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Craft Higns to separate into two publicly traded companies. Jen Bartashis joins a senior retail stables and packaged food analyst at Bloomberg Intelligence. Jen, what is craft Higns doing? It wasn't just like ten years ago they put the companies.
Together, Hi, Paul.
Yes, it was just about a decade ago that they put the companies together with the plans that it would become kind of a package food powerhouse. But trends have changed and consumers have changed, and it just hasn't materialized the way they originally thought it would.
So what did the two companies get out of this merger?
Then?
So you know when they when when we're looking at what they brought together, they brought together some products where they were able to recognize some synergies, They were able to do some co branding, some you know, product development, that sort of thing. But as I said, the consumer has changed and demand for shelf stable packaged food products
is just less than it was. And so we've seen multiple years where scanner data shows that Kraft Heind's brands have sort of been shrinking a little bit, and I think this separation as an attempt to kind of reinvigorate growth in different parts of their portfolio.
He loss that the companies ended up selling each of those each of those two companies end up selling to private owners because something similar happen here.
Uh, there is that possibility, you know, it's the It definitely echoes what Kellogg did. They took their emerging markets, they took their higher growth brands, spun them off into Kelenova, which then got acquired by Mars or is in the process of being acquired by Mars. Their w K Kellogg was their residual North America cerial business was recovering from drike issues and distribution issues, and that has been snapped
up by Ferraro. So there's definitely possibility that craft Time split could result the same sort of end result down the road.
You mentioned several times how the consumer has changed. Let's dig into that a little bit more. Are we talking about because of the ANTIOBESD drugs like GLP one. Is it a case where RFK and Make America Healthy Again is really taking root? I mean this is kind of a slow moving shift in the consumer, right.
It is, indeed scarlet. It's a slow moving shift, and it started, you know, coming out of the pandemic. In the pandemic, everybody sort of retreated to familiarity, right. They went back to brands, they went back to shelf stable products. And since then there's been more emphasis on things that are more natural, lower sodium, healthier for you, that sort
of thing. And while Kraft Time's has been making updates to their portfolio, it is hard to envision how kind of electric orange mac and cheese has a long term growth, long term growth appeal to people where you know, there's pressure from as you said, RFK and more like natural colorance and things like that. So you know their portfolio is caught in that crosshairs.
You know.
Again, as a former banker, I probably told my clients, hey, when need announce the seeing the stock is going to go up, well stocks down here. When you put companies together, the pressurelease often talks about the synergies that are going to be the cost synergies, maybe some revenue synergies.
Maybe are there dissynergies when you break them.
Apart, Yeah, there are dissynergies. The company expects about three hundred million dollars in dissynergies. You know, thankfully most of their manufacturing practices are fairly separate, but there is a component to that. You know, the stock is down today, but this isn't really new news. Craft Tign's actually said
in May they were exploring strategic options. There's been repeated rumors that it would result in a split of two companies, So the confirmation today isn't necessarily unexpected news.
Paul Geez, does that just mean upfront costs?
I think I need a new CFO, I need a new accounting department. I don't know.
Well, so go ahead, Jay Jed's what's next for the package food business? I mean, is this just a industry wide secular decline?
Well, right now it appears to be, especially in North America, a bit of a secular decline. Pockets of growth are becoming more and more isolated, and so when you're looking at scanner data, the problem is the consumer. As I said, they're shifting behaviors. But they're just not buying as much as they used to. And you see this even with Walmart or Target or Kroger, where people used to buy in multiples and stock up their pantries, and they just
don't shop that way anymore. They're buying more on an as needed basis, and part of that is the macroeconomic environment, and so that just doesn't favor these companies right now where historically they've been pantry staples. And so right now when consumers are looking what they're going to make for dinner tonight, a bigger know they're played as fresh foods. So the perimeter of grocery stores are doing much better than the center of the store, which is these shelf stable products.
Let's talk about the folks who brought these two companies together. Is Berkshire Hathaway run by Warren Buffett and three G Capital run by a group of Brazilian operations. Guys, where did they stand in all this gen what happens to do they each still hold steaks in the companies?
I mean, do they come out looking better ten years later?
Well, Berkshire Hathaway still has a large steak in the company. I think they owned just over twenty five percent of the outstanding shares. But you know, they did relinquish their their chairs on the board shortly before the strategic options were announced, or that the company was exploring strategic options. So they've been slowly pulling back, you know, from the time of their initial steak. They're probably still going to come out ahead, but it has been a ten year play for them.
Do we know where they're going to put their shares?
Are they going to go equally between the two company these because I'd like to invest alongside.
One At this point, I don't think that's been disclosed, but it is certainly something that everyone will be watching for.
