Big Food is slimming down.

As both consumers and regulators push back against ultra-processed foods, the companies that make them have been splitting up or divesting iconic brands. Last year, Unilever spun off its ice cream business into The Magnum Ice Cream Company. Kraft Heinz is preparing to break up later this year, undoing much of the merger forged more than a decade ago by Warren Buffett’s Berkshire Hathaway and private equity firm 3G Capital. And Keurig Dr Pepper is planning a similar split after it finishes its acquisition of JDE Peet’s.

In 2024, nearly half of mergers and acquisitions activity in the consumer products industry came from divestitures, according to consulting firm Bain. Over the next three years, 42% of M&A executives in the consumer products industry are preparing an asset for sale, a Bain survey found.

Of course, the trend isn’t confined to just the consumer packaged goods industry. Industrial companies like GE and Honeywell have pursued their own breakups in recent years. It’s happening too in legacy media; Comcast spun off many of its cable assets into CNBC owner Versant, while Warner Bros. Discovery is planning to spin off its cable networks later this year as Netflix acquires its streaming and studios division.

“In many of the spaces that we’re seeing this type of activity, there are many very fierce competitive pressures that are making it harder to operate,” said Emilie Feldman, a professor at The Wharton School at the University of Pennsylvania.

The squeeze on packaged food and beverage companies comes from lower demand, which has led to shrinking volume for many of their products. To turn around their businesses and win back investors, they are counting on dumping underperforming brands.

February will bring both quarterly earnings reports and presentations at the annual CAGNY Conference, offering investors more opportunities to hear about food executives’ plans for their portfolios. Companies to watch include Kraft Heinz, which could share more details on its upcoming split, and Nestle, which is considering selling off multiple brands in its portfolio.

More recently, regulators, emboldened by the “Make America Healthy Again” agenda espoused by Health and Human Services Secretary Robert F. Kennedy Jr., have put both more pressure and a bigger spotlight on processed foods. And the rise of GLP-1 drugs to combat diabetes and obesity have meant some of food companies’ key consumers have lost their appetite for the sweet and salty snacks that they used to eat.

As a percentage of overall spending, the consumer packaged goods industry has held onto its market share. But the biggest companies are losing customers to upstart brands or private-label products, according to Bain partner Peter Horsley.

On average, about 35% of large consumer products companies’ portfolios are in categories with more than 7% growth, Horsley said. For comparison, over half of private-label brands are in high-growth categories, like yogurt and functional beverages, and for insurgent brands, it’s even higher.

For Big Food, the result has been slowing — or even declining — sales, followed by stock declines. In some cases, activist investors push for companies to focus more on their core offerings and to offload so-called distractions.

“You’re seeing a lot of pressure from a valuation standpoint, especially for these publicly traded companies,” said Raj Konanahalli, partner and managing director of AlixPartners. “One way to reset expectations is to really kind of focus more on the core offerings and dispose or divest the slower, capital-intensive or non-core businesses.”

While getting bigger helped food companies develop scale, enter new markets and grow their sales, it also made their businesses much more complex, according to Konanahalli. Become too big, and it becomes too difficult to make decisions quickly or to decide how and where to invest back into the business.

To be sure, some of these divestitures and breakups follow deals that seem to have been ill-advised from the start. Look no further than the merger of Keurig Green Mountain and Dr Pepper Snapple Group in 2018, to form Keurig Dr Pepper.

“Frankly the surprise to us was the decision back in 2018 when Keurig Green Mountain acquired the Dr Pepper Snapple Group in an $18.7 billion deal to create Keurig Dr Pepper in the first place,” Barclays analysts Patrick Folan and Lauren Lieberman wrote in a note to clients in August when the breakup was announced. “At the time, it was seen as both odd and a very left field deal with the questionable logic of combining coffee and [carbonated soft drinks].”

(When the merger was announced in 2018, Lieberman said on a conference call with executives from both companies that she was still “scratching my head” about the logic of the deal for both players).

Shares of Keurig Dr Pepper have risen 37% since the merger. The S&P 500 has climbed 150% over the same period.

Like many industries, the packaged food industry has gone through cycles of expansion and contraction, according to Feldman. For example, Kraft spun off a snacking business that includes Oreos into Mondelez in 2012, just three years before it merged with Heinz.

However, in recent years, expanding through acquisitions has required more sophisticated thinking and execution.

