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Speaker 2: Craft Higns to separate into two publicly traded companies. Jen
Speaker 2: Bartashis joins a senior retail stables and packaged food analyst
Speaker 2: at Bloomberg Intelligence. Jen, what is craft Higns doing? It
Speaker 2: wasn't just like ten years ago they put the companies.
Speaker 3: Together, Hi, Paul.
Speaker 4: Yes, it was just about a decade ago that they
Speaker 4: put the companies together with the plans that it would
Speaker 4: become kind of a package food powerhouse. But trends have
Speaker 4: changed and consumers have changed, and it just hasn't materialized
Speaker 4: the way they originally thought it would.
Speaker 5: So what did the two companies get out of this merger?
Speaker 6: Then?
Speaker 4: So you know when they when when we're looking at
Speaker 4: what they brought together, they brought together some products where
Speaker 4: they were able to recognize some synergies, They were able
Speaker 4: to do some co branding, some you know, product development,
Speaker 4: that sort of thing. But as I said, the consumer
Speaker 4: has changed and demand for shelf stable packaged food products
Speaker 4: is just less than it was. And so we've seen
Speaker 4: multiple years where scanner data shows that Kraft Heind's brands
Speaker 4: have sort of been shrinking a little bit, and I
Speaker 4: think this separation as an attempt to kind of reinvigorate
Speaker 4: growth in different parts of their portfolio.
Speaker 2: He loss that the companies ended up selling each of
Speaker 2: those each of those two companies end up selling to
Speaker 2: private owners because something similar happen here.
Speaker 4: Uh, there is that possibility, you know, it's the It
Speaker 4: definitely echoes what Kellogg did. They took their emerging markets,
Speaker 4: they took their higher growth brands, spun them off into Kelenova,
Speaker 4: which then got acquired by Mars or is in the
Speaker 4: process of being acquired by Mars. Their w K Kellogg
Speaker 4: was their residual North America cerial business was recovering from
Speaker 4: drike issues and distribution issues, and that has been snapped
Speaker 4: up by Ferraro. So there's definitely possibility that craft Time
Speaker 4: split could result the same sort of end result down
Speaker 4: the road.
Speaker 7: You mentioned several times how the consumer has changed. Let's
Speaker 7: dig into that a little bit more. Are we talking
Speaker 7: about because of the ANTIOBESD drugs like GLP one. Is
Speaker 7: it a case where RFK and Make America Healthy Again
Speaker 7: is really taking root? I mean this is kind of
Speaker 7: a slow moving shift in the consumer, right.
Speaker 4: It is, indeed scarlet. It's a slow moving shift, and
Speaker 4: it started, you know, coming out of the pandemic. In
Speaker 4: the pandemic, everybody sort of retreated to familiarity, right. They
Speaker 4: went back to brands, they went back to shelf stable products.
Speaker 4: And since then there's been more emphasis on things that
Speaker 4: are more natural, lower sodium, healthier for you, that sort
Speaker 4: of thing. And while Kraft Time's has been making updates
Speaker 4: to their portfolio, it is hard to envision how kind
Speaker 4: of electric orange mac and cheese has a long term growth,
Speaker 4: long term growth appeal to people where you know, there's
Speaker 4: pressure from as you said, RFK and more like natural
Speaker 4: colorance and things like that. So you know their portfolio
Speaker 4: is caught in that crosshairs.
Speaker 6: You know.
Speaker 2: Again, as a former banker, I probably told my clients, hey,
Speaker 2: when need announce the seeing the stock is going to
Speaker 2: go up, well stocks down here. When you put companies together,
Speaker 2: the pressurelease often talks about the synergies that are going
Speaker 2: to be the cost synergies, maybe some revenue synergies.
Speaker 3: Maybe are there dissynergies when you break them.
Speaker 4: Apart, Yeah, there are dissynergies. The company expects about three
Speaker 4: hundred million dollars in dissynergies. You know, thankfully most of
Speaker 4: their manufacturing practices are fairly separate, but there is a
Speaker 4: component to that. You know, the stock is down today,
Speaker 4: but this isn't really new news. Craft Tign's actually said
Speaker 4: in May they were exploring strategic options. There's been repeated
Speaker 4: rumors that it would result in a split of two companies,
Speaker 4: So the confirmation today isn't necessarily unexpected news.
