Rosenfeld on restructuring

by Josh Sosland
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NORTHFIELD, ILL. — Prospects for a $3.5 billion restructuring program announced May 7 by Mondelēz International, Inc. should not be measured against earlier restructuring plans by its predecessor companies, said Irene Rosenfeld, chairman and chief executive officer.

Ms. Rosenfeld made the comparisons in response to a question posed during a conference call with investment analysts. The question related to a restructuring program to be carried out between 2014 and 2018. Expected to cost $2.5 billion in cash expenses and $1 billion in non-cash costs, the company said most of the costs would be incurred in 2015 and 2016.

The plans is intended is to “create a leaner, simpler and more focused organization by reducing operating costs to best-in-class levels through zero-based budgeting and by accelerating its supply chain reinvention initiative.”

The restructuring, which appears to focus principally on staffing and other administrative costs, is in addition to another plan announced last year in which a company executive announced Mondelēz intends to replace much of its aging production infrastructure.

Reflecting on earlier restructuring programs, Eric Katzman, an analyst with Deutsche Bank, wondered whether the company’s track record with restructuring should give investors much confidence.

“I would say that so much restructuring, so much cash leaving, really historically hasn’t led to great fundamental performance,” Mr. Katzman said. “This was ‘Growth Co.’ 18 months ago, and the top-line targets have now taken a complete backseat. So if I was working at Mondelēz, I would be kind of wondering, ‘What are my targets? I (Mondelēz marketing employees) used to be recruited here to be a brand manager with growth and now it’s all about cost savings and Z.B.B.’ So I guess as we kind of go through this next iteration of change and restructuring, how do you keep people focused or motivated? And how much disruption do you think is going to occur from so much going on within the company?”

Noting that the company’s last major restructuring program was launched a decade ago, Ms. Rosenfeld said the earlier program was more successful in many respects than the question suggested.

“I would remind you, as you know, our last restructuring program was in 2004 to 2008,” she said. “We did deliver the targeted savings under the program. But (we) had a business that was severely in need of reinvestment at that time. And if you recall in 2006, our shares were declining, our product quality was not where it needed to be. We didn’t have an innovation pipeline. So we did reinvest most of those savings back into the business. And quite frankly, I’d argue it created some great value on a number of those businesses, which allowed us to split off the North American grocery business and create great value for shareholders. At this point though, we’re in a very different position. Our shares have now been consistently positive for a couple of years. We’ve got our investments up to where we need them to be on our core snacking businesses. And I have great confidence that the savings we’ve laid out, you will see reflected in our P&L. And in fact, we’ve made the commitments today to take up the bottom end of our range over these next couple of years. And as we’ve said, we actually see some additional upside beyond that as a consequence of the investments.

“With respect to how should employees react, there’s a lot to absorb here. There’s no question about but that our employees are committed to creating this global snacking powerhouse that will win in the marketplace. And it is clear that as the environment has changed in large measure, it was imperative that we take appropriate actions to address some of the inefficiencies in our cost structure, while continuing to drive growth.

“If anything, the number of actions that we’re describing today will certainly help our margins, but will also give us the fuel to reinvest in growth.”

The different circumstances aside, the approach of the earlier restructuring program was quite similar in many respects to the latest plan. Charges associated with the 2004 restructuring initially were predicted by Kraft to aggregate $1.2 billion over the next three years, with roughly half being non-cash charges. The majority of the charges were expected to be costs to be incurred in the second and third years in pre-tax restructuring charges, primarily for asset write-offs and severance costs. The plan called for the closing of 20 manufacturing plants and the elimination of 6,000 jobs.

The 2004 program, in turn, followed by five years a restructuring of the direct-store delivery sales organization at Nabisco Group Holdings. The 1999 move put back into place the store-by-store system that was lost in a 1997 revamping.

“This massive rebuilding of an entire sales and distribution system was completed in less than a year,” the company’s top executives said at the time.

The 2004 program failed to spur enthusiasm on Wall Street, at least for several years. After hitting a price peak of $20.14 in May 2002, shares of Kraft Foods, adjusted for dividends, failed to eclipse that high water mark for nine years, until April 2011. Over the same period, a tumultuous one for the stock market, the S.&P.500 climbed 51%.
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