Jones Lang LaSalle
Kraft Plans to Cut Jobs and Plants
By MELANIE WARNER
Americans are spending more at restaurants and less at the supermarket. Now Kraft Foods, the world's second-largest food company, is paying the price.
Kraft, which makes brands like Oreo Cookies, Oscar Meyer, Velveeta and Jell-O, announced a second revamping yesterday, one that would eliminate 8,000 jobs, or 8 percent of the work force, and close 20 plants. The overhaul comes on top of 5,500 layoffs and 19 plant closures that were announced two years ago.
Packaged-food companies, which aim their products at ordinary shoppers, are beginning to see slower growth as consumers are choosing the convenience of eating out at restaurants or relying on take-out — while making fewer trips down grocery aisles.
The American restaurant industry has forecast a 5.1 percent increase in sales this year; the packaged-food industry is expecting growth of about 2 percent.
The packaged-food industry is also feeling pressure from higher oil prices. Manufacturers like Kraft must transport products mostly by truck to distribution centers and supermarkets and petroleum is used to make the plastic used in the packaging of products.
Amid those challenges, Kraft has struggled more than its rivals. It has been criticized for failing to come up with successful new products that excite consumers and would allow the company to charge higher prices.
"When you think of Kraft's portfolio, it's plain vanilla right up the middle," said Eric Katzman, an analyst at Deutsche Bank.
Kraft said yesterday that it would close plants in Broadmeadows, Victoria, in Australia and in Hoover, Ala., although it did not announce the other plant closings. It also said it would trim 10 percent of its brand portfolio.
Kraft reported sales yesterday that were up 10 percent for the quarter, to $9.66 billion. Earnings for the quarter were $773 million, or 46 cents a share, up from $628 million, or 37 cents a share, a year earlier. The United States is Kraft's largest market, comprising about 65 percent of total sales.
Analysts, however, looked beyond sales and earnings to Kraft's operating margins. Those margins, according to Deutsche Bank, were 15.3 percent for 2005, down from 16.5 percent in 2004 and down from 21 percent in 2002.
An analyst at Citigroup, David Driscoll, said he worried that the declining margins meant that Kraft was unable to raise its prices to keep pace with its higher costs. Last year, Kraft saw an $800 million increase in raw material costs from the previous year, much of it stemming from high oil prices.
"Other companies have done a much better job of handling those commodity costs," Mr. Driscoll said, "and also maintaining the sales growth."
Operating margins at its rivals were better; Kellogg's were 18.7 percent for the last four quarters and at General Mills, they were 17.9 percent.
Raising operating margins for food products can be tricky. If a food manufacturer raises prices too much, consumers are likely to migrate to a cheaper competitor or to the supermarket's own brand, which can be priced as much as 30 percent less.
If a company keeps prices low, market share may improve, but margins are hurt, which, many analysts say, is Kraft's problem.
In November, the company announced a 4 percent price increase on certain categories. Mr. Driscoll says that the increase applied to 14 percent of the company's portfolio and will not be enough to offset the huge increases in costs.
In a conference call yesterday with investors, the chief executive, Roger K. Deromedi, acknowledged that the company's financial results were "not where we wanted them to be when we started the year."
But he highlighted some bright spots, including the South Beach Diet line of products, which have had $170 million in sales in 10 months, and the 100 Calorie Packs of Kraft's popular cracker and cookies, which pulled in more than $100 million in 2005.
Mr. Deromedi also said that Kraft's efforts in health and wellness were starting to pay off. American sales of the company's healthier Sensible Solutions products are growing at a rate three to four times faster than other products, he said.
"We get very positive feedback from consumers on our healthier products, whether the 100 Calorie Packs or whole-grain Mac & Cheese," said Mr. Deromedi, who took over as Kraft's sole chief executive in late 2003, after his co-chief executive, Betsy D. Holden, accepted blame for market share losses and missed earnings projections. Ms. Holden has since left Kraft.
Analysts say that while Kraft has made progress in stemming its market share losses, its big challenge remains innovation. The creator of modern culinary mainstays like processed cheese slices, Cheez Whiz and Shake 'N Bake has failed to dazzle the market in recent years.
Mr. Katzman of Deutsche Bank said Kraft lacked a significant presence in the areas where the food business was expanding — premium products; ethnic foods; and organic and natural products.
General Mills and Kellogg, for instance, have built strong natural food brands, General Mills with Cascadian Farms and Kellogg with Kashi. Kraft's Back to Nature brand, which it acquired in 2003, remains a distant third.
David Adelman, an analyst at Morgan Stanley, said that Kraft was also late to offer a cereal bar, a booming business as consumers sought on-the-go breakfast options. Mr. Deromedi said that Kraft had caught up with its South Beach cereal bars, which were now second in sales in the category.
The challenge this year will be for Kraft to find more successful brands like South Beach. "With a $34-billion-a year company, one new successful product is not enough to move the whole system," said Mr. Driscoll, the Citigroup analyst. "You've got to have more like six or seven."
Successful new products are essential because they allow food manufacturers to charge higher prices and stay ahead of the grocery store's in-house brands. David Palmer, an analyst at UBS, says Kraft has the greatest exposure to in-house supermarket brands, largely because some of its primary products of cheese, lunch meats and nuts are big areas for in-house labels.
