Kraft's bold ambition means tough task for Rosenfeld
By Elizabeth Rigby
Published: April 1 2010 03:00 | Last updated: April 1 2010 03:00
Irene Rosenfeld's leap into the big league was underlined this week when the chief executive of Kraft Foods overtook her counterparts at PepsiCo and Coca-Cola to become one of the best-paid heads in consumer goods in the US.
Having spent recent months slogging it out to secure Cadbury, Ms Rosenfeld has been richly rewarded. She was awarded $26.3m last year for "exceptional" leadership during Kraft's $19.1bn takeover of the British confectioner, as well as for Kraft's improved performance on completion of a three-year turnround plan.
Now she has the potential to turn the maker of Oscar Mayer meats and Oreo cookies from the biggest US food producer into a "global powerhouse".
The company she has led since 2006 now boasts a 14.8 per cent share of the global confectionery market, just ahead of Mars with 14.6 per cent.
More than half of its revenues now come from outside the US - the figure was 43 per cent before the Cadbury deal. Most crucially, a quarter of sales come from developing markets such as China, Brazil and India, against a fifth pre-Cadbury.
A bigger Kraft is now bolder in ambition. Ms Rosenfeld has set her long-term revenue growth target at 5 per cent, against 4 per cent before the merger.
She expects growth in earnings per share to reach 9-11 per cent, compared with 7-9 per cent before the deal, and has also promised $675m of annual cost synergies by the end of the third year after completion (although the deal also comes with $1.3bn of reorganisation costs).
But in spite of Ms Rosenfeld's enthusiasm over the tie-up, the unwieldy food group remains unloved.
Kraft has lagged behind its peers during Ms Rosenfeld's turnround, underperforming food products in the S&P 500 by 8.5 per cent from the beginning of 2006 to the middle of 2009. Since September, when Kraft announced the Cadbury deal (using a big tranche of its shares), it underperformed the S&P 500's food producers by 5.4 per cent.
"This is a very large company in a lot of different categories and geographies," says David Driscoll, analyst at Citigroup. "Kraft wanted to achieve faster growth rates than it has been able to achieve so far. Are investors irritated that management thought they could do better than they did? Yes. Did they think they would get the franchise better than they did? Yes."
In spite of having made strides towards "rewiring" Kraft for growth by investing in marketing, new products and better ingredients, Ms Rosenfeld has struggled consistently to increase sales above its 4 per cent target while also hitting earnings-per-share targets.
But she has delivered on sales, with a compound annual growth rate of 5.5 per cent in the three years to the end of 2009. Underlying growth in earnings per share has come in at just 2.3 per cent, according to Deutsche Bank estimates.
On a diluted earnings-per-share measure, performance rose at 6.1 per cent over the three years - missing Ms Rosenfeld's range of 7-9 per cent, though she did hit 7 per cent in 2009.
It leaves many pondering how Ms Rosenfeld can now deliver more ambitious goals following the deal.
"If you look at the company in total, the sales growth objective of 5 per cent plus [of the merged group] is too aggressive," says Eric Katzman, analyst at Deutsche Bank.
The execution risk of the deal is also increased because it was a hostile approach - very different from Ms Rosenfeld's friendly $7.6bn acquisition of LU Biscuit from Danone in 2007.
Missteps over Cadbury's Somerdale plant near Bristol - which Kraft said it would keep open only to reverse its decision within days of doing the deal - have caused unnecessary upset in the UK.
However, she has at least managed to get Cadbury's operational heads to stay on in the enlarged company.
As she integrates Kraft, Ms Rosenfeld may also face pressure from activist shareholders such as Nelson Peltz's Trian Group to dispose of some of the slower growth businesses, possibly including the Kraft cheese brand itself.
Shareholders will urge more focus on the high growth combination of chocolate and biscuits that has been strengthened by the Cadbury deal.
She has already tested the patience of some, with Warren Buffett, Kraft's biggest shareholder, critical of the deal. The billionaire investor is unhappy that Ms Rosenfeld sold Kraft's successful DiGiorno pizza business to Nestlé for $3.7bn to help finance the bid, while he has also complained that undervalued Kraft stock was "a very expensive currency" to be used in an acquisition.
But Mr Buffett also thinks Ms Rosenfeld is a "good operator". Her supporters say investors should keep their eye on the bigger prize. With Cadbury under its arm, Kraft is becoming more focused on confectionery and snacks, with more than half of its turnover now in these areas.
"She has transformed it into a niche company in emerging markets and it is going into chocolate that doesn't have much private label competition so now the five-year and 10-year terms get better and better," says Mr Driscoll.
Additional reporting by Jonathan Birchall in New York
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