What will you be watching for, Jen, in terms of how competitors respond or react or move in, you know, to kind of take advantage of this breakup.
I think what will be interesting is to watch the level of promotional activity. There will likely be some some effort to take market share, and Craft Times is likely to up their marketing spend in order to try to drive volumes just ahead of when this split actually becomes realized, to sort of show improvement in some of their legacy brands.
So what that really sets up a stage for is actually probably good for the everyday shopper and that they'll be probably more sale items, more discounts, But it also means that it's less profitable sales for the companies that are involved in chasing that market share. So it will be interesting to watch how it unfolds. Companies only expecting this to close or to be realized that this second half of next year, so there's some time for those dynamics to play out.
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Lots of deals out there, but the deals aren't, you know, M and A per se and breaking stuff up. Some of those consumer products companies haven't been put together.
Over the last several.
Years, we're seeing some of those companies think about breaking themselves up.
One of them is Pepsi.
We have Pepsi, we have investor Elliott Management activists Investor taking a four billion dollar stake in Pepsi.
Maybe provoking some change down the road. Let's see what happens there.
Ken Shay joins us Bloomberg Intelligence senior Commodity consumer Products analyst here. Ken Ken, I mean when you look at Pepsi, do you think about it as Ree Delay and all the snacks on one side and Pepsi and all the other soft drinks on the other side, And it just feels like it's a company that, boy, it could be broken.
Up, just like some of these other consumer productsy companies. What do you think?
Yeah, Hi, Paul, Actually it's only a few weeks ago. I wrote a report over Bloomberg Intelligence saying that given the weakness of the stock, is really just a matter of time where these talks are going to be revived. Recall back in twenty fourteen, try On and an activist actually advocated that breaking the company up between beverages and foods. The company decided not to do it. It made the case that it was getting good synergies between the two.
Fast forward to today, Elliott isn't quite going that far. And Elliot's letter today it said it believes that value can be created by simply having the beverage side. Roughly forty percent of the business just refranchise their bottling operations and plain English, what that means is to divest those capital intensive operations manufacturing operations that create the finished product from the syrups and concentrates that Pepsi, the beverage company sells.
That's really the golden part of that business, you know, the jewel that business is the concentrate business. That's what Coca Cola does. Coca Culture sells concentrates, syrups or high margin to third parties to make the product. PepsiCo chooses to do it in house. That results in tying up capital,
lower margins, and so on. At the same time, Elia is also saying on the food side, perhaps some SKU rationalization is due, meaning there's a lot of food products there that they may not be well suited to sell. The fredola is doing really well, although it's a kind of a slowdown right now with many consumer products. It's the Quacker foods. I think it's really targeting and saying, you know, maybe maybe some reduction there, maybe in order. So that's really what the gist is today with Pepsi.
All right, Ken, thank you for that very very detailed rundown. I want to pick up on what you were talking about with the bottling business, refranchising the bottling business, which is what Coca Cola does. Right now, what does Coca Cola give up by doing that? I mean there had to be a reason why Pepsi chose to keep it in house up until now.
Yeah, that's a great question, Scarlett. So go back in time with ten fifteen years ago or so, both companies had done that. They both had separated those businesses. Pessico decided to retain or it sol and then it brought it back and it decided to keep it and made the case. At the time that's the softwareing business was in a downturn, volumes were week. They thought by gaining more control of those bottling operations they could right size the ship that they could get it back in order
align the interest between the bottlers and the company. Because I'm going to remember Coca Cola, by separating it, it is to some degree giving up a little it's accepting a little risk. I mean, these are third parties, or these are independent companies. They can sell beer, they can do other things. PepsiCo didn't want them to do that. PepsiCo said, look, we want you to be fully aligned
with what we want. So that's what they said they gained from that, and I guess there's some truth to that, but you're giving up a lot also for the factors that I mentioned before.
Ken, You've been covering this consumer space for a long time. You've seen the cycles come and go. It seems like we're in a cycle of breaking these companies up. I mean, you've seen this game before. How do you think this is going to play out across the consumer space?
Well, you know, given the PepsiCo stock before today was down about twenty percent over the last two years, so it's really disappointed investors. And beyond that, it's that their long term algorithm of high single digit comparable EPs growth
is not going to happen this year. They're looking at flat earnings, you know, this year, and investors see the writing on the wall, they see a slow down, and they're saying, look, maybe there's more than just a cyclical element here, Maybe there are some structural things this company can do. I think Elliott's making some good points here, and I think PepsiCo ought to follow through on some of these if they want to regain some of the low sentiment that's out there among investors.
Do you expect other investors to jump in here and kind of ride on Elliot Management's coattails. I mean, is Elliott going to be empowered to ask for more going forward?
