well as it can with its retail equivalent. An analysis of the profit of the major FMCG companies worldwide would indicate that only the very largest companies by size are able to maintain the high margins that shareholders demand and expect.

  L’Oréal

  Where Did They Come From?

  Of all the world’s top consumer goods businesses, L’Oréal is perhaps still the closest to the vision of its founder. Eugène Schuller was born into very modest circumstances, as the son of a pastry cook. By the age of four, before school, he was buttering tart tins and shelling almonds. These were the beginnings of a lifelong, ferocious work habit - clocking 6,000 working hours a year, over 16 hours a day, 365 days a year – that would be the driving force of his business. After finishing school, Eugène entered the Institute for Applied Chemistry in Paris, and paid his way by working nightshift as a pâtissier. He qualified top of his class. An academic career beckoned for the bright, hard-working chemist, and an instructor’s post at the Sorbonne initiated what seemed an inevitable rise to a professorship. But he found academia dreary, and left for a job at a maker of chemical products, the Pharmacie Centrale de France. Eugène soon became, first, the head of their research laboratory and then head of chemical services.

  In 1905, Eugène’s life, and the future global cosmetics industry, changed. He was visited by a hairdresser anxious to pay someone 50 Francs a month to find a safe and reliable hair dye. Eugène eagerly grabbed the project as something to engage his evenings. In those days, cosmetics was a tiny industry in which serious chemists had no interest. It was widely conside
red to be a frippery used mostly by women of questionable morals. However Eugène found the challenge interesting. Hair dyes at the time were either safe or effective, but never both. Their use could be spotted at a hundred paces. Eugène deconstructed current hair dyes to discover their active and harmful components then, in his kitchen, experimented with new formulae. He would then test out, working at a hairdresser’s salon from 8 to 11pm.

  By 1907, Eugène had cracked the problem and immediately saw the potential. The hairdresser was bought off and Eugène launched his new hair dye under the brand name Auréole. After selling Auréole to many Parisian hairdressers, in 1909 he founded a company to manufacture and sell the product. Its original name, Société Francaise des Teintures Inoffensives pour Cheveux (literally translated French Society for Inoffensive Tinctures of Hair), later gave way to L’Oréal. To publicise his venture, Eugène contributed articles to a magazine called Coiffure de Paris. This was primarily to get a cheaper (contributor’s) rate for advertising, of which he was a prodigious user. Notwithstanding, he was soon sole proprietor and editor, which no doubt helped the magazine’s editorial line regarding his product.

  The outbreak of the Great War prompted Eugène to enlist in the army. Although he was over age, he persuaded them to admit him as a chemist. Later he was able to transfer to an active posting in the 31st Artillery, rising to the rank of lieutenant and amassing a chestful of medals for valour. While Eugène had been giving the German army the same treatment later doled out to his competitors, the running of L’Oréal was in the hands of his wife. It did very well. The formula for success was already very well established, and top scientists were coming up with products, which offered breakthrough performances at affordable prices. Right from the start, Eugène was clear how he wanted his company to run: it would be based on applying science to the problems of hair care. The rise of Lumière and then Hollywood films was making cosmetics and hair dye more mainstream. Eugène was convinced this growing market could only be conquered by scientifically advanced products.