FMCG

by Greg Thain

  The 1990 mini-restructure was Kraft General Foods’ first move to an over-arching marketing function, with links to all the business units. This function would remain largely unchanged even after the full 1995 merger of the US divisions. The year previously, the acquisition of the substantial Jacobs Suchard led to its merger with the much smaller Kraft Europe. This created Kraft Jacobs Suchard as a wholly owned subsidiary of Kraft Foods International.

  The next major structural change would come after the disappointing 2003 results highlighted the need for Kraft Foods to catch up with other global packaged goods companies. The setting up of a Global Marketing and Strategy group was not just a rebranding of the previous global marketing function; but a real shift of power away from the business units towards the centre. Category strategy, major innovation projects and global brand management would become defining features of this new function; while still leaving a high degree of autonomy to meet local tastes and nutritional needs – a Kraft strength – with the individual regional and country business units. But Kraft was playing organisational catch-up compared to the likes of Nestlé, Unilever and Heinz.

  What Has It Been Doing Recently?

  2004

  The new strategy and structure were apparently off to a good start with sales up by 5.5% to over $32 billion and volume up by 2.8%. However, fully half of the revenue increase came from favourable currency movements, while the majority of the volume increase was due to the acquisition of Fruit2O, a North American flavoured-water brand. Within the divisions not affected by the acquisition, volume movement was positively arthritic, as Table 10.4 shows:

  However, the company was at the beginning of a strategic transformation so what was more important was the progress being made to reshape Kraft Foods. Here there were promising signs within the now expanded number of strategic thrusts:

  Build Superior Consumer Brand Value

  Carrying the breakthrough innovation load once again was DiGiorno pizzas, with the introduction of Thin Crispy Crust Pizza and the Rising Crust Microwave Pizza, which cut preparation time down from twenty minutes to five. Cracker Barrel and Kraft Cheese Sticks were good snacking introductions and over 500 lines had improved nutritional profiles. All good stuff but not enough to drive the business forward. More significant was the rollout of Kraft’s Consumer Relationship Marketing (CRM) programme. This really was best in class. Kraft.com was the number-one website amongst food companies, while the What’s Cooking and Food&Family quarterly magazines were among the top circulation magazines in Canada and the US.

  Build Shopper Demand Through Superior Customer Collaboration

  This was a new element to the strategy and long overdue.

  Transform the Portfolio

  To be fair to Kraft, it was a huge portfolio to transform and there was little it could do in any one year to make much of a difference. To tap into health and wellness trends the company announced collaboration with South Beach Diet, labelling existing products that met the diet’s principles while a range of specially formulated lines was in development. Also, the Nabisco 100 Calories Packs and Ritz Chips were big successes in their first year. Elsewhere, the test marketing of the Tassimo hot beverage system in France had been so successful a global rollout was planned for 2005. The company also agreed to sell its sugar confectionery, yoghurt and UK desserts businesses for over $1.5 billion.

  Expand Global Scale

  While operations in Brazil, Russia, China and Mexico were beefed up, the percentage of operating income coming from overseas was going down rather than up. In 2002, 24% of income came from Kraft International, but this had fallen to 19.4% by 2004. Kraft was still a US-focused business, where its top-five customers accounted for 28% of total company sales; Wal-Mart alone accounted for more of Kraft’s sales than did Europe, Middle East & Africa put together.

  Drive Out Costs and Under-performing Assets

  Thirteen plants were announced for closure. This would still leave the company with 179, so the change was little more than good housekeeping.

  Strengthen Employee and Organisational Excellence

  The Global Marketing and Category Management Team had spent 2004 getting organised, so we shall look for their influence and effect in the next year.

  Act Responsibly

  Also new, this element of the strategy covered areas like nutritional labelling, where Kraft led the way to implement clearer information on small pack sizes; healthy eating, where Kraft implemented its ‘Sensible Solutions’ symbol to highlight better-for-you food options; and advertising to children, where Kraft committed to only advertise Sensible Solutions products to children aged 6–11, phasing out the promotion of non-Sensible Solutions ones.

  2005

  The new strategy should have shown made impact on growth by now and it had not. Excluding things like the 53rd accounting week and M&A effects, total volume was down by 1%. The bottom line did even worse as the company felt unable to pass on, in increased pricing, of around $800 million of increased commodities’ costs. Kraft was held back by private label brands and European hard discounters holding down prices, particularly in Germany. This showed the fundamental fragility of much of the Kraft brand portfolio: it didn’t have enough differentiated brands that could stand significant price premiums.

  There were bright spots. Sales from new products hit a company high of $1.5 billion, with the South Beach products proving to be mostly incremental. The Crystal Light/Clight brand grew by 12%, reinforcing its position as the US’s number-one non-carbonated diet beverage. Also Tang, available in 80 countries, grew by 10% worldwide, while Philadelphia’s global sales increased by 7% and the Thin Crust frozen pizza technology delivered $175 million in sales across three brands. The new global Marketing function was making its presence known with new global campaigns for Philadelphia and Maxwell House.

