Kraft Was Global, Then It Wasn't
As you may have heard, those smart people at 3G Capital have this really brilliant idea for jump-starting growth at the Kraft, part of what henceforth will be called Kraft Heinz (but should be called Heinzkraft): globalization! Kraft gets 98 percent of its sales from North America; Heinz gets 61 percent of its sales from outside of North America. This is a big opportunity, then, to “leverage Heinz’s existing international infrastructure for expansion,” as the Heinzkrafters put it in an investor presentation.
Analysts and investors are nodding in agreement that this is a swell idea. “You move that funnel overseas, which is what 3G can do with Heinz,” The Street's oft-enthusiastic Jim Cramer enthused in a video, “and suddenly you have brands that resonate overseas that have lost their resonance here.” Or here’s Brian Yarbrough of Edward Jones & Co., talking to Bloomberg News: “For Kraft to go grow these brands internationally would just take years and years and years. Now they can use the Heinz platform.”
Right, but here’s a funny thing. Until October 2012, there was this company called Kraft Foods that had a quite well-developed “international infrastructure for expansion.” Then it spun off its North American grocery business, which got the name Kraft Foods Group. The parent company marched onward under the name Mondelez, with a global snacks business (with its roots in Nabisco, combined with Kraft by then-owner Philip Morris in 2000) and all the Kraft grocery brands outside of the U.S.
It is this U.S.-centric Kraft Foods Group that is merging with H.J. Heinz. But to repeat, it’s not U.S.-centric because it never tried expanding overseas; it’s U.S.-centric because all its overseas operations are now part of Mondelez.
Happily, all is not lost for Kraft Heinz’s global expansion plans. Well, Philadelphia Cream Cheese is lost, because Mondelez now owns that brand outside North America. So is Miracle Whip in the European Union, Cheez Whiz in Venezuela, the Philippines and Mexico, and Jell-O in Mexico -- because Kraft Foods Group has granted Mondelez perpetual, royalty-free licenses for those brands in those markets.
Mondelez was the parent company that set the terms of the spinoff, so it’s probably safe to assume that it kept the best stuff for itself. But a lot of other Mondelez licenses for Kraft brands around the world will eventually expire. The most important ones will run out in 2022, but some will come up sooner and some already have (for example: Miracle Whip in the Asia Pacific, Panama and parts of Eastern Europe, Bull’s-Eye barbecue sauce in Germany, the U.K. and Australia, and Kool-Aid in the Asia Pacific and Latin America).
A couple of the analysts who called in to ask questions of Kraft and Heinz executives on Wednesday clearly had not read the 2012 SEC filing that spelled out all these licensing agreements, so the revelation that the company would be getting some of those overseas brands back was for them a pleasant surprise. Jason English of Goldman Sachs, though, had not only read the filing but made some calculations off it. From the call transcript:
The claw-back brands that Mondelez is selling on right now, I believe that's about eight years left, maybe seven-and-a-half years left on the vast majority of the revenue. And the last time we tried to cut math against this, we came up with retail sales of around $1.3 billion to $1.4 billion. Are we in the right ballpark there?
“It's just too early here for us to give you a sense of that,” replied Kraft Foods Group Chief Executive Officer John Cahill. “We've got our homework to do. We just wanted to point out to you and to the other investors what the opportunity is over time.”
That opportunity, if English’s calculations are right, is to increase Kraft Heinz’s sales (currently $29 billion) by a bit more than $1 billion eight years down the road. Maybe it will work out even better than that, because overseas markets will grow faster than the U.S. market and, when Kraft Heinz takes over the brands, it will do a better job of selling them than Mondelez. Kraft certainly will be in a better position to manage its overseas brands in conjunction with Heinz than it would be alone. Also, Mondelez has reportedly been thinking about selling its (slow-growing) European grocery business, so Kraft Heinz would be a potential buyer for that.
But overall, this opportunity for global expansion is years in the future, it might be expensive and it doesn’t exactly seem transformative. The fact that people have been citing it as a big plus for the deal seems to be less a signal about Kraft Heinz’s global growth potential than an indication that financial markets have really short memories.
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