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In a strategic pivot that could reshape its brand portfolio, Kraft Heinz is reportedly exploring the possibility of spinning off several of its slower-growing brands, including Velveeta and Oscar Mayer, as part of an effort to reverse the fortunes of its underperforming grocery division.

In recent years, consumers have shifted towards healthier and more affordable options, leaving traditional packaged foods struggling to maintain market share. By divesting these slower-growing brands, Kraft Heinz aims to concentrate on its more profitable and innovative lines, such as condiments and sauces, which are experiencing robust demand.

This potential move, first reported by the Wall Street Journal, could create a new entity valued at approximately $20 billion, making it one of the largest deals in the consumer goods sector this year.

Kraft Heinz, formed from a $45 billion merger in 2015 backed by Warren Buffett's Berkshire Hathaway, has seen its stock plummet by nearly two-thirds since the merger.

The company’s challenges have been exacerbated by changing consumer behaviours post-pandemic, with many shoppers opting for cheaper private-label alternatives over traditional name brands. In particular, the rising costs of packaged foods have led to a decline in sales, prompting a reevaluation of the company’s strategic direction.

The potential spinoff comes as Kraft Heinz’s leadership acknowledges the need for significant changes to unlock shareholder value. In May, the company indicated it was evaluating strategic transactions, coinciding with the exit of Berkshire Hathaway executives from its board, signalling a potential loss of confidence in the current trajectory of the food giant.

Market analysts suggest that while the spinoff may provide some immediate financial relief, the real challenge lies in attracting buyers for the newly formed entities.

The success of this strategy heavily depends on Kraft Heinz's ability to find acquirers willing to pay a premium for either the grocery-focused business or the more lucrative condiments division, which includes well-known brands like Heinz ketchup and Philadelphia cream cheese.

The condiments segment generated $11.4 billion in sales last year and is seen as having substantial growth potential, particularly in international markets. In contrast, the legacy brands, which contributed $14.5 billion in sales, face intense competition and declining market share.

Investment bankers have drawn parallels between Kraft Heinz's situation and the recent successful spinoff of Kellogg's cereal business, which was sold to Ferrero for $3.1 billion. Such examples highlight the potential for value creation through strategic divestitures, although analysts caution that the current landscape for food and beverage acquisitions is fraught with challenges.

Industry watchers are speculating on potential acquirers for Kraft Heinz’s brands, with companies like McCormick & Company, Unilever and Nestlé emerging as possible candidates.

As Kraft Heinz navigates this complex landscape, the implications of a spinoff remain uncertain. While the company seeks to rejuvenate its brand portfolio and improve financial performance, the path forward is laden with risks that could impact its standing in the competitive food and beverage market.

Kraft Heinz has not yet confirmed the spinoff plans, and further details regarding the potential restructuring remain to be seen. The company’s next moves will be closely monitored by industry stakeholders as they assess the viability of its strategies in a rapidly evolving marketplace.