While Philip Morris talked about “an important scale-enhancing opportunity,” this deal is really all about snacking. America has become a Snack Food Nation. More than ever, “meals” are being consumed behind the wheel of a car in what food-industry experts call “dashboard dining.” Americans wolfed down $50 billion in snacks last year, enabling the junk-food business to grow at 4 percent, twice the rate of the food industry in general. And no company is better situated to take advantage of that craving than Nabisco. It makes America’s favorite cookie (Oreo), cracker (Ritz), peanut (Planters) and hard candy (Life Savers). The Nabisco brands are expected to supercharge Philip Morris’s giant Kraft Foods division, which has a pantry full of slow-growth cheeses and aging brands like Jell-O, Oscar Mayer and Maxwell House coffee. The combination of Nabisco and Kraft creates the most profitable food company on earth, with projected earnings of nearly $6 billion and revenues of $35 billion.
Amid this triumph of noshing, though, more than just the bottom line is getting fat. “Look at the waistlines of America, and you can see snacking is a growth business,” says John McMillin, food analyst for Prudential Securities. The rate of obesity in the United States soared by 50 percent in the last decade, with nearly one in five Americans now seriously overweight. Poor diet and lack of exercise is second only to cigarette smoking as a leading cause of death in America.
But the country’s propensity to pig out plays to Nabisco’s strengths. As makers of healthy foods like Campbell Soup and Kellogg’s struggle to adapt their sit-down meals to America’s deteriorating diet, Nabisco has thrived by reviving indulgent old favorites like Cheese Nips, which contain 150 calories and 6 grams of fat per serving of 29 nips. A decade ago when the masses embraced healthy eating briefly, Nabisco managed to score big by introducing SnackWell’s fat-free cookies and crackers. For a time, grocers couldn’t keep them in stock, but they eventually fell out of favor. “People became sick of biscuits that tasted like cardboard,” says Goldman Sachs food analyst Romitha Mally. These days SnackWell’s aren’t selling so well, even after Nabisco boosted the fat content to improve the taste. But the rest of Nabisco’s sugary and salty lineup is selling briskly.
Now that Philip Morris is gobbling up Nabisco, one of America’s most storied business dramas is coming to an end. More than a decade ago, a bruising Wall Street bidding war led to the leveraged buyout of RJR Nabisco, which became the exclamation point on the go-go ’80s and spawned a best-selling book, “Barbarians at the Gate.” But being yoked to the R.J. Reynolds tobacco company hobbled Nabisco. As tobacco lawsuits sapped RJR’s focus and resources, food sales suffered and the 102-year-old biscuit company’s fabled new-product machine ground to a halt. Even as Nabisco’s fortunes rose on the snack craze, it suffered from guilt by association with the tobacco business and received little credit from Wall Street. Kraft, too, has been tainted by its connection to Philip Morris, maker of Marlboro cigarettes.
Philip Morris plans to spin off a portion of Kraft-Nabisco to put food at a safe distance from tobacco. Wall Street is hoping Philip Morris will eventually give Kraft-Nabisco full independence. “Then they can finally get rid of that tobacco albatross,” says industry watcher Bob Messenger, editor of Food Trends Newsletter. But never mind the stockholders. A hungry nation sees the pairing of Kraft’s Velveeta processed cheese and Nabisco’s buttery Ritz crackers as a marriage made in junk-food heaven. For snackers everywhere, this deal is fat city.