Kraft Plans to Cut Jobs and Plants
By MELANIE WARNER
Americans are spending more at restaurants and less at the supermarket. Now Kraft Foods, the world's second-largest food company, is paying the price.
Kraft, which makes brands like Oreo Cookies, Oscar Meyer, Velveeta and Jell-O, announced a second revamping yesterday, one that would eliminate 8,000 jobs, or 8 percent of the work force, and close 20 plants. The overhaul comes on top of 5,500 layoffs and 19 plant closures that were announced two years ago.
Packaged-food companies, which aim their products at ordinary shoppers, are beginning to see slower growth as consumers are choosing the convenience of eating out at restaurants or relying on take-out — while making fewer trips down grocery aisles.
The American restaurant industry has forecast a 5.1 percent increase in sales this year; the packaged-food industry is expecting growth of about 2 percent.
The packaged-food industry is also feeling pressure from higher oil prices. Manufacturers like Kraft must transport products mostly by truck to distribution centers and supermarkets and petroleum is used to make the plastic used in the packaging of products.
Amid those challenges, Kraft has struggled more than its rivals. It has been criticized for failing to come up with successful new products that excite consumers and would allow the company to charge higher prices.
"When you think of Kraft's portfolio, it's plain vanilla right up the middle," said Eric Katzman, an analyst at Deutsche Bank.
Kraft said yesterday that it would close plants in Broadmeadows, Victoria, in Australia and in Hoover, Ala., although it did not announce the other plant closings. It also said it would trim 10 percent of its brand portfolio.
Kraft reported sales yesterday that were up 10 percent for the quarter, to $9.66 billion. Earnings for the quarter were $773 million, or 46 cents a share, up from $628 million, or 37 cents a share, a year earlier. The United States is Kraft's largest market, comprising about 65 percent of total sales.
Analysts, however, looked beyond sales and earnings to Kraft's operating margins. Those margins, according to Deutsche Bank, were 15.3 percent for 2005, down from 16.5 percent in 2004 and down from 21 percent in 2002.
An analyst at Citigroup, David Driscoll, said he worried that the declining margins meant that Kraft was unable to raise its prices to keep pace with its higher costs. Last year, Kraft saw an $800 million increase in raw material costs from the previous year, much of it stemming from high oil prices.
"Other companies have done a much better job of handling those commodity costs," Mr. Driscoll said, "and also maintaining the sales growth."
Operating margins at its rivals were better; Kellogg's were 18.7 percent for the last four quarters and at General Mills, they were 17.9 percent.
Raising operating margins for food products can be tricky. If a food manufacturer raises prices too much, consumers are likely to migrate to a cheaper competitor or to the supermarket's own brand, which can be priced as much as 30 percent less.
If a company keeps prices low, market share may improve, but margins are hurt, which, many analysts say, is Kraft's problem.
In November, the company announced a 4 percent price increase on certain categories. Mr. Driscoll says that the increase applied to 14 percent of the company's portfolio and will not be enough to offset the huge increases in costs.
In a conference call yesterday with investors, the chief executive, Roger K. Deromedi, acknowledged that the company's financial results were "not where we wanted them to be when we started the year."
But he highlighted some bright spots, including the South Beach Diet line of products, which have had $170 million in sales in 10 months, and the 100 Calorie Packs of Kraft's popular cracker and cookies, which pulled in more than $100 million in 2005.
Mr. Deromedi also said that Kraft's efforts in health and wellness were starting to pay off. American sales of the company's healthier Sensible Solutions products are growing at a rate three to four times faster than other products, he said.
"We get very positive feedback from consumers on our healthier products, whether the 100 Calorie Packs or whole-grain Mac & Cheese," said Mr. Deromedi, who took over as Kraft's sole chief executive in late 2003, after his co-chief executive, Betsy D. Holden, accepted blame for market share losses and missed earnings projections. Ms. Holden has since left Kraft.
Analysts say that while Kraft has made progress in stemming its market share losses, its big challenge remains innovation. The creator of modern culinary mainstays like processed cheese slices, Cheez Whiz and Shake 'N Bake has failed to dazzle the market in recent years.
Mr. Katzman of Deutsche Bank said Kraft lacked a significant presence in the areas where the food business was expanding — premium products; ethnic foods; and organic and natural products.
General Mills and Kellogg, for instance, have built strong natural food brands, General Mills with Cascadian Farms and Kellogg with Kashi. Kraft's Back to Nature brand, which it acquired in 2003, remains a distant third.
David Adelman, an analyst at Morgan Stanley, said that Kraft was also late to offer a cereal bar, a booming business as consumers sought on-the-go breakfast options. Mr. Deromedi said that Kraft had caught up with its South Beach cereal bars, which were now second in sales in the category.
The challenge this year will be for Kraft to find more successful brands like South Beach. "With a $34-billion-a year company, one new successful product is not enough to move the whole system," said Mr. Driscoll, the Citigroup analyst. "You've got to have more like six or seven."
Successful new products are essential because they allow food manufacturers to charge higher prices and stay ahead of the grocery store's in-house brands. David Palmer, an analyst at UBS, says Kraft has the greatest exposure to in-house supermarket brands, largely because some of its primary products of cheese, lunch meats and nuts are big areas for in-house labels.
posted by Jones Lang LaSalle NJ News Blog at 11:47 AM
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