What Does Kraft's Planned Split Mean for Adland?

Company Says Agency Roster Won't Be Touched -- for Time Being

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Kraft Foods said today it plans to split into two publicly traded companies, an international snacks business including Cadbury, Oreo and Trident, and a North American grocery business which will include Kraft Macaroni and Cheese, Oscar Mayer, Philadelphia, Maxwell House, Jell-O and other non-snack brands. The move, expected to be finalized by the end of 2012, raises a host of questions about what the split means for ad agencies, brands and marketing spending. At this point, there are few definitive answers -- and many aren't likely to come for months. But here's an early look at why it's happening and what it could eventually mean in Adland.

Why exactly is Kraft doing this?
The move seems designed to give more attention and spotlight to Kraft's fast-growing global snack brands, such as Oreo, Cadbury and Tang, which are getting a big boost in developing markets -- 80% of revenue for these brands now comes from outside North America, including some 40% from developing markets. "I think we have never been able to get credit for the tremendous snacking portfolio that we have within the company," CEO Irene Rosenfeld said on a call with analysts.

But didn't Kraft acquire Cadbury as a way to bring their older brands to newer markets? How is this possible if the company is split in two?
Indeed, it will presumably make it a lot harder, as Morningstar analyst Erin Lash pointed out in a note: "We now question the firm's ability to garner the targeted $1 billion in revenue synergies, since it will no longer be able to extend the distribution of some existing brands through Cadbury's network. From a cost perspective, because the integration was still in the early innings, we doubt the firm has realized substantial savings from the Cadbury deal that could reverse post-spin-off."

So are analysts panning the move?
Not at all. Most seem to say it makes sense. "While the earnings power of the two entities doesn't change all that much as a result of this transaction, the opportunity to immediately realize value in its attractive global snacks portfolio and the potential to increase the internal focus on its [North American] grocery business down the line -- or let someone else capitalize on it -- are attractive considerations," Janney's Jonathan Feeney said in an analyst's note.

What does the split mean for Kraft's ad agencies?
Probably nothing in the short term. "There are no immediate changes to agency relationships as a result of this announcement," Kraft spokesman Mike Mitchell told Ad Age . "We are operating business as usual and we are going to continue on delivering our plans for 2011 and 2012." Kraft is telling agencies the same thing in private, according to one roster agency.

However, there could be changes in the long term. One leading ad-industry consultant suggested that brands thrown into the North American grocery business could eventually be consolidated under just a handful of agencies, if it saves some money. That's because these are slower growing brands, and Kraft today signaled that these business will be managed to "deliver reliable revenue growth, strong margins and free cash flow." In other words, these are the cash-cow brands for which Kraft said it will maintain a "sharp focus on cost structure."

Does this mean the new grocery company would spend less on marketing than those brands spend today?
Not necessarily. Indeed, one analyst says spending could actually jump under the new company. That's because some of these grocery brands -- which might have been an afterthought in the larger Kraft -- might emerge as stars in the new grocery company, getting them more marketing attention. "I wouldn't be at all surprised if the net effect of this move is the significant increase in marketing spending on all the brands combined," said marketing consultant David Diamond.

Of course, it's all speculation at this point, and a lot of the agency and marketing decisions will ultimately depend on who is installed as CEO and CMO of the new companies.

So who will become the new CEO and CMO for the two new companies?
These decisions have not been made and are not likely to come for many months. It is likely, however, that CEO Irene Rosenfeld will join the global snack company because these brands have been a priority for her. (She led Kraft's acquisition of Cadbury, for instance.) In that case, would she also be joined by CMO Mary Beth West and Senior VP-Marketing Strategy and Communications Dana Anderson? Asked by analysts about possible personnel moves, Ms. Rosenfeld would only say: "We have a very rich bench from which to populate these two companies and we will keep you posted as we move forward here."

Hasn't Kraft been making a bunch of agency roster moves? Is this at all related to today's news?
Kraft has made many moves recently. It put Trident into review last week and just this week assigned Triscuit to CP&B. But it's hard to discern any real pattern in the moves related to today's news. If anything, the company is growing its roster -- starting new relationships with Creature (for A1 steak sauce), WPP's Taxi, (which recently won Mio) and Droga 5 (which joined the Kraft roster late last year, winning the Athenos line of Mediterranean foods). This seems to contradict any notion that Kraft is getting ready to trim its roster.

What will the new companies be called? Which one will keep the Kraft name?
Kraft said these decisions have not yet been made.

What about individual brand names?
Ms. Rosenfeld said "it's a pretty clean separation," meaning that few brands names are shared across the two planned new businesses. The "Kraft" brand -- now on Macaroni & Cheese, for instance -- will be housed in the North American grocery business.

Where will the new companies be headquartered?
Mr. Mitchell said both will remain in suburban Chicago.

Is Kraft doing this to make it easier to sell off one of the two new businesses?
Ms. Lash said it is doubtful. "The sheer size of the units (with global snack revenue at $32 billion and North American grocery at $16 billion) makes them unlikely targets," she wrote in note. "From our perspective, following the spin-off, investors with a thirst for growth in the packaged food sector may be interested in the global snack business, while income-seeking investors may want to consider the North American grocery business, as management has stated that dividend payments would be a priority for cash for the more mature grocery segment."

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