Currently, large food companies are gradually reducing their business scale and embarking on a "slimming down" mode.

As consumer and regulatory resistance to ultra-processed foods intensifies, companies that produce these foods are choosing to spin off or divest their iconic brands. Last year, Unilever spun off its ice cream business into Magnum Ice Cream Company; Kraft Heinz plans to proceed with a spin-off later this year, a move that will largely undo the merger agreement reached more than a decade ago between Warren Buffett's Berkshire Hathaway and private equity firm 3G Capital; in addition, Keurig Dr Pepper also plans to implement a similar spin-off after completing its acquisition of JDE Peet's.

Data from Bain & Company shows that by 2024, nearly half of the M&A activity in the consumer goods industry will come from asset divestments. Another survey by the firm also found that 42% of M&A executives in the consumer goods industry are preparing to sell assets in the next three years.

It is worth noting that this trend of spin-offs and divestments is not limited to the packaged consumer goods industry. Industrial companies such as General Electric and Honeywell have also carried out spin-offs in recent years; a similar phenomenon has also appeared in the traditional media industry, with Comcast divesting many of its cable television assets to Versant, a subsidiary of CNBC, while Warner Bros. Discovery plans to spin off its cable television network later this year, due to Netflix's acquisition of its streaming and studio divisions.

"In many of the areas where we're seeing this type of activity, there's a lot of competitive pressure, which makes it more difficult to operate," said Emily Feldman, a professor at the Wharton School of the University of Pennsylvania. The difficulties faced by packaged food and beverage companies stem from declining market demand, which has directly led to shrinking sales for many of their products. To reverse their declining fortunes and regain investor confidence, these companies are pinning their hopes on divesting underperforming brands.

In February, the quarterly earnings calls and the annual CAGNY conference will provide investors with more opportunities to learn about food company executives' plans for their business portfolios. Companies to watch include Kraft Heinz, which may disclose more details about its upcoming spin-off plans, and Nestlé, which is considering selling several of its brands.

Declining Sales: Multiple Factors Squeeze the Industry

For over a decade, consumers have been buying fewer items from the inner aisles of supermarkets, instead focusing on the outer aisles where fresh produce, meat, and other goods are displayed. This trend reversed during the pandemic, with many consumers returning to familiar brands. However, as life gradually returns to normal, rising prices and "shrinkflation" have largely offset this shift in consumer behavior.

In recent years, driven by the "Make America Healthy Again" agenda championed by Robert F. Kennedy Jr., the Secretary of Health and Human Services, regulators have increased scrutiny and attention on processed foods. Furthermore, the rise of GLP-1 drugs for treating diabetes and obesity has led some of these food companies' core consumers to lose interest in their previously favored sweet and salty snacks.

While the packaged consumer goods industry's market share remains stable in terms of overall consumer spending, Bain & Company partner Peter Horsley points out that large companies are continuously losing customers to emerging brands or private-label products.

Horsley states that, on average, about 35% of large consumer goods companies' product portfolios are in categories with growth rates exceeding 7%; in contrast, more than half of private-label products are in high-growth categories (such as yogurt and functional beverages), and this proportion is even higher for emerging brands.

For large food companies, this situation directly leads to slower or even declining sales growth, which in turn triggers stock price drops. In some cases, activist investors are also urging companies to focus on core products and divest so-called "non-core businesses." “From a valuation perspective, these companies are facing significant pressure, especially for publicly traded companies,” said Raj Konanahalli, partner and managing director at AlixPartners. “One way to reset expectations is to really focus on the core business and divest or sell off those slow-growing, capital-intensive, or non-core businesses.”

Konanahalli also noted that while scaling up helps food companies expand operations, enter new markets, and increase sales, it also makes their businesses more complex. Excessive size often leads to inefficient decision-making and difficulty in determining the direction and magnitude of reinvestment.

Admittedly, some divestitures and spin-offs stem from deals that seemed questionable from the start. The 2018 merger of Keurig Green Mountain and Dr Pepper Snapple Group to form Keurig Dr Pepper is a prime example.

Barclays analysts Patrick Folan and Lauren Lieberman wrote in a report to clients last August when the company announced the spin-off: “Frankly, we were surprised that Keurig Green Mountain acquired Dr Pepper Snapple Group for $18.7 billion back in 2018, creating Keurig Dr Pepper. At the time, the deal was considered strange and highly unconventional, and the logic of combining coffee and carbonated soft drinks was questionable.”

(During a conference call with executives from both companies when the merger was announced in 2018, Lieberman said she was still “perplexed” and didn’t understand the logic of the deal for either party.)

Since the merger, Keurig Dr Pepper’s stock price has risen 37%, while the S&P 500 index has gained 150% over the same period.

To Sell or Not to Sell: Opportunities and Pitfalls of Spin-Offs

Feldman said that, like many industries, the packaged food industry experiences cyclical cycles of expansion and contraction. For example, Kraft Foods spun off its snack business, including Oreo cookies, to form Mondelez International in 2012, and just three years later, Kraft merged with Heinz.

