by Adam Hartung | Sep 18, 2012 | Current Affairs, Defend & Extend, Food and Drink, In the Rapids, In the Whirlpool, Innovation, Leadership, Lifecycle
Apple is launching the iPhone 5, and the market cap is hitting record highs. No wonder, what with pre-orders on the Apple site selling out in an hour, and over 2 million units being presold in the first 24 hours after announcement.
We care a lot about Apple, largely because the company has made us all so productive. Instead of chained to PCs with their weight and processor-centric architecture (not to mention problems crashing and corrupting files) while simultaneously carrying limited function cell phones, we all now feel easily interconnected 24×7 from lightweight, always-on smart devices. We feel more productive as we access our work colleagues, work tools, social media or favorite internet sites with ease. We are entertained by music, videos and games at our leisure. And we enjoy the benefits of rapid problem solving – everything from navigation to time management and enterprise demands – with easy to use apps utilizing cloud-based data.
In short, what was a tired, nearly bankrupt Macintosh company has become the leading marketer of innovation that makes our lives remarkably better. So we care – a lot – about the products Apple offers, how it sells them and how much they cost. We want to know how we can apply them to solve even more problems for ourselves, colleagues, customers and suppliers.
Amidst all this hoopla, as you figure out how fast you can buy an iPhone 5 and what to do with your older phone, you very likely forgot that Kraft will be splitting itself into 2 parts in about 2 weeks (October 1). And, most likely, you don't really care.
And you can't imagine why I would even compare Kraft with Apple.
Kraft was once an innovation leader. Velveeta, a much maligned product today, gave Americans a fast, easy solution to cheese sauces that were difficult to make. Instant Mac & Cheese was a meal-in-a-box for people on the run, and at a low budget. Cheeze Whiz offered a ready-to-eat spread for canape's. Individually wrapped American cheese slices solved the problem of sticky product for homemakers putting together lunch sandwiches for school children. Miracle Whip added spice to boring sandwiches. Philadelphia brand cream cheese was a tasty, less fattening alternative to butter while also a great product for sauces.
But, the world changed and these innovations have grown a lot less interesting. Frozen food replaced homemade sauces and boxed solutions. Simultaneously, cooking skills improved. Better options for appetizers emerged than stuffed celery or something on a cracker. School lunches changed, and sandwich alternatives flourished. Across Kraft's product lines, demand changed as new technologies were developed that better fit customers' needs leading to revenue stagnation, margin erosion and an increasing irrelevancy of Kraft in the marketplace – despite its enormous size.
Apple turned itself around by focusing on innovation, becoming the most valuable American publicly traded company. Kraft eschewed innovation for cost cutting, doing more of the same trying to defend its "core," leaving investors with virtually no returns. Meanwhile thousands of Kraft employees have lost their jobs, even though revenues per employee at Kraft are 1/6th those at Apple. And supplier margins are a never-ending cycle of forced reductions as Kraft tries to capture their margin for itself.
Chart Source: Yahoo Finance 18 September, 2012
Apple's value went up because it's revenues went up. In 2007 Apple had #24B in revenues, while Kraft was 150% bigger at $37B. Ending 2011 Apple's revenues, all from organic growth, were up 4x (400%) at $108B. But Kraft's 2011 revenues were only $54B, including roughly $10B of purchased revenues from its Cadbury acquisition, meaning comparative Kraft revenues were $44B; a growth of (ho-hum) 3.5%/year.
Lacking innovation Kraft could not grow the topline, and simply could not grow its value. And paying a premium price for someone else's revenues has led to…. splitting the company in 2 in only 2 years, mystifying everyone as to what sort of strategy the company ever had to grow!
But Kraft's new CEO is not deterred. In an Ad Age interview he promised to ramp up advertising while slashing more jobs to cut costs. As if somehow advertising Velveeta, Miracle Whip, Philadelphia and Mac & Cheese will reverse 30 years of market trends toward different products which better serve customer needs!