Speaker 5: Paul Geez, does that just mean upfront costs?
Speaker 3: I think I need a new CFO, I need a
Speaker 3: new accounting department. I don't know.
Speaker 2: Well, so go ahead, Jay Jed's what's next for the
Speaker 2: package food business? I mean, is this just a industry
Speaker 2: wide secular decline?
Speaker 4: Well, right now it appears to be, especially in North America,
Speaker 4: a bit of a secular decline. Pockets of growth are
Speaker 4: becoming more and more isolated, and so when you're looking
Speaker 4: at scanner data, the problem is the consumer. As I said,
Speaker 4: they're shifting behaviors. But they're just not buying as much
Speaker 4: as they used to. And you see this even with
Speaker 4: Walmart or Target or Kroger, where people used to buy
Speaker 4: in multiples and stock up their pantries, and they just
Speaker 4: don't shop that way anymore. They're buying more on an
Speaker 4: as needed basis, and part of that is the macroeconomic environment,
Speaker 4: and so that just doesn't favor these companies right now
Speaker 4: where historically they've been pantry staples. And so right now
Speaker 4: when consumers are looking what they're going to make for
Speaker 4: dinner tonight, a bigger know they're played as fresh foods.
Speaker 4: So the perimeter of grocery stores are doing much better
Speaker 4: than the center of the store, which is these shelf
Speaker 4: stable products.
Speaker 7: Let's talk about the folks who brought these two companies together.
Speaker 7: Is Berkshire Hathaway run by Warren Buffett and three G
Speaker 7: Capital run by a group of Brazilian operations. Guys, where
Speaker 7: did they stand in all this gen what happens to
Speaker 7: do they each still hold steaks in the companies?
Speaker 5: I mean, do they come out looking better ten years later?
Speaker 4: Well, Berkshire Hathaway still has a large steak in the company.
Speaker 4: I think they owned just over twenty five percent of
Speaker 4: the outstanding shares. But you know, they did relinquish their
Speaker 4: their chairs on the board shortly before the strategic options
Speaker 4: were announced, or that the company was exploring strategic options.
Speaker 4: So they've been slowly pulling back, you know, from the
Speaker 4: time of their initial steak. They're probably still going to
Speaker 4: come out ahead, but it has been a ten year
Speaker 4: play for them.
Speaker 3: Do we know where they're going to put their shares?
Speaker 2: Are they going to go equally between the two company
Speaker 2: these because I'd like to invest alongside.
Speaker 4: One At this point, I don't think that's been disclosed,
Speaker 4: but it is certainly something that everyone will be watching for.
Speaker 7: What will you be watching for, Jen, in terms of
Speaker 7: how competitors respond or react or move in, you know,
Speaker 7: to kind of take advantage of this breakup.
Speaker 4: I think what will be interesting is to watch the
Speaker 4: level of promotional activity. There will likely be some some
Speaker 4: effort to take market share, and Craft Times is likely
Speaker 4: to up their marketing spend in order to try to
Speaker 4: drive volumes just ahead of when this split actually becomes realized,
Speaker 4: to sort of show improvement in some of their legacy brands.
Speaker 4: So what that really sets up a stage for is
Speaker 4: actually probably good for the everyday shopper and that they'll
Speaker 4: be probably more sale items, more discounts, But it also
Speaker 4: means that it's less profitable sales for the companies that
Speaker 4: are involved in chasing that market share. So it will
Speaker 4: be interesting to watch how it unfolds. Companies only expecting
Speaker 4: this to close or to be realized that this second
Speaker 4: half of next year, so there's some time for those
Speaker 4: dynamics to play out.
Speaker 3: Stay with us. More from Bloomberg Intelligence coming up after this.
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Speaker 2: Lots of deals out there, but the deals aren't, you know,
Speaker 2: M and A per se and breaking stuff up. Some
Speaker 2: of those consumer products companies haven't been put together.
Speaker 3: Over the last several.
Speaker 2: Years, we're seeing some of those companies think about breaking
Speaker 2: themselves up.
Speaker 3: One of them is Pepsi.
Speaker 2: We have Pepsi, we have investor Elliott Management activists Investor
Speaker 2: taking a four billion dollar stake in Pepsi.
