Kraft Foods announced this morning that it has agreed to sell the assets of its North American pizza business to Nestle. Among other brands, the sale includes the California Pizza Kitchen trademark license and is expected to close in 2010. CPKI stated in a press release that it is “excited about a new relationship with Nestle and look forward to working with them in further developing the brand in the grocery channel." Although CPKI management went on to say that it expects a smooth transition to Nestle, I would expect some disruption around the company’s royalty business until the transition is complete. And, longer term, the future of this part of CPKI’s business could be in question as we do not know if or how the trademark agreement will change with Nestle or how the brand will fit into Nestle’s portfolio. With Nestle being a European company, albeit with a presence in the U.S., I am concerned that the CPK brand may not get the same focus as it did from Kraft, which could impact both the marketing and execution of the frozen pizza products.
Royalties from the Kraft licensing agreement only represented about 1% of total sales in 2008, but it is a fast growing, high margin business for CPKI. In the most recent quarter, Kraft royalties grew 35.2% and this follows 40% growth in 2008 and 30% growth in 2007. It was only two months ago on CPKI’s 3Q09 earnings call that CEO Rick Rosenfield said “Our Kraft business continues to perform well with its expanded product line of pizza and pizza-related items. And despite an influx of competition and escalating marketing initiatives, our Kraft royalties were up 35.2% in the period. We continue to be encouraged by our prospects in the grocery aisle and feel that we have a distinct advantage by having our frozen products identified with our successful restaurants. Moreover, we have a great relationship with Kraft and expect them to spend a significant amount promoting the CPK brand this year. Larry and I are working cooperatively with them on several initiatives to increase brand awareness of both our frozen product line and full service restaurants themselves.”
His point about Kraft spending a significant amount behind the CPK brand is an important one as Kraft was required to spend a percentage of net sales on advertising and promotion of California Pizza Kitchen’s licensed products. One of the key questions for CPKI is whether this part of the agreement remains intact under the new agreement with Nestle.