That's a great question. I think there's going to be some supporters of Elliott. Like I said, I think Elliot's making some fair points. PepsiCo has been really disappointing on the operational side, and like I said in the stock Front, I think it ought to be open ears to listen to what Elliott said. I think others will support Elliott in this case.
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Lot's going on in the world of global healthcare. We want to check in with sampaz Ellie. He's a director of research for Global Industries any Senior Biotech, Pharmaceuticals, all that healthcare stuff Analyties based in London.
Here.
Hey, Sam, We've.
Had a lot of turnover and a lot of uncertainty within our healthcare. I don't know Washington, DC government entities. How does that affect the rest of the world here.
Oh, that's a very big question, Paul, and lovely to talk to you again. It's been a while. There's all sorts of layers. Of course, you know about USAID which has been stopped, and lots of projects that have been going have been stopped in terms of funding. Then you have the CDC, which is much more focused on the US.
The CDC is Control and Prevention, is the body that is responsible for US as health and it is part of the Health and Human Services the division, so HHS Secretary RFK Junior is in charge of basically the whole thing. And there's been major upheavals in terms of people that even they have had a point themselves to the CDC resigning within about you know, after about a month. I'm talking about monareres Of, who was the director of the CDC and just left or was fired because apparently she
wasn't prepared to Robbert Stamp whatever. The Advisory Committee or Immunization Practices, which is part of the CDC, suggests to the CDC what vaccine should be used, when, how, and that then impacts insurance coverage. She was told you need to rubber stop what they say, and of course she didn't believe that was the right way to do it. So there's a lot of uppeople And we now have another ACIP Advisory committe meeting on the eighteenth of September.
Let's see what they say about COVID vaccine. But already are the US's access to vaccines that has been reduced?
What does this mean for the rest of the world, though, Sam, I get what you were saying about insurance coverage in the U, but do the equivalent of CDCs and other countries take their queue from the US CDC.
No, no, no, no, no no. In fact, to be honest with you, the Federal the FDA's decision with regards to the limiting of vaccines in the US for COVID, for sure, has brought the US policy or will bring US policy in line with the rest of the world. In the UK, I am not seventy five yet. I hope you can tell that you're going to allow to thank you. I need to go a for it until you're seventy five. Right in the US, it was pretty much available to anyone under the age of sixty four
or sixty five. Now it's been limited to sixty five and above. So this just brought the rules in line with Europe. So Europeans were already there because of our healthcare, but just being under constraints, et cetera. But the US is supposed to be about free choice, and that is where I think the complex complexity comes in. And what I'm more worried about is that the language and the way they're addressing it is what will cause people or concerned about actually going in and getting a shot.
So what about just if the FDA limits approval of COVID shots for example, or I don't even flu shots.
I'm not sure how they're how they're going to approach.
It, that would be more I guess out of pocket expense for consider Yeah.
Yeah, I think Bloomberg had an article saying that it's going to be right two hundred and twenty dollars and twenty four dollars a shot. Now you and I can probably afford that, right, A lot of people can't, and that will then be the issue that you know, a pregnant woman where actually a lot of scientists and medics believe that they should get the shot, and in Europe it is approved. They do get it. They they're not
they're not recommended for the vaccine anymore. So that is the problem because then your baby is born with no protection against the shot the virus, which is bad for babies. So there are these issues. And of course we've got this meeting coming up. Don't forget. There's another thing coming up in September, this big research they've been doing to try and see what is causing this massive rising autism,
and we'll talk about it. I'm sure the day the research comes out or that week, I wouldn't be shocked if it comes out and says, oh, here you go, there's evidence that it's caused by there's a correlation with vaccines use or aluminium in vaccines or whatever. And I can show you chart up the chart that you can show it related to glyphosades or fructose corn syrup that we've used in choicters. You could keep making these correlations.
We've done things to a lifestyle that have called this issue and mental health issues, etc. You can't just pinpoint vaccines until you do it all prospective analysis.
Yeah, but that's very complicated, and it feels like people want simple answer, Sam. What does this mean for the companies, the companies that develop the vaccines, that sell the vaccines, how are they positioning themselves?
Are they pushing back?
Well, they can only push back so far. We just saw some tweets from President Trump saying, look, if you've got the great data about vaccine and their safety that we hear you've got them and their efficacy, why don't you come and show us. I'm sorry, I'll could show you a link. I can send it to you if
you put it in the show notes or whatever. They go into a link to the CDC meeting where the companies came and the CDC itself did research showing how what the effectedness of the vaccines had been in the previous twelve months, how many hospitalizations did it saved, the economic impact, and their safety analysis. What is it that the administrations are looking for? They're being presented four or five times a year through that same mechanism at the CDC.
Who says these companies that are hiding the data.
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