Rosenfeld outlines new direction for Kraft Foods

by Keith Nunes
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SCOTTSDALE, ARIZ. — Since Irene Rosenfeld took over as chief executive officer of Kraft Foods Inc. 18 months ago there has been speculation about what changes she would make to reinvigorate Kraft’s business. One train of thought had Kraft shedding some of its assets, like Oscar Mayer, for example, to provide more focus to the organization. But during her presentation at the Consumer Analyst Group of New York conference last week she dispelled those rumors and argued that the company’s future lies in managing "economies of effectiveness."

"We’ve realized some very significant benefits from an efficiency and cost standpoint," Ms. Rosenfeld said. "What I’m arguing for today is about scale as an effectiveness play, and I come back to the reality that man cannot live by one product category alone."

Ms. Rosenfeld noted there is more to be done in order to create a culture that allows the company to innovate on a broad scale.

"We have been far too focused on cost and efficiency at the expense of quality and effectiveness," she said. "As a result, we have lost our edge in a number of areas like product quality, share of voice and sales execution. This has played out in a loss of market share and brand equity. And even when we have invested in quality, we have set our standards too low. Good enough is not truly delicious."

Going forward, one of Kraft’s goals is to exploit the company’s broad portfolio of brands by exploiting how individual products complement others throughout the meal occasion.

"We need to view our portfolio through a new lens," Ms. Rosenfeld said. "How do we do this? In three different ways: by broadening our frame of reference; by thinking beyond meal components to complete meals; and by capitalizing on the power of our portfolio. Broadening our frame of reference is a new approach to managing our categories for growth. I believe that for the most part, we have a strong product portfolio. It is simply not growing fast enough. That is because we have been looking at our products through the narrow lens of our manufacturing processes rather than through the eyes of our consumers.

"How many people do you know who say, ‘Boy, am I thirsty. I could really go for a cold aseptic punch drink right now.’ Or, ‘I want a treat. I’d love one of those chocolate enrobed sandwich cookies.’ But that is how we talk to each other. By focusing on narrow categories, we lose sight of the bigger

picture of how our foods fit into consumers’ lives."

Ms. Rosenfeld argued that with a broader frame of reference Kraft can compete in larger, faster growing product categories, gain share from a wider range of quick meal and snack alternatives, drive incremental volume and mix, and better meet consumer needs. Kraft’s success stories in broadening its frame of reference include Oscar Mayer, cheese, pizza and packaged salads.

For example, a few years ago the $4 billion prepackaged cold cut category had stagnated, and Kraft’s Oscar Mayer business was losing share. That is until the company broadened its frame of reference to include the growing $4 billion deli meat market.

"This allowed us to reassess our strengths versus the competition and get additional sales from consumers shopping at the deli counter," Ms. Rosenfeld said. "And just like that, because we shifted our change in perspective and

shifted our thinking, our market doubled in size.

"Today, we are competing in that larger market with Oscar Mayer deli shaved meats, a big idea worth over $200 million. This product grew 49% last year and has contributed to the 8% growth of the entire brand."

Cheese is Kraft’s largest business, with margins above the company’s average. It has been growing, but not fast enough, Ms. Rosenfeld said. She said the problem facing Kraft was not a lack of demand for cheese, but the fact people were not eating Kraft cheese.

"When we stop thinking about our business in terms of processed slices, chunks, naturals, sticks, shreds and that ever delectable jar cheese, and we start thinking about how and when consumers eat cheese, it opens up a whole new set of ideas and opportunities," she said. "The processed cheese slices category is declining at 2%. But if we broaden our perspective to reflect the way consumers actually use sliced cheese, then we have a much larger category to consider — sandwich cheese — and it is growing at 2%.

"The story is similar for natural chunks — that is another one of our manufacturing designations. Our natural chunks products are growing at 4%. (That) sounds pretty good, unless you realize that by expanding our focus to include all snacking cheese, we can compete in an even larger market that is growing at 6%. By expanding our frame of reference, I am confident that we can increase our share of the $14 billion cheese market."

Kraft intends to use its "frame of reference" strategy to expand its market position in the multi-billion dollar frozen pizza business. Innovation has been at the heart of Kraft’s success in the category. The Jack’s and Tombstone pizza brands were Kraft’s flagship in the category. In 1995, Kraft set its sights on competing with national pizza chains, like Pizza Hut and Domino’s, a market that is three times larger and represented an additional $11 billion in potential market share.

"The introduction of DiGiorno Rising Crust Pizza totally revolutionized frozen pizza, and we built on it with our premium California Pizza Kitchen line," Ms. Rosenfeld said. "Now, we have a 9% share of a $15 billion category. But despite our success, we have even more opportunity. Today, we are going after an even bigger slice of the pizza pie. We’re setting our sights on the $20 billion local pizzeria business. By expanding our frame, we’re now competing in the total $35 billion pizza market where we only have a 4% share. With this perspective, I am confident that we can accelerate our pizza growth to double-digit rates. "How will we do it? Well, we will start with a delicious new product called DiGiorno Ultimate Pizza. We have used our proprietary dough technology and topped these pies with the highest quality ingredients: crushed Roma tomatoes, Parmesan, Reggiano cheese and the like.

The introduction of Kraft’s DiGiorno Ultimate Pizza signals the company’s efforts to compete with local pizzerias.

"It’s one of our most visible examples of our commitment to moving our product quality from good enough to truly delicious," she said. "The result is restaurant-quality pizza at half the price."

Ms. Rosenfeld also announced Kraft would expand its reach to the produce departments of grocery stores with the introduction of Fresh Creations, a packaged salad line that is currently being tested in select markets. The line uses a proprietary packaging technology and consists of Oscar Mayer meats, Kraft’s cheeses and salad dressings.

"Prepared salads are one of the 10 fastest-growing categories in North America, growing at 19% annually," Ms. Rosenfeld said. "We’re taking our portfolio to a whole new section of the store — the produce section. It’s highly incremental volume in a totally new category and it’s done in a way that only Kraft can do."

As a result of its investment in reinvigorating its product portfolio, in 2007 Kraft expects earnings per share of $1.50 to $1.55, or $1.75 to $1.80, excluding 25c of restructuring costs. In 2008, the company expects its operational turnaround to gain momentum. Kraft again will grow revenue 3% to 4% organically, with operating income exceeding revenue growth. The company will invest a portion of its growth back into the business, including further marketing spending, toward a long-term target of 8% to 9% of net revenue.

"By 2009, we’ll hit our stride," Ms. Rosenfeld predicted. "We’ll fully realize the financial benefits of our investments and deliver our long-term targets of at least 4% organic net revenue growth and 7% to 9% e.p.s. growth."

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