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Several marketing services vendors to Kraft say the company has increased pressure on them to cut costs in the past year. And market research vendors say Kraft even proposed retroactive rebates on services already performed and billed for those wishing to keep Kraft's business. Research vendors shouldn't have been surprised, Kraft spokeswoman Kathy Knuth noted. "It had been previously discussedThey knew this was something that was coming.
"We have a responsibility to our shareholders," she added, "to have the best services for the least cost."
While squeezing marketing spending has hurt growth, Leach believes that over-promising on the IPO -- notably projected annual earnings increases of 15 percent -- ultimately set up Kraft to fail. "It was the second biggest IPO in history, and they had 16 underwriters," he says. "They just hyped it to death. They over-promised and under-delivered."
Plans to spend more to support brands are overdue, Leach says. "But the fact is they're just never going to be a 15 percent grower. In reality, a company like Kraft is really a 2 to 3 percent grower."
Tim Ramey, analyst with D.A. Davidson & Co., agrees that Kraft's growth projections have been overstated. At this point, he says, it would be prudent for Kraft to make more realistic projections instead of continuing to spend heavily to meet the old ones.
"The solution is to be realistic about your expectations and not try to exceed your natural growth rate," Ramey continues. "I know that sounds like heresy. But if you saw the discounted cash flow model on the $200 million [in increased marketing spending] they're going to do for the rest of the year, I bet you wouldn't do it with your own money. You'd think the risk-adjusted returns were just too low."
Kraft's biggest problem is that the innovation that helped it rise above much of the industry just isn't there as it had been, says Eric Katzman, analyst with Deutsche Bank Securities. "The basic criticism against Kraft is that it's in commodity-oriented categories, whether it be coffee or cheese or meat, but over the past several years, that was obscured or offset by some pretty impressive innovation," he says. "You can point to Oscar Mayer Lunchables or sliced cheese with added calcium, or the takeover of Starbucks' license in retail coffee. That put competition in a tough spot, meaning Kraft was able to get a premium for those brands and products. Now it appears that the consumer isn't giving those products a premium vs. the competition."
Simply tossing money at the problem isn't going to solve it, Katzman says. "The long-term solution is to continue proving to investors and consumers that they have differentiated products that will keep the competition at bay."
A lesser problem, Katzman believes, is a lingering integration issue from Kraft's 2000 merger with Nabisco. "I think this warehouse-driven company is having a little more difficulty than it thought dealing with the complexity of the [direct-store delivery] network."
"These things have cycles," Katzman says. "The company went through a few years where their innovation was ahead of the competition. And now they seem to be in a trough. But at some point they'll come out of it. It's too big and strong of a company; its management depth is too great for them to remain down forever. How long that takes is the $64,000 question."
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