NORTHFIELD, Ill. (TheStreet) -- Kraft Foods' (KFT) decision to split into two separate companies highlights a trend that consumer foods and goods makers need to focus on higher-growth emerging markets as the outlook for expansion in developed markets remains sluggish.
Along with posting its better-than-expected second-quarter profit Thursday morning, Kraft laid out plans to split into two: a snacks business and a North American grocery business.
The snacks business, with estimated revenue of about $32 billion, will consist of the current Kraft Foods Europe and developing markets units as well as the North American snacks and confectionery businesses, the company said in a statement. The North American grocery business would consist of the current U.S. beverages, cheese, convenient meals and grocery segments and the non-snack categories in Canada and food service. The tax-free spinoff could be complete by the end of 2012.Kraft's strategic move underscores the recent sentiment of a number of established companies, namely that growth potential in developed markets is weak at best, at least in the foreseeable near term, as consumer spending is kept in check by uncertain economics and still-unstable employment and housing markets. Meanwhile, growth potential in emerging markets is seemingly boundless.
"Given the different investment priorities and growth trajectories of the two businesses, it makes a lot of sense to separate them," Sanford C. Bernstein analyst Alexia Howard noted Thursday. "The strategic rationale for such a move is strong." She said Kraft's split will aid CEO Irene Rosenfeld in expanding Kraft's footprint in emerging markets and take on new acquisitions, all while working to push the company's higher-margin U.S. grocery business forward. Sara Lee (SLE) and Fortune Brands (FO) have been working on similar moves to deleverage their companies through spinoffs.
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