Speaker 3: Maybe provoking some change down the road. Let's see what
Speaker 3: happens there.
Speaker 2: Ken Shay joins us Bloomberg Intelligence senior Commodity consumer Products
Speaker 2: analyst here. Ken Ken, I mean when you look at Pepsi,
Speaker 2: do you think about it as Ree Delay and all
Speaker 2: the snacks on one side and Pepsi and all the
Speaker 2: other soft drinks on the other side, And it just
Speaker 2: feels like it's a company that, boy, it could be broken.
Speaker 3: Up, just like some of these other consumer productsy companies.
Speaker 3: What do you think?
Speaker 8: Yeah, Hi, Paul, Actually it's only a few weeks ago.
Speaker 8: I wrote a report over Bloomberg Intelligence saying that given
Speaker 8: the weakness of the stock, is really just a matter
Speaker 8: of time where these talks are going to be revived.
Speaker 8: Recall back in twenty fourteen, try On and an activist
Speaker 8: actually advocated that breaking the company up between beverages and foods.
Speaker 8: The company decided not to do it. It made the
Speaker 8: case that it was getting good synergies between the two.
Speaker 8: Fast forward to today, Elliott isn't quite going that far.
Speaker 8: And Elliot's letter today it said it believes that value
Speaker 8: can be created by simply having the beverage side. Roughly
Speaker 8: forty percent of the business just refranchise their bottling operations
Speaker 8: and plain English, what that means is to divest those
Speaker 8: capital intensive operations manufacturing operations that create the finished product
Speaker 8: from the syrups and concentrates that Pepsi, the beverage company sells.
Speaker 8: That's really the golden part of that business, you know,
Speaker 8: the jewel that business is the concentrate business. That's what
Speaker 8: Coca Cola does. Coca Culture sells concentrates, syrups or high
Speaker 8: margin to third parties to make the product. PepsiCo chooses
Speaker 8: to do it in house. That results in tying up capital,
Speaker 8: lower margins, and so on. At the same time, Elia
Speaker 8: is also saying on the food side, perhaps some SKU
Speaker 8: rationalization is due, meaning there's a lot of food products
Speaker 8: there that they may not be well suited to sell.
Speaker 8: The fredola is doing really well, although it's a kind
Speaker 8: of a slowdown right now with many consumer products. It's
Speaker 8: the Quacker foods. I think it's really targeting and saying,
Speaker 8: you know, maybe maybe some reduction there, maybe in order.
Speaker 8: So that's really what the gist is today with Pepsi.
Speaker 7: All right, Ken, thank you for that very very detailed rundown.
Speaker 7: I want to pick up on what you were talking
Speaker 7: about with the bottling business, refranchising the bottling business, which
Speaker 7: is what Coca Cola does. Right now, what does Coca
Speaker 7: Cola give up by doing that? I mean there had
Speaker 7: to be a reason why Pepsi chose to keep it
Speaker 7: in house up until now.
Speaker 8: Yeah, that's a great question, Scarlett. So go back in
Speaker 8: time with ten fifteen years ago or so, both companies
Speaker 8: had done that. They both had separated those businesses. Pessico
Speaker 8: decided to retain or it sol and then it brought
Speaker 8: it back and it decided to keep it and made
Speaker 8: the case. At the time that's the softwareing business was
Speaker 8: in a downturn, volumes were week. They thought by gaining
Speaker 8: more control of those bottling operations they could right size
Speaker 8: the ship that they could get it back in order
Speaker 8: align the interest between the bottlers and the company. Because
Speaker 8: I'm going to remember Coca Cola, by separating it, it
Speaker 8: is to some degree giving up a little it's accepting
Speaker 8: a little risk. I mean, these are third parties, or
Speaker 8: these are independent companies. They can sell beer, they can
Speaker 8: do other things. PepsiCo didn't want them to do that.
Speaker 8: PepsiCo said, look, we want you to be fully aligned
Speaker 8: with what we want. So that's what they said they
Speaker 8: gained from that, and I guess there's some truth to that,
Speaker 8: but you're giving up a lot also for the factors
Speaker 8: that I mentioned before.
Speaker 2: Ken, You've been covering this consumer space for a long time.
