On March 30, 2007 Kraft is planning to complete its spin-off from Altria (see full article here.) This long-anticipated transaction will allow Kraft to independently decide how to manage its product portfolio, and how to earn above average returns and grow. Should investors anticipate a change in management behavior leading to much better performance when Kraft becomes independent? Should we jump into this opportunity to buy shares before management creates abundant new value?
To expect Kraft to suddenly become more valuable would be like expecting your 1978 Plymouth Horizon to be declared a collectible and suddenly become worth a lot more money. Not likely.
For Kraft to be worth more the company needs to launch new products. It needs to move beyond Velveeta, Philadelphia Cream Cheese and DiGiorno pizza (its last major new product launch) to strike a chord with new customers in new market segments. And to do that the company needs to demonstrate it can manage White Space projects that will reach these new opportunities and redesign the outdated and firmly Locked-in Success Formula. Unfortunately, no such projects appear to be in the pipeline – at least none that anybody has reported. Instead, over the last few years Kraft has been selling businesses (such as Altoids) because it wanted to focus exclusively on large but slow growing market segments. The previous CEO even said he felt investing more in Velveeta advertising gave the company its greatest rate of return. Really.
Kraft can turn around. It wasn’t a decade ago that Kellogg’s was Locked-in to old business methods that had almost half of all volume given away in free offers. But a new CEO Disrupted Kellogg by changing the metrics for measuring performance and closing outdated manufacturing plants. He created White Space projects by opening a new R&D center and buying a new company (Keebler) just to get a new distribution system (store-door delivery rather than warehouse delivery) which he allowed to operate independently inside Kellogg. In just 2 years Kellogg went from big problems to big wins, and the company value jumped dramatically as the other parts of Kellogg migrated to a new Success Formula.
Kraft can’t save its way to prosperity. Its returns are dependent upon finding new markets. Until you see reports of Internal Disruptions by the new leadership – actual claims of needing to stop what they are doing and rethink – don’t expect any significant change. Until you see examples of White Space projects, don’t expect much improvement in results, or any improvement in growth —- or much increase in equity value.