Ooey, gooey mess

Jack Neff, Contributing Editor

Executives are leaving, sales are sagging, products are failing, and its parent is ailing. So what's next for Kraft?

A quick survey of the exhibit hall for the Food Marketing Institute's (FMI) annual conference and exhibition, which was held in May, shows just how mighty Kraft Foods has become in the U.S. food industry: Its exhibit space literally towers over everyone else's. Kraft's reputation on Wall Street casts a similarly long shadow.

 

Yet things have been unraveling fast for the food industry's finest in recent months due to events both within and beyond Kraft's control. A legal ruling in tobacco litigation against parent Altria Group (the cigarette maker formerly known as Philip Morris Cos.) resulted in credit rating downgrades for Altria and Kraft and significantly raised the latter's borrowing costs.

 

Then two key executives left in July -- Irene Rosenfeld, president of North American Businesses, and Michael Polk, Kraft Foods North America Group (KFNA) vice president as well as president of Biscuits, Snacks and Confections, which include Nabisco. Polk left to become senior vice president of marketing and chief operating officer of Unilever Bestfoods, which is struggling with problems of its own. The next stop for Rosenfeld, who left only nine months into her job, hasn't been disclosed.

           

A week later, another shoe dropped when Kraft reported it missed second-quarter earnings expectations and reduced its sales and earnings outlook for the balance of this year. Suddenly, a company that nearly could do no wrong in the eyes of Wall Street was reeling amid widespread downgrades and harsh appraisals by analysts.

 

Kraft co-CEOs Betsy Holden and Roger Deromedi, who blamed competition from private labels and the failure of some key products for the mess, pledged to spend an extra $200 million on marketing through the end of 2003 to shore up core businesses such as cheese and biscuits.

 

In a July conference call, Holden blamed Kraft's disappointing performance on a host of factors. "We incurred higher promotional spending in certain categories, including cheese, coffee and cold cuts, to narrow price gaps versus private label and price-oriented competitors," she said. "Disappointing results on certain new biscuit items, including Chips Ahoy [Ooey Gooey Warm & Chewy cookies], generated significant product returns [from retailers]. And finally and most significantly, we expected our top-line growth to be stronger and [our] product mix to be more favorable."

           

A "private" problem

 

Inventory de-stocking by retailers, particularly of higher-priced items, as well as a poor worldwide economy also hurt results. Consumers traded down to private labels after Kraft raised prices on cheese and its private-label competitors didn't follow suit.

           

Notwithstanding problems with its Ooey Gooey product, which occurred when original microwave instructions had to be adapted for differing climatic conditions, resulting in cookies with iffy consistency, most products launched by Kraft this year have met or exceeded expectations, Holden said. These include Altoids breath strips, Lunchables Fun Fuel, Uh-Oh Oreos and Kraft Cheese and Cracker Cups. Developing markets also posted a solid 4.8 percent increase in the quarter, one-third of which came from acquisitions, she said.

 

But analysts think that Kraft's problems may be simpler , yet deeper , than Holden and Deromedi describe. 

 

"Kraft is first and foremost huge and in a mature industry," says William Leach, analyst with Neuberger Bergman. "Their core categories, which are coffee and cheese, are frankly just one step above commodities. If you look back at the promises they made all through their [2000 initial public offering], it looks ridiculous in hindsight. And they were clearly guilty of cutting their marketing spending to make their earnings. Now they're paying the price for it. They've gone from one of the best in the industry to one of the worst."