Apple spends nearly nothing on advertising. But it does spend on innovation. Innovation adds value. Advertising aging products that solve no new needs does not.
Unfortunately for employees, suppliers and shareholders we can expect Kraft to end up just like Hostess Brands, owner of Wonder Bread and Twinkies, which recently filed bankruptcy due to 40 years of sticking to its core business as the market shifted. Industry leaders know this, as they announced this week they are using Kraft's split to remove the company from the Dow Jones Industrial Average.
Companies that innovate change markets and reap the rewards. By delivering on trends they excite customers who flock to their solutions. Companies that focus on defending and extending their past, especially in times of market shifts, end up failing. Failure may not happen overnight, but it is inevitable.
by Adam Hartung | Aug 8, 2011 | Current Affairs, Food and Drink, In the Swamp, Innovation, Leadership, Quotes
"If you can't dazzle 'em with brilliance – Baffle 'em with Bulls**t" – W. C. Fields
Just 18 months ago Kraft CEO Irene Rosenfeld was working very hard to convince investors she needed to grow Kraft with a $19B acquisition of Cadbury. This was after her expensive acquisition of Lu Biscuits from Danone. Part of her justification for the massive expenditure was an out-of-date industrial manufacturing adage, "Scale is a source of great competitive advantage. " How these acquisitions provided scale advantage was never explained.
Now she wants to convince investors Kraft needs to be split into two companies, saying the acquisition trail has left her with "different portfolios." (Quotes from the Wall Street Journal, "Activists Pressed for Kraft Spinoff") For some reason, scale is now less important than portfolio focus. And the scale advantages that justified the acquisition premiums are now – unimportant?
If Ms. Rosenfeld was a politician, she might be accused of being a "flip-flopper." Remember John Kerry?
Ms. Rosenfeld would like to break Kraft into 2 parts. Some brands would be in a new "grocery," or "domestic" business (Oscar Mayer, Cool Whip, Maxwell House, Jell-O, Philadelphia Cream Cheese, Kool Aid, Miracle Whip is a partial list.) The rest of the company would be a "snack" or "international" business. Although the latter would still include the North American snacks and confectionary brands. (More detail in the Wall Street Journal "Kraft: Breaking Down the Breakup.")
We will ignore the obvious questions about why the acquisitions if your strategy was to split up the company. Instead, looking forward, the critical questions to have answered would be "How will this break-up help Kraft grow? And what is the benefit for investors, employees and shareholders of this massive, and costly, change?"
Kraft was split off from Altria at the end of 2006, with Ms. Rosenfeld at the helm. At its rebirth, Kraft became a Dow Jones Industrial member. Rich in revenues and resources, at the time, Kraft was valued at about $35/share. Now, 5 years and all the M&A machinations later, Kraft is valued (with optimism about the breakup value) at about $35/share! Between the two dates the company's value was almost always lower. So investors have gained nothing for their 5 years of waiting for Ms. Rosenfeld to "transform" Kraft.
The big winners at Kraft have been their investment bankers. They received enormous multi-million dollar fees for helping Ms. Rosenfeld buy and sell businesses. And they will receive massive additional fees if the company is split in two. In fact, given her focus on M&A as opposed to actually growing Kraft, one could well assess Ms. Rosenfeld's tenure as more investment banker than Chief Executive Officer. She didn't really do anything to improve Kraft. She just moved around the pieces, and swapped some.
Kraft has had no growth, other than from the expensive purchased acquisition revenues. Despite its massive $50B revenue stream, what new innovation – what exciting new product – can you recall Kraft introducing? Go ahead, take your time. We can wait.
What's that – you can't think of any. Nor can anybody else.
In Kraft's historical businesses, volume declined 1.5% over the last couple of years. The company has been shrinking. According to Crain's Chicago Business in "Kraft's Rosenfeld's About Face Spurred by Dwindling Options," the only reason revenues grew in the base business was due to rising commodity prices, which were passed along, with a premium added, in retail price increases to consumers! A business doesn't have a sparkling future when it keeps selling less, and raising prices, on products that consumers largely could care less about.