  Although the company had over 2,000 people in R&D across five key technology centres (three in the US, one in the UK and one in Germany), the total R&D spend as a percentage of sales was a paltry 1.1%. So it was difficult to view this as a war-winning weapon. It was perhaps also significant that not one of the R&D centres was located in developing markets. There revenues grew by 8%, although it’s hard to say the company was thriving. Volume declined in China, Brazil and much of Latin America. This lack of progress was behind a November announcement of a reorganisation of the International businesses into two revised segments: European Union and Developing Markets, Oceania and North Asia.

  The final change announced in the year was the addition of three ‘guiding principles’ to the seven elements of the strategy, these being:

  Put Consumers First, Work Simply

  Act Quickly

  Play to Win

  If anything summed up the problems in the company, it was having to put these in writing.

  2006

  Unsurprisingly, given Kraft’s lack of real progress, there was a change at the top in June 2006. An ex-General Foods executive, Irene Rosenfeld, was brought in as CEO from PepsiCo, where she had been successfully running the Frito-Lay unit. She was clearly not impressed with what she found. With volume down by 5% year-on-year (3%, discounting the 2005 53rd accounting week), Irene pulled no punches: ‘We recognise that we must fix certain aspects of the business to deliver predictable growth over the long term.’ She was spoiled for choice about what to fix first. Again, factoring out the 53rd week issues, the divisions’ volume performances in 2006 had been mostly dire:

  While North America Grocery had been affected by the sales of much of the Canadian portfolio and the fruit snacks business, the rest of that portfolio had also performed poorly.

  Given such a sorry state of affairs and a new CEO at the helm, you would have bet your house on a new strategy appearing. Irene did not disappoint. While the company clearly had portfolio and regionality issues, the problems were more systemic, as the new strategy made clear:

  Rewire the organisation for growth

  Reinforce a mindset of candour, courage
and action throughout the company

  Put operations decisions in the hands of the local-market leaders.

  Reframe the categories

  Broaden the frame of reference for the categories by looking at them through consumers’ eyes rather than by production technologies.

  Target premium segments

  Move beyond meal components to meal solutions.

  Exploit the company’s sales capabilities

  Leverage the US food industry’s largest sales force

  Combine the executional benefits of direct store delivery with the economics of warehouse delivery

  Focus on a select number of developing markets where the company has sufficient scale

  Drive down costs without compromising quality

  Lower overheads as a percentage of sales

  Outsource business processes and shared functions

  This was a pretty damning indictment of what had gone before. It recognised that the combining old Kraft (which had just emerged from years of being twinned with a conglomerate) with General Foods and then with Nabisco had successively weakened and diluted the company culture. It was finally time to build a new one, especially as the owner, Altria (the rebranded Philip Morris), cast Kraft Foods adrift, by spinning it off to its shareholders as a separate entity.

  2007

  Little time was wasted now the company was independent once again in reshaping the portfolio. In November, the Post Cereals business – almost all its $1.1 billion turnover being North American based – would be merged into Ralcorp Holdings, Inc.. The company’s flavoured-water and juice brands were sold. A mere two weeks later, Kraft bought Danone’s entire global biscuit business for approximately $7.6 billion. As virtually all the units’ $2.8 billion turnover was outside North America, this would make a substantial difference to Kraft’s international profile. This profile had not got back to its 1975 level, i.e. accounting for 25% of sales. These changes increased the number of Kraft brands with sales of over $1 billion to nine: Kraft branded cheeses, dinners and dressings, Oscar Mayer, Philadelphia, Maxwell House, Nabisco cookies and crackers, Jacobs coffee, Milka chocolates and Lu biscuits.

  Within the year itself, top-line sales increased by an 8.4% that looked healthy enough but in reality owed half of its complexion to currency movements and acquisitions. Organic volume growth was lagging at 1.7%. All the volume growth and more came from overseas. The European Union was up thanks to the previous year’s acquisition, from United Biscuits, of the distribution rights for Nabisco brands. Sales picked up across the board in Developing Markets, which was good because volume declined in every one of the North American categories. This was through the combined effect of divestitures, poor sales and the discontinuation of slow-selling lines.

  Much groundwork had also been done on the new strategy. Rewiring the organisation for growth had included significant changes to the organisational structure, the senior management team and the incentive systems. The biggest changes were happening within the European Union division. This was moving to a pan-European centralised category management and value chain model where most key strategy and marketing decisions would be taken at the centre; leaving just sales and distribution to be managed locally. The categories were being refocused by use of the ‘Growth Diamond’. This concentrated everyone’s minds on the four key consumer trends driving growth: Snacking, Quick Meals, Health & Wellness, and Premium. In North America a hybrid sales model of central delivery and direct store delivery was being tested on the biscuit business, and would soon be rolled out across all categories. When it came to driving down costs without compromising quality, $100 million had already been added back into the products to make good incremental quality degradations of the past.

