As Kraft Foods Inc. (KFT) moves ahead with its spin-off plan, the company plans to slash the jobs of about 1,600 employees in North America in the year 2012.
According to Kraft, the move was imperative for the smooth running of its businesses. The company also projects higher profits than its earlier forecast for the fiscal year 2011.
Kraft had planned to spin-off its North American grocery business and split itself into two independent public companies in August 2011; a global snacks business and North American grocery business. It stated its intent to split into a high-growth global snacks business with estimated revenue of $32 billion and a high-margin North American grocery business with estimated revenue of $16 billion.
Global snacks will henceforth consist of the current Kraft Foods Europe and Developing Markets units as well as the North American snacks and confectionery businesses. The North American grocery business would comprise the current U.S. Beverages, Cheese, Convenient Meals and Grocery segments along with the non-snack categories in Canada and Food Service.
Accordingly, about 40% of the job cuts will take place as a result of reorganizing of the U.S. sales positions, while 20% of the eliminations in U.S. and Canada will remain unfilled. However, Kraft, which has about 46,500 employees in North America, out of the total workforce of 127,000 employees worldwide, has decided not to reduce its workforce at its manufacturing facilities currently.
Though the job cuts have negatively affected the lives of many employees, Kraft, on the other hand, is expected to benefit from this planned reduced workforce, as it now expects its net revenue to climb by about 10% for fiscal 2011 to reach $54.13 billion.
In addition, Kraft expects its 2011 operating earnings per share of at least $2.28, up from $2.27 per share as projected earlier. The company is also likely to invest more aggressively in its brands.
As part of the other plans, Kraft plans to divide its grocery sales business into two agencies of Acosta Sales & Marketing for its grocery store and big box retailer sales, and Crossmark for its convenience store sales. On the other hand, the company plans to close two of its four U.S. management centers, while combining its other offices across the country, making the East Hanover, New Jersey facilities as the U.S. headquarters for its global snacks business.
Further, Kraft’s beverages division, which is currently based in Tarrytown, New York, and Planters, based in East Hanover, New Jersey, will be moved to the Chicago area by December 2012, while its Glenview, Illinois management center will be closed by the end of 2013. However, most of the employees will be given an option of transfer.
In December 2011, Kraft had also named the chief executive officers (CEOs) and the chief financial officers (CFOs) for the two companies that will be created after it splits into two entities before the end of 2012.
Kraft had announced that the current CFO of Kraft, David Brearton, will continue as CFO of the independent global snacks company, whereas Kraft CEO Irene Rosenfeld will lead the global snacks company as its CEO. The current president of the North American foods division, Tony Vernon, would become the CEO of the North American grocery business; and Timothy McLevish will be the CFO of the North American grocery business upon the completion of its planned split.
Kraft’s North American team has been streamlining its operations since last year, and we believe that the job cuts will also bring about cost reductions which are expected to benefit its margins. However, it might happen that the spin-off would result in some additional costs that could exceed the planned savings.
Besides, Kraft is facing challenges including higher commodity prices and increasing packaging and distribution costs, increased marketing expenses, and competition from private labels. Further, the presence of tough competitors like Unilever Plc. (UL) and ConAgra Foods Inc. (CAG) also add to our concerns.
Currently, we prefer to rate the stock as Neutral. Further, Kraft holds the Zacks #3 Rank, which translates into a short-term Hold rating.
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