Food & Beverage

Take them all private — legacy companies from Kellogg to Clorox could be better off out of the public eye

Key Points
  • Consumer companies' valuations have been rising even as many have seen their sales declining.
  • With less fat left to cut, they will need to create growth, a task with which they have struggled .
  • Once private, large consumer companies could reinvest the cash their businesses throw off into their iconic brands, rather than spending money on risky deals.
Cans of Campbell's Chicken Noodle Soup are seen in a supermarket in New York.
Richard Levine | Corbis News | Getty Images

Consumer companies from Kellogg to Clorox are maybe not best suited for the public eye.

Public investors crave growth, but America's oldest brands are not growing. They are fighting for eaters whose tastes change constantly and new brands that pop up by the minute.

Those brands, though, are still valuable. They could be even more valuable if out of the public spotlight.

Iconic names like Heinz ketchup and Special K cereal are always going to have a place in the Americans' cupboards and refrigerators. The trouble is these brands still require investment — like simpler labeling and cleaner ingredients — to compete as upstart brands offer health and transparency. It's hard to make these investments while held hostage to quarterly earnings targets.

So far, consumer companies have largely been able to manage their challenges by cutting costs to grow earnings, in lieu of growing sales. Kraft Heinz and its 3G-led zero-based budgeting approach to company management helped usher in a new era of cost-slashing for consumer companies.

That process has largely worked. Public investors value consumer companies today by 40 percent more than they did five years ago. Those valuations are also boosted by the fact investors often view these stocks as safe investments with steady dividends.

But the same cannot be said for sales growth, which in 2017 clocked in at just 2.6 percent, nearly half the industry's growth five years ago.

As consumer companies' ability to cut to grow has tapered, the companies have either seen shares crater, like Kraft Heinz, or paid lofty prices to buy growth they could not create on their own. Unfortunately, consumer companies' track record of maintaining growth after an acquisition is rocky. Brands from Hershey to Kellogg have acknowledged such challenges.

Meantime, many have created incubator or venture arms to explore new ways to grow in a more entrepreneurial environment. But few, if any, of these endeavors have resulted in a home run. It's hard to take risks and match the start-up culture of young brands as a large public company.

Here are five companies that might be better off private, if only they can find an equity investor to put up the cash for it. These companies share in common stable products — ketchup, cereal and bleach — that throw off a steady cash flow, but still need long-term investment.

Kraft Heinz

Kraft and Heinz products
Scott Olson | Getty Images

Kraft Heinz, the ketchup company backed by 3G Capital and Warren Buffett, is essentially already run like a private equity firm. 3G believed that stable iconic brands like Heinz ketchup need little by way of marketing. Rather than focusing on growth, Kraft Heinz doubled down on cost-cutting through its infamous zero-based budgeting approach. The company slashed $1.7 billion in costs after the 2015 merger of Kraft and Heinz.

But now, public investors want growth. While iconic products like Heinz ketchup continue to grow, it's not enough to counteract the decline of its smaller brands. The ketchup company also owns brands like Oscar Mayer, Kool-Aid and Velveeta.

Kraft Heinz last quarter posted a decline of 1.9 percent in its U.S. net sales.

Shares of the company have dropped nearly 30 percent over the past year, giving it a market capitalization of about $67 billion.


Kellogg’s Raisin Bran brand breakfast cereal sits on display in a supermarket in Princeton, Ill.
Daniel Acker | Bloomberg | Getty Images

Kellogg has a cereal problem. Cereal sales declined 1.7 percent from 2016 to 2017, according to Euromonitor. But Kellogg's iconic brands, like Raisin Bran and Froot Loops aren't going away. Kellogg needs to reduce capacity to account for declining demand, but doing so isn't easy with the fixed costs of its mass-producing equipment.

Meantime, Kellogg, like its peers, has forked over cash for growth, last year paying $600 million to buy protein bar RXBar, the results of which are too early to tell.

Shares of Kellogg, which has a market capitalization of about $24 billion, are up around 2 percent this year.

General Mills

General Mills Cereal boxes
Joe Raedle | Getty Images

General Mills' core business has been struggling and efforts to secure growth have put it on thin ice. Its stock has dropped around 20 percent since announcing its roughly $8 billion acquisition of Blue Buffalo pet food earlier this year.

General Mills pounced on the rare find in the food industry — a business that is large, growing and profitable. But investors are worried about its ability to justify the high multiple it paid — 22 times 2017 adjusted earnings before interest, taxes, depreciation and amortization. Not to mention potentially costly risks that might happen as it integrates a business that is so different from its own.

Other deals it has done for growth have already stumbled. The Cheerio's owner earlier this year recorded a nearly $97 million impairment charge on its acquisition of Yoki snacks and seasonings, Mountain High yogurt and Immaculate Baking's cookie business.

Its cereal business last quarter clocked 1 percent growth, the only business within its four U.S. segments that grew.

General Mills reported modest organic sales growth for its latest quarter, but cash provided by operating activities was up 3 percent.

The company's stock is down 26 percent since January, pushing its market value to about $26 billion.


ConAgra Foods products
Daniel Acker | Bloomberg | Getty Images

Conagra's stock still hasn't recovered from its fall when it announced its roughly $8 billion acquisition of Pinnacle Foods.

The deal was a push further into the frozen food industry, combing frozen brands Healthy Choice and Birds Eye.The owner of Reddi-Wip whipped cream saw opportunity to scale and cut costs.

But while the resurgence of frozen food had made it a darling among mature food companies, the 3 percent growth it clocked last year is still modest for public investors' demands.

Meantime, the Conagra's older brands like Orville Redenbacher popcorn and Chef Boyardee canned pasta are far from on trend with today's consumers' tastes.

For next year, Conagra is anticipating net sales growth of only 0.5 to 1.5 percent.

Conagra shares, which have a market capitalization of $14.6 billion, have declined 5.5 percent since January.


Adam Jeffery | CNBC

Clorox, best known for its bleach, also owns brands like Pine Sol cleaner, Glad trash bags and Brita water filters.

Those sturdy brands have helped drive strong cash flow and consistent dividend hikes. Clorox is part of the S&P "Dividend Aristocrats" group — companies that have increased their dividends every year for at least the last quarter century, according to Argus Research.

Clorox expects free cash flow for 2019 of about 11 to 13 percent of sales, it recently told analysts. But the company, like other consumer brands, faces competition from upstarts like Seventh Generation cleaners, which Unilever bought two years ago, as well as from cheaper private-label products like Costco's Kirkland brand. That competition comes as Clorox is forced to hike prices to counteract rising commodity costs.

The company's organic sales this past quarter dropped a half a percent.

In 2011, activist investor Carl Icahn sought to force a sale of the company, either to himself or to a peer, before ultimately withdrawing those efforts. Today, Icahn's $80 a share offer for Clorox would be eclipsed by its $148 trading price. With a market capitalization of around $19 billion, it would be tough to find the financing to take it private. But for a willing taker, it could be a cash cow.