However, in recent years, the model of expansion through acquisitions requires more complex thinking and more rigorous execution. According to Horsley of Bain & Company, "If you look back at the glory days before 2015, the rules of the game in the consumer goods industry seemed quite simple, at least for a global company. You acquired a company relatively similar to your own business, integrated it, achieved cost synergies... and then you could achieve good revenue and profit growth. But the rules of the game have changed."

Horsley further pointed out that around 2015, emerging brands like Chobani and BodyArmor began to take market share from traditional brands. Therefore, food giants had to be more cautious in selecting acquisition targets and optimize the management of their business portfolios.

The case of Kraft Heinz is undoubtedly a cautionary tale regarding divestment decisions. The company was formed in 2015 through a massive merger, and investors initially had high expectations for the deal. However, as the merged company's sales in the US continued to decline, investor enthusiasm gradually faded. Subsequently, many of Kraft Heinz's iconic brands (such as Kraft, Oscar Mayer, Maxwell House, and Velveeta) were impaired, and the US Securities and Exchange Commission also issued a subpoena regarding its accounting policies and internal controls.

In hindsight, analysts and investors generally believe that Kraft Heinz's decline stemmed largely from the aggressive cost-cutting strategies implemented after the merger. Company management focused excessively on cost reduction while neglecting reinvestment in brand building, especially during a critical period of changing consumer tastes.

Since the merger of Kraft Heinz, its stock price has fallen by 73%.

However, not all industry insiders believe that divesting underperforming brands will benefit shareholders.

"If the fundamental problems aren't addressed, it doesn't matter how many brands you sell," said Nick Modi, an analyst at RBC Capital Markets. "They're not getting to the root of the problem. This is just to appease investors and make them feel like they're making changes."

One divestment case that Modi approves of is Kellogg's split – the company split in 2023 into Kellanova, focused on snacks, and WK Kellogg, primarily focused on cereals. Last year, chocolate maker Ferrero acquired WK Kellogg for $3.1 billion, while Mars completed its acquisition of Kellanova for $36 billion.

According to Modi, the value created for shareholders by the two spun-off companies far exceeded that of the combined entity. Kellogg's high-growth snack business, freed from the drag of the slow-growing cereal division, became a more attractive acquisition target; furthermore, both acquiring companies were privately held, eliminating the pressure of disclosing quarterly earnings to the public.

Some investors also hope that Kraft Heinz can achieve similar results through a spin-off.

"Many people believe the best way to create value is to split the company and hope to create a Kellanova 2.0, where both entities are acquired at some point in the future, and that's where the value creation happens," said Bank of America Securities analyst Peter Galbo.

To facilitate the spin-off process, Kraft Heinz hired former Kellogg and Kellanova CEO Steve Cahillane as its CEO. After the company's split, Cahillane will serve as CEO of Global Taste Elevation—the tentative name for the spun-off business entity that will own high-growth brands such as Heinz and Philadelphia.

However, according to Galbo's analysis, acquiring either of the spun-off Kraft Heinz companies would be a massive transaction, making the likelihood of either company being acquired relatively low. The uncertainty surrounding value creation after the spin-off may be the core reason why the company's largest shareholder, Berkshire Hathaway, plans to sell its 27.5% stake in Kraft Heinz.

Food Industry Divestment Trend: Trend Continues, Direction Shifts

A month into the new year, the trend of asset divestment in the food industry shows no signs of slowing down.

This Tuesday, General Mills announced it would sell its organic tomato brand Muir Glen to focus on its core brands. Last week, Bloomberg reported that Nestlé is preparing to sell its bottled water business; other reports indicate that the Swiss giant is also considering selling its high-end coffee brand Blue Bottle and underperforming vitamin brands.

Bain & Company stated that if large food companies make any acquisitions, these deals are more likely to focus on "emerging brands." The firm stated that over the past five years, acquisition deals valued at less than $2 billion accounted for 38% of total consumer goods transactions, significantly higher than the 16% recorded between 2014 and 2019.  For example, last year PepsiCo acquired the prebiotic soda brand Poppi for $1.95 billion, and Hershey acquired the LesserEvil popcorn brand for $750 million.

Konanahalli said that the current regulatory environment is making it increasingly difficult to complete larger deals. In the future, acquirers may no longer be primarily strategic investors, but rather private equity firms with substantial cash reserves. For instance, in January of this year, L Catterton acquired a majority stake in the emerging cheese producer Good Culture.

However, it's important to note that high-profile divestitures or acquisitions may not fundamentally solve the operational difficulties of food groups, nor are they a guaranteed solution for boosting stock prices. Sometimes, a more grounded approach of focusing on core businesses and actively seeking breakthroughs can yield better results.

"Even if the winds seem to be blowing in your favor, it doesn't mean you can't work hard and turn things around," said Konanahalli of AlixPartners.