“If you go back to those glory years of pre-2015, the rules of the game in consumer products felt fairly simple, at least if you’re a global company,” Bain’s Horsley said. “You bought another company that was relatively similar to you. You integrated it together, you pulled out the cost synergies … and then that gave you good top-line and bottom-line growth. But the rules of the game have changed.”

Around 2015, upstarts like Chobani or BodyArmor began stealing market share from legacy brands. As a result, food giants needed to become more thoughtful about what they were acquiring and how they were managing their portfolios, according to Horsley.

For a cautionary tale, look no further than Kraft Heinz, formed by a mega-merger in 2015. Investors initially cheered the deal, but their enthusiasm waned as the combined company’s U.S. sales began lagging. Then came write-downs of many of its iconic brands, like Kraft, Oscar Mayer, Maxwell House and Velveeta, in addition to a subpoena from the Securities and Exchange Commission related to its accounting policies and internal controls.

With the benefit of hindsight, analysts and investors have blamed much of Kraft Heinz’s downward spiral on the brutal cost-cutting strategy imposed after the merger. The company’s leadership was too focused on slashing costs and not enough on investing back into its brands, particularly at a time when consumer tastes were changing.

Since Kraft Heinz began trading as one company, shares have tumbled 73%.

But not everyone is sold that getting rid of underperforming brands will benefit shareholders.

“If you don’t fix the underlying capability, it doesn’t matter how many brands you sell or don’t sell,” RBC Capital Markets analyst Nik Modi said. “They’re not addressing the root problem. It’s just something to make investors happy because it seems like they’re making a change.”

One breakup that Modi agrees with is that of Kellogg, which split into the snacks-focused Kellanova and cereal-centric WK Kellogg in 2023. Last year, chocolatier Ferrero snapped up WK Kellogg for $3.1 billion, while Mars closed its $36 billion acquisition of Kellanova.

From Modi’s perspective, the breakup created more value for shareholders than the combined business did. Kellogg’s high-growth snack business was much more viable as an acquisition target without the sluggish cereal division attached. Plus, the two strategic buyers are both privately held companies that don’t have to worry about sharing quarterly earnings with the public.

Some investors are hoping for the same outcome with Kraft Heinz.

“The view that many have had is the best way to create value is split the companies and hope that you can create a Kellanova 2.0 where both entities get acquired at some point down the line, and that’s where value creation happens,” said Peter Galbo, analyst at Bank of America Securities.

Kraft Heinz hired Steve Cahillane, the former CEO of Kellogg and then Kellanova, as its chief executive. Once the company separates, Cahillane will serve as chief executive of Global Taste Elevation, the placeholder name for the spinoff with high-growth brands like Heinz and Philadelphia.

But acquiring either company resulting from the Kraft Heinz split would be a pretty big acquisition, making it less likely that either is snapped up, according to Galbo. And the resulting uncertainty about the value creation from the breakup is maybe why Berkshire Hathaway, the company’s largest shareholder, is preparing to exit its 27.5% stake in Kraft Heinz.

On Tuesday, General Mills announced that it is selling its Muir Glen brand of organic tomatoes to focus on its core brands. And last week, Bloomberg reported that Nestle is preparing the sale of its water unit; the Swiss giant is also reportedly considering offloading upscale coffee brand Blue Bottle and its underperforming vitamin brands.

And if Big Food is making any acquisitions, the deals are more likely to involve “insurgent brands,” according to Bain. Over the last five years, acquisitions with a value of less than $2 billion represented 38% of total consumer products deals, up from 16% in the period from 2014 to 2019, the firm said. For example, last year, PepsiCo bought prebiotic soda brand Poppi for $1.95 billion and Hershey snapped up LesserEvil popcorn for $750 million.

Bigger deals are harder to come by because of the current regulatory environment, Konanahalli said. Buyers might not be strategic players, but instead private equity firms with plenty of cash on hand. For example, in January, L Catterton bought a majority stake in cottage cheese upstart Good Culture.

But a flashy divestiture or acquisition might not be the solution to a food conglomerate’s woes — or a surefire way to lift the stock price. Sometimes, good old-fashioned elbow grease can work even better.

“Just because it seems like the wind is blowing your way, it doesn’t mean that you can’t put in some hard work and turn things around,” AlixPartners’ Konanahalli said.