Speaker 2: You've seen the cycles come and go. It seems like
Speaker 2: we're in a cycle of breaking these companies up. I mean,
Speaker 2: you've seen this game before. How do you think this
Speaker 2: is going to play out across the consumer space?
Speaker 8: Well, you know, given the PepsiCo stock before today was
Speaker 8: down about twenty percent over the last two years, so
Speaker 8: it's really disappointed investors. And beyond that, it's that their
Speaker 8: long term algorithm of high single digit comparable EPs growth
Speaker 8: is not going to happen this year. They're looking at
Speaker 8: flat earnings, you know, this year, and investors see the
Speaker 8: writing on the wall, they see a slow down, and
Speaker 8: they're saying, look, maybe there's more than just a cyclical
Speaker 8: element here, Maybe there are some structural things this company
Speaker 8: can do. I think Elliott's making some good points here,
Speaker 8: and I think PepsiCo ought to follow through on some
Speaker 8: of these if they want to regain some of the
Speaker 8: low sentiment that's out there among investors.
Speaker 7: Do you expect other investors to jump in here and
Speaker 7: kind of ride on Elliot Management's coattails. I mean, is
Speaker 7: Elliott going to be empowered to ask for more going forward?
Speaker 8: That's a great question. I think there's going to be
Speaker 8: some supporters of Elliott. Like I said, I think Elliot's
Speaker 8: making some fair points. PepsiCo has been really disappointing on
Speaker 8: the operational side, and like I said in the stock Front,
Speaker 8: I think it ought to be open ears to listen
Speaker 8: to what Elliott said. I think others will support Elliott
Speaker 8: in this case.
Speaker 5: Yes, stay with us.
Speaker 3: More from Bloomberg Intelligence coming up after this.
Speaker 1: You're listening to the Bloomberg Intelligence podcast. Catch us live
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Speaker 1: Auto with the Bloomberg Business app. Listen on demand wherever
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Speaker 2: Lot's going on in the world of global healthcare. We
Speaker 2: want to check in with sampaz Ellie. He's a director
Speaker 2: of research for Global Industries any Senior Biotech, Pharmaceuticals, all
Speaker 2: that healthcare stuff Analyties based in London.
Speaker 4: Here.
Speaker 8: Hey, Sam, We've.
Speaker 2: Had a lot of turnover and a lot of uncertainty
Speaker 2: within our healthcare. I don't know Washington, DC government entities.
Speaker 2: How does that affect the rest of the world here.
Speaker 6: Oh, that's a very big question, Paul, and lovely to
Speaker 6: talk to you again. It's been a while. There's all
Speaker 6: sorts of layers. Of course, you know about USAID which
Speaker 6: has been stopped, and lots of projects that have been
Speaker 6: going have been stopped in terms of funding. Then you
Speaker 6: have the CDC, which is much more focused on the US.
Speaker 6: The CDC is Control and Prevention, is the body that
Speaker 6: is responsible for US as health and it is part
Speaker 6: of the Health and Human Services the division, so HHS
Speaker 6: Secretary RFK Junior is in charge of basically the whole thing.
Speaker 6: And there's been major upheavals in terms of people that
Speaker 6: even they have had a point themselves to the CDC
Speaker 6: resigning within about you know, after about a month. I'm
Speaker 6: talking about monareres Of, who was the director of the
Speaker 6: CDC and just left or was fired because apparently she
Speaker 6: wasn't prepared to Robbert Stamp whatever. The Advisory Committee or
Speaker 6: Immunization Practices, which is part of the CDC, suggests to
Speaker 6: the CDC what vaccine should be used, when, how, and
Speaker 6: that then impacts insurance coverage. She was told you need
Speaker 6: to rubber stop what they say, and of course she
Speaker 6: didn't believe that was the right way to do it.
Speaker 6: So there's a lot of uppeople And we now have
Speaker 6: another ACIP Advisory committe meeting on the eighteenth of September.
Speaker 6: Let's see what they say about COVID vaccine. But already
Speaker 6: are the US's access to vaccines that has been reduced?
Speaker 7: What does this mean for the rest of the world, though, Sam,
Speaker 7: I get what you were saying about insurance coverage in
Speaker 7: the U, but do the equivalent of CDCs and other
Speaker 7: countries take their queue from the US CDC.
