Food giants spawn generation of orphans

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As food companies look to throw more marketing weight behind core brands, they are creating a new generation of orphans: ones that dwell in their own houses.

While Kraft Foods, Unilever and others are looking to shed brands to focus their portfolios and meet earnings targets, it's likely that many will prove too expensive for smaller players to buy and rebuild, leaving them to languish.

"Food companies are getting savvier about how they allocate their resources and while there may not be buyers for some less profitable brands, they will likely be de-emphasized strategically," predicted one Wall Street analyst.

Sara Lee and Hershey Foods in recent years have specified the brands that will be the focus of their marketing investment. Kraft has been less direct, but a spokeswoman for the food behemoth offered that, "In any portfolio, some products and categories will warrant more investment than others."

Like package-goods counterparts Unilever and Colgate-Palmolive Co. did recently, Kraft has told Wall Street it would increase marketing spending, in its case by as much as $600 million, to drive sales of core brands. But that sum won't be spread across Kraft's complex tangle of brands, the result of a years-long acquisition binge. CEO Roger Deromedi noted recently that Kraft is "aggressively reviewing its current portfolio and would pursue divestitures."

The statement has sparked speculation about possible sell-offs among Kraft's bloated brand list. Among the likely candidates: Altoids and Lifesavers, which Credit Suisse First Boston analyst Dave Nelson said might fit with Wm. Wrigley Jr. Co.'s strategy to expand beyond gum; and Stove Top and Minute Rice, which Mr. Nelson said could meld with ConAgra Foods.

Neuberger Berman analyst Bill Leach said that peddling smaller brands would do little to help Kraft. "They have to get out of cereal," he said, by selling Post, or out of the more commodity-like Oscar Mayer business. But given capital gains, "It's hard to make them real selling propositions."

"Virtually all companies have to spend more against their brands, which makes a leveraged buyout strategy riskier," Mr. Nelson said. "Just because something's for sale doesn't mean it gets sold."

Orphans gobbled up by smaller companies in recent years have been beset by difficulties. Accounting scandals and overpayment for mature brands such as Duncan Hines and Aunt Jemima caused Aurora Foods to twice file for bankruptcy. This year, it merged with Pinnacle Foods to form an amalgam that now includes brands from Vlasic pickles to Van de Kamps fish sticks.

Pinnacle is now touting the latest round of reformulations and increased marketing to turn the brands around, including innovations such as lime-flavored Vlasic Pickles and the relaunch of Swanson Great Starts frozen breakfasts under the Aunt Jemima name. But retail buyers are afraid that battling the big guys could prove too costly.

International Multifoods Corp. similarly tried to carve a niche with the purchase of the Pillsbury baking mixes. But earlier this year, it threw in the towel and was sold to J.M. Smucker Co.

Lloyd Greif, president-CEO of Los Angeles-based investment bank Greif & Co., said there is "no shortage of buyers for food brands," especially top national ones versus the "hodge-podge of second-tier and regional brands" picked up by Pinnacle and Aurora. But he also noted the difficulty of re-energizing existing brands because it requires extensive expense to correct the previous impression consumers had.

Burt Flickinger, managing director of Strategic Resources Group, said that reality has significantly devalued mature brands. Interstate Bakeries was forced to file Chapter 11 protection recently after failing to get a decent price for its Hostess brand. "It's definitely a buyer's market and even then, few people are buying," he said.

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