Kraft Foods accomplished each of those goals in the last year and is one of the few companies stronger than it was a year ago. In a year where economic difficulties were the norm, Kraft managed all of this and even made an impact in the world of high finance.
IPO, IPO…Off to Work They GoNetting $8.7 billion, Kraft's stock offering was the second largest IPO in U.S. history, but the company had far more in mind than simply bragging rights. Kraft has one or two rivals in scope and scale in the world. U.S. competitors are far outdistanced by Kraft's sales of $35 billion, billions ahead of its closest direct rival. A pair of European companies are where the competition really lies. Unilever, for instance, boasts some $44 billion in revenues, though only half of that is food. Truth be told, Kraft's biggest rival is Nestle.
The Swiss giant, which reported $46 billion in sales last year, is by far the largest obstacle to Kraft's goal of being “recognized as the undisputed leader of the global food and beverage industry,” but Nabisco's presence will go a long way to meeting those high expectations. Take, for instance, two categories highly regarded by investors—net profit and operating profit margin—where Kraft outpaced its Swiss rival. Nestle's 2000 profits grew 22%, but with Nabisco in hand for the entire year, Kraft's would have set the pace with 26% growth. Likewise, Nabisco would have powered Kraft to a 13.2% operating profit margin—two full points ahead of Nestle.
Indeed, further inspection shows the true value of the Nabisco acquisition, especially in light of June's IPO. Proceeds from going public will allow Kraft to repay roughly half of the $15 billion borrowed from parent Philip Morris for December 2000's acquisition of Nabisco. Including the valuable brands and strategies afforded by the Nabisco acquisition, the pieces are in place for Kraft to attain that world leadership status.
As Betsy Holden, Kraft Foods North America's CEO, notes, “Undisputed leadership is in the eye of the beholder. We will not have earned it unless our consumers naturally think of us as their first choice for the foods they want. Or our customers think of us as their indispensable business partner. Or our investors see us as the most consistent food company for top-tier performance and returns.
“For us to be undisputed leaders, all our important constituencies should think of Kraft as the best. That also includes our employees, the communities in which we operate and our strategic partners.”
King of the WorldThe company leads the world in 11 different product categories—coffee, cookies, crackers, cream cheese, dessert mixes, dry packaged dinners, lunch combinations, powdered soft drinks, processed cheese, salad dressings and snack nuts. Boasting 61 brands with more than $100 million in sales in 140 countries, Kraft saw 73% of its 2000 total revenues from North America. Other consumer product giants, such as McDonald's and Wm. Wrigley, garner only about 40% of their total from North America. So, Kraft does have room to grow internationally.
Indeed, Kraft has begun to enhance its overseas position. For instance, the company has launched European versions of its Lunchables and Handi-Snacks, while also expanding Tang into new markets. A recent prospectus noted Kraft will continue that growth by focusing on snacks, beverages and convenience meals, addressing consumer health and wellness needs, and expanding its presence in faster-growing distribution channels, such as club stores and supercenters.
Nontraditional distribution channels offer quite the opportunity for those who make the effort. According to Rick Searer, group vice-president of Kraft Foods North America and president of the Oscar Mayer and Pizza Divisions, Kraft has specific sales teams for these nontraditional customers but takes it a step further.
“Within the divisions, we have also created cross-functional teams focused on the needs of these specific customers, recognizing that we oftentimes have to modify our product and package offerings to meet the customers' needs and the needs of their consumers. For convenience stores, we may have more single packs or smaller-sized offerings, or in the case of club stores, we could have larger-sized offerings and multi-packs.”
The Nontraditional Approach“Since 1996, we have been growing in these nontraditional channels at a rate of 24% per year,” he says. “Our success in these channels is driven by a combination of innovation and focus. First, innovation: Consumers who shop these channels are looking for different kinds of offerings. Consequently, the customers who run these channels want to deliver these offerings. Manufacturers who adapt, grow their businesses. By focus, I mean in terms of dedicated resources—both in our selling teams, as well as with dedicated resources within divisions—to make sure we can deliver the insights and the packaging innovation to drive our business there.