When was the last time you asked for a Velveeta sandwich? Interestly, Tang now seems to have outlived even NASA and the American space program. Have you enjoyed that sugar-laden breakfast delight lately? Or when did you last look for that special opportunity to use artificial ice-cream (Cool Whip) in your desert?
BusinessInsider.com tried valiantly to make the case "The Kraft Foods Split is the Grand Finale of an Epic Transformation." But as the author takes readers through the myriad re-organizations, in the end we realize that all these changes did nothing to actually improve the business – and managed to tick off Kraft's largest investor, Warren Buffet of Berkshire Hathaway, who has been selling shares!
The argument that Kraft has 2 portfolios as a justification for splitting the company makes no sense. Every investor is taught to have a wide portfolio in order to maximize returns at lowest risk. That Kraft has multiple product lines is a benefit to investors, not a negative!
Unless the leaders have no idea how to use the resources from these businesses to innovate, and bring out new products building on market trends and creating growth! And that's the one thing most lacking at Kraft. It's not a portfolio issue – it's a complete lack of innovation issue! As Burt Flickingerof Strategic Resources Group pointed out, Kraft has been losing .5% to 1% market share every year for the last decade in its "core" business, and he understatedly commente that Kraft has "very little innovation."
Markets have shifted dramatically the last 5 years, and food is no exception. People want fewer carbs, and fewer fats. They want easily prepared foods, but without additives like sugar (or high fructose corn syrup,) salt and oil that have negative long-term health implications for blood pressure, heart disease and diabetes. Also, they don't want hidden calories that make ease of preparation a trade-off with their wastelines! Further, most families have changed from the traditional 3 times per day standard meals to more grazing habits, and from large portions to smaller portions with greater variety.
But Kraft addressed none of these shifts with new products. Instead, it kept pouring advertising dollars into the traditional foodstuffs, even as these were finding less and less fit with 2011 dietary needs – or consumer interest! When the most exciting thing anyone can say about a Kraft launch the last 5 years was the re-orientation of the Triscuit line (did you catch that, or did you somehow miss it?) then it's pretty clear innovation has been on the back burner. Or maybe stuck in the shelf with the Cheez Whiz.
It is clear that Ms. Rosenfeld offered no brilliance as Kraft's leader. Uninspiring to consumers, investors and employees. She made very expensive acquisitions to create the illusion of revenue growth; financial machinations that hid declines in the traditional business which suffered from no innovation investment. After all that money was thrown around, and facing very little prospect of any growth, it was time for the biggest baffling bulls**t of all – split the company up so nobody can trace the value destruction!
Andrew Lazar at Barclay's Capital Plc gave a pretty good insight in another Crain's Chicago Business article ("Kraft Jettisons U. S. Brands so Global Snack Biz Can Fly Higher.") He said Kraft (aka Ms. Rosenfeld) is "Taking action before it ever has to potentially disappoint investors in a struggle to reach overly optimistic sales growth targets."
Yes, I think Mr. Fields had it pretty right when it comes to describing the leadership of Ms. Rosenfeld and her team at Kraft. They have been unable to dazzle us with any brilliance. The question is whether we'll be foolish enough to let them baffle us with their ongoing bulls**t. What Kraft needs is not a break-up. What Kraft needs is new leadership that understands how to move beyond the past, tie investments to market needs, and start Kraft growing again!!
This week most people don't really care about Kraft. After the U.S. debt ceiling "crisis," followed by the Friday night announcement of the U.S. debt downgrade, the news has been dominated by mostly economic, rather than company, items. The collapse of the DJIA has been a lot more important than a non-value-adding split-up of a single component. And that is unfortunate, because the leadership of Kraft have been playing chess games with company pieces, rather than actually doing what it takes to help a company grow. With the right leadership, Kraft could be creating the jobs everyone so desperately wants.
