In the Spotlight - Kraft Puts "Lean, Mean, Machine" Wheels in Motion
The job cuts represent around 3.4% of Kraft's 46,500-person workforce in the US and Canada
Kraft Foods gave some insight this week into how its split into two independent companies will take shape, which will result in around 1,600 job losses.
On Tuesday (17 January), the US food and beverage group's CEO, Irene Rosenfeld, said the company will trim corporate, sales and other positions, relocate jobs, and consolidate offices and close another. The job cuts represent around 3.4% of Kraft's 46,500 workforce in the US and Canada. Globally, Kraft employs around 127,000.
For Rosenfeld, the cuts are all necessary if Kraft wants to create two independent companies and turn the group into what she describes as a "lean, mean, centre-of-the-store machine".
"We're confident that this transformational work will improve effectiveness and fuel the future growth of both companies," Rosenfeld said on Tuesday.
Morningstar analyst Erin Lash told the Chicago Tribune that the announcement is in keeping with Kraft's efforts in recent years in "streamlining manufacturing, distribution and eliminating jobs".
BMO Capital Markets analyst Kenneth Zaslow has estimated that the cuts should save Kraft around US$50m. "The incremental value of the spin-off is Kraft's ability to accelerate its cost-cutting efforts, as evidenced by its announcement," Zaslow said in a note to the Chicago Tribune.
Around 40% of the cuts will come from Kraft's US sales team, while vacant positions will account for another 20%. The remaining 40% will affect corporate staff and various business units.
In addition, Kraft's beverages business unit in Tarrytown, New York, and its Planters brand in East Hanover, New Jersey, will relocate to the Chicagoland area by December. Employees will have the option to transfer with their businesses. The company has not made a decision, however, on the future of its Northfield headquarters.
Barclays Capital analyst Andrew Lazar believes the reorganisation plan, which includes the appointment of a third-party broker, Acosta, for the in-store selling responsibilities of its warehouse products, may provide an "interesting 'frenemy' dynamic" with other grocery manufacturers.
While Acosta will have a dedicated team that only handles Kraft brands in categories the company competes in, other divisions of Acosta will be able to work with Kraft's competitors.
"We suspect the arrangement with Kraft ... could open the door for some potential 'frenemy' relationships with other packaged food ... manufacturers," Lazar said. "This would, in our view, give Acosta more categories to work in, in addition to ample sales in Kraft's categories, thereby limiting some of the potential impact from this adjustment."
Nevertheless, Lazar believes that Kraft's productivity measures suggest there is "significant ... margin and value creation" potential for the firm's North America grocery division.
Stifel Nicolaus analysts raised their target price on Kraft shares from $39 to $42 in a research note this week.
The increase may have been boosted by the firm's trading update, released after the reorganisation announcement. Kraft said it forecasts a full-year 2011 net sales increase of around 10%, after ending the year with "strong momentum around the world".
While this may have temporarily taken the edge off news of the firm's reorganisation plans, some industry observers have questioned whether further cost-cutting measures will take place before the split is completed.
"We would not be surprised if Kraft were to announce additional incremental savings in the next few months throughout its supply chain, particularly in US manufacturing," Zaslow said.
Stifel Nicolaus analysts echoed this, adding that Kraft should "be in a position to institute further cost-reduction activities on the manufacturing side in 2012 in preparation of the split". The analysts believe this may include plant closures.
The full transition into two separate companies is expected to be completed by the end of the year. In the meantime, the industry will be left wondering if this is just the tip of the iceberg.
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