“We have conducted considerable research to understand consumer behavior in these channels, and we have found that consumers shop different channels to satisfy different needs. So simply offering the same product and package configurations across all channels is not a recipe for success. Consequently, customer expectations reflect those of their consumers', and to succeed, the expectations of both consumers and customers must be met.”
The company attracts an array of consumers, as Kraft boasts seven brands that each generate more than $1 billion in annual sales—Philadelphia, Maxwell House, Oscar Mayer, Kraft, Jacobs, Post and Nabisco, the recent addition that has paid obvious and less-obvious dividends. In fact, Michael Polk, group vice-president of Kraft Foods North America and president of Nabisco Biscuit & Snacks Group, says much hard work remains, but the companies are well on their way.
Preserving Synergies“The integration is going very well,” Polk says. “We still have some things to tackle, but all in all, we are very pleased with the progress.
“The strategic challenge is to deliver 'smart scale'. We are aggressively pursuing synergies and are on track to deliver approximately $100 million in savings this year. At the end of this process, we will have a stronger P&L that should enable us to fuel additional growth.”
“Our push to achieve synergies extends to revenue opportunities, as well. There are, clearly, opportunities to bring some of our brands together to drive growth. In particular, Kraft brings tremendous cheese credentials to Nabisco. With Nabisco's cheese crackers, like Cheese Nips, there is opportunity to leverage Kraft's cheese equities to grow Cheese Nips. Also, Nabisco's snack cracker businesses have opportunities to leverage Kraft cheese and Oscar Mayer cold cuts in appetizer recipes.”
Gaining Leverage“We already have experience extending the Oreo trademark. In a pre-existing relationship with the Kraft cereal division, Oreo O's is a cereal product under the Post trademark. We have Oreo pie crusts and ice cream cones,” says Polk.
The Oreo brand is being leveraged in Kraft's dessert division. According to Margo Lowry, senior vice president of development with Kraft Foods North America, “a lot of interesting projects are going on in our Jell-O refrigerated ready-to-eat desserts. Our powdered dessert has been extended into a snackable area and created a category. Most recently, we leveraged our Nabisco acquisition by introducing Jell-O Oreo pudding. It has been out for a couple of months, and early results are encouraging.”
“We have had a string of new product successes, and the momentum this year is accelerating,” says Polk. “Chocolate Creme Oreo has been a terrific success. In the fall, we launched a Mini version of the base Oreos, and that momentum has continued into 2001. Mini Oreo cookies allow us to take advantage of consumers' desire for grab-and-go food. It also gives us a package and product that will sell better through the down-the-street type of convenience store outlets. Mini Oreos is more adapted for a specific channel of distribution, which is very positive and a new strategy for the business. In fact, coming shortly is a new Mini version of Chocolate Creme Oreo cookies.
“In Kraft's confections business, Creme Savers has been a huge success. They are a fruit- and dairy-based hard candy platform made with real cream. Two flavors were launched last year, and a third launched in the first half of this year. In the back half of this year, the fourth flavor will be Raspberry and Cream, a flavor voted on by consumers. We left the decision about the fourth flavor up to them, and more than 1.1 million consumers voted.”
The Creme Savers flavor vote is just one example of the high regard Kraft has for consumer opinions in its development process. The company uses an array of techniques to garner consumer insight, from focus groups to survey research to one-on-one interviews and in-home tests. With these insights, Kraft begins development.
Teaming with Success“We take a team-oriented approach to the development of new products,” says Searer. “So no one single function drives the development. It's a team from the very beginning. We structure our divisions around the concept of category business teams, which include people from marketing, marketing information, R&D, operations, sales, new product development, finance and other functions, as needed. This total team approach facilitates successful commercialization and fosters an integrated approach—from insight to innovation to sales that generates the growth.”
As Lowry observes, new product development success requires focus, attention and dedication. “You have to do everything right across the entire value chain. You must be able to turn a good idea into a good business idea. To do that, you have to identify the correct consumer need and solve it correctly. You must have fabulous product quality, which directly correlates with longevity and long-term success. However, even that is not enough. You also must be able to execute flawlessly. Everything you are doing in the market—from distribution to advertising to marketing plans, availability, spending—has to be done right. You have to be methodical in the development process. You also need experienced professionals who love the process of discovery and have a passion for food.”