  The shareholders of the newly independent Kraft Foods were no doubt hoping these changes would work. An investment of $100 in Kraft shares in 2002 had so far yielded a total shareholder return of minus $4.75. The same $100 invested in Kraft’s peer companies over the same period would have almost doubled the stake money. Kraft Foods under Philip Morris’s ownership had been far from a success; the independent Kraft Foods needed to do a lot better.

  2008

  The structural, operational and cultural remaking of Kraft Foods continued apace during 2008. Structurally, there were some significant changes to the make-up of the North American segments as follows:

  · US Cheese became a stand-alone unit

  · Macaroni & Cheese and other dinner products were moved from US Convenience Foods into US Grocery

  · Canada was extracted from each of the segments to operate independently again, and was combined with Foodservice to create a segment that perhaps could be best described as local but different

  The combination of these changes and the Danone LU biscuits acquisition meant that there was a distinctly new look to the Kraft business. The most striking observation was the realisation that Kraft was no longer a cheese business that sold some other things, but a snacking and beverage company that also sold cheese:

  Another notable feature was that the two biggest categories both generated well over 50% of their sales from markets outside of North America; thanks to a series of acquisitions over time. However, Kraft International only generated 23% of company sales because the Cheese, Grocery and Convenience Meals segments had barely been developed beyond North America.

  Sales performance again looked good, with the top-line growing by nearly 17% to over $42 billion, but of this increase, the LU biscuit acquisition accounted for 9%, currency 2% and pricing a surprisingly high 7.4% (i.e. $2.6 billion). Not only had all the commodity cost increases of $1.9 billion and incremental marketing spend of $266 million been added into price, but previous years’ cost increases had also been piled in. That’s a lot of price increase to ask the consumer to swallow, when real incomes in developed markets were static at best.

  We believe that profitable volume growth is the true measure of the success of a business. On those counts Kraft hadn’t done too well: total volume was down nearly 2% and operating profit down by nearly 4%. These reduced the operating margin from 11% to a paltry 9%. Volumes were down nearly 4% in US Beverages, nearly 7% in US Cheese, slightly up in US Convenience Meals, down by 3.5% in US Grocery and 3% in US Snacks. Outside the US, volume was down by 1% in Europe and up slightly in Developing Markets. Only Canada with its newfound independence managed to grow volume across all retail categories. This was not a thriving business. Volume declines, once allowed to set in, can be very difficult and expensive to halt, let alone recover from. Especially with a recession gathering steam.

  2009

  This year was largely the same as previous years at Kraft Foods. ‘Largely the same’ meant more structural change, another strategy change, prices up and volumes down. Blockbuster innovations were a distant memory, DiGiorno frozen pizzas being the last that to make a real difference (and their appearance was far back in 1996).

  The latest structural changes involved the disappearance of Kraft International. The business now had three main reporting units: Kraft North America, Kraft Europe and Kraft Developing Markets. Just to keep things interesting, the Central European markets came under the wing of Kraft Developing Markets. This reflected their different stage of development compared to the Western Europe Kraft strongholds. Within Kraft Europe, the Biscuit, Chocolate and Cheese categories became fully independent business units with top and bottom line responsibility. These comprised the entirety of Kraft Europe.

  Perhaps of greater importance was the change to the strategy, which had now evolved as follows:

  Focus on growth categories to further transform into a leading snack, confectionery and quick meals company

  Expand footprint in developing markets to benefit from population growth trends

  Expand presence in instant consumptions channels in order to gain share versus grocery channels in the US and European Union

  Enhance margins by improving portfolio mix and reduce costs while investing in quality


  It did not take a rocket scientist to work out this was not the strategy of a US-focused cheese company that Kraft had once been. Nor was it the strategy of the Kraft/General Foods/Nabisco Philip Morris creation. It was a strategy for a new company that could perhaps best be paraphrased as ‘We need to buy Cadbury’, which is what senior management spent most of the second half of the year trying to do.

  Such a change in direction was clearly necessary as the current business was essentially going nowhere. 2009 was no different. Volume was basically flat and top-line sales declined by nearly 4% because currency movements knocked off nearly 5% (slightly made up by the follow-on effect of the previous year’s price increases adding 2%). The malaise was best illustrated in the US Cheese category, where in 2008 a whopping 14% increase in prices had knocked 7% off volume. This resulted in half the price increases being dealt or rolled back in 2009. This could not prevent volume falling another 1%. Virtually the only bright spot in the whole US set up was the frozen pizza business, which was up another 13.5% to over $1.5 billion. The irony was, this one shining light was to be sold off to help pay for buying Cadbury.