Speaker 6: No, no, no, no, no no. In fact, to be
Speaker 6: honest with you, the Federal the FDA's decision with regards
Speaker 6: to the limiting of vaccines in the US for COVID,
Speaker 6: for sure, has brought the US policy or will bring
Speaker 6: US policy in line with the rest of the world.
Speaker 6: In the UK, I am not seventy five yet. I
Speaker 6: hope you can tell that you're going to allow to
Speaker 6: thank you. I need to go a for it until
Speaker 6: you're seventy five. Right in the US, it was pretty
Speaker 6: much available to anyone under the age of sixty four
Speaker 6: or sixty five. Now it's been limited to sixty five
Speaker 6: and above. So this just brought the rules in line
Speaker 6: with Europe. So Europeans were already there because of our healthcare,
Speaker 6: but just being under constraints, et cetera. But the US
Speaker 6: is supposed to be about free choice, and that is
Speaker 6: where I think the complex complexity comes in. And what
Speaker 6: I'm more worried about is that the language and the
Speaker 6: way they're addressing it is what will cause people or
Speaker 6: concerned about actually going in and getting a shot.
Speaker 2: So what about just if the FDA limits approval of
Speaker 2: COVID shots for example, or I don't even flu shots.
Speaker 3: I'm not sure how they're how they're going to approach.
Speaker 2: It, that would be more I guess out of pocket
Speaker 2: expense for consider Yeah.
Speaker 6: Yeah, I think Bloomberg had an article saying that it's
Speaker 6: going to be right two hundred and twenty dollars and
Speaker 6: twenty four dollars a shot. Now you and I can
Speaker 6: probably afford that, right, A lot of people can't, and
Speaker 6: that will then be the issue that you know, a
Speaker 6: pregnant woman where actually a lot of scientists and medics
Speaker 6: believe that they should get the shot, and in Europe
Speaker 6: it is approved. They do get it. They they're not
Speaker 6: they're not recommended for the vaccine anymore. So that is
Speaker 6: the problem because then your baby is born with no
Speaker 6: protection against the shot the virus, which is bad for babies.
Speaker 6: So there are these issues. And of course we've got
Speaker 6: this meeting coming up. Don't forget. There's another thing coming
Speaker 6: up in September, this big research they've been doing to
Speaker 6: try and see what is causing this massive rising autism,
Speaker 6: and we'll talk about it. I'm sure the day the
Speaker 6: research comes out or that week, I wouldn't be shocked
Speaker 6: if it comes out and says, oh, here you go,
Speaker 6: there's evidence that it's caused by there's a correlation with
Speaker 6: vaccines use or aluminium in vaccines or whatever. And I
Speaker 6: can show you chart up the chart that you can
Speaker 6: show it related to glyphosades or fructose corn syrup that
Speaker 6: we've used in choicters. You could keep making these correlations.
Speaker 6: We've done things to a lifestyle that have called this
Speaker 6: issue and mental health issues, etc. You can't just pinpoint
Speaker 6: vaccines until you do it all prospective analysis.
Speaker 7: Yeah, but that's very complicated, and it feels like people
Speaker 7: want simple answer, Sam. What does this mean for the companies,
Speaker 7: the companies that develop the vaccines, that sell the vaccines,
Speaker 7: how are they positioning themselves?
Speaker 5: Are they pushing back?
Speaker 6: Well, they can only push back so far. We just
Speaker 6: saw some tweets from President Trump saying, look, if you've
Speaker 6: got the great data about vaccine and their safety that
Speaker 6: we hear you've got them and their efficacy, why don't
Speaker 6: you come and show us. I'm sorry, I'll could show
Speaker 6: you a link. I can send it to you if
Speaker 6: you put it in the show notes or whatever. They
Speaker 6: go into a link to the CDC meeting where the
Speaker 6: companies came and the CDC itself did research showing how
Speaker 6: what the effectedness of the vaccines had been in the
Speaker 6: previous twelve months, how many hospitalizations did it saved, the
Speaker 6: economic impact, and their safety analysis. What is it that
Speaker 6: the administrations are looking for? They're being presented four or
Speaker 6: five times a year through that same mechanism at the CDC.
Speaker 6: Who says these companies that are hiding the data.
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