Rough road ahead

by Keith Nunes
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BOCA RATON, FLA. — "Challenging" was a word used frequently by food industry executives presenting at the Consumer Analyst Group of New York (CAGNY) conference, held Feb. 19 to 22. Confronted by historically high input costs, the leading food and beverage companies have turned to improved productivity, innovation and pricing to offset the increases and drive profitability. They also have put a renewed focus on emerging markets in China, Russia, India and others in an effort to further grow sales and profits.

It became clear as executives spoke that pricing will play a greater role in the second half of the year, as most of the "low-hanging" productivity initiatives have been executed by many companies. For competitive reasons, company executives would not identify how much pricing they will take or when, but consumers will see prices rise for a variety of prod-ucts in the second half of the year.

"So far this year we have had $170 million in costs and have offset all but $10 million in the first half of the year," Brenda Barnes, chairman and chief executive officer of Sara Lee Corp., Chicago, told Food Business News. "For the full year we are anticipating $300 million in increased costs and plan to offset the rest with pricing. Productivity can’t offset those kinds of increases that fast."

At the same time they are raising prices, many companies are facing more difficult, and sometimes, expensive productivity decisions in an effort to improve efficiencies. General Mills, Inc., Minneapolis, for example, is in the process of building an expanded distribution center in Cedar Rapids, Iowa.

"We are building a much bigger warehouse that will allow us to centralize and put more of our products in one place, and then ship a larger variety of products in full trucks directly to customers," Ken Powell, chief executive officer, told Food Business News. "That is an investment driven by the fact we no longer live in a world of $20 oil. We live in the world of $90 and $100 oil and the idea of centralizing and using full trucks is something we have to consider."

Mr. Powell said current market conditions also have forced General Mills to invest in centralizing its sales forecasting efforts.

"We used to have a de-centralized forecasting branch and had lots of marketing people around the company doing forecasting brand by brand," he said. "What we found is that approach was not giving us the accuracy we needed.

"We centralized the operation to four or five people who are very focused on forecasting and communicating with customers. We are getting the right amount of product to the place it needs to go to. When you get it wrong you have to get it back on the truck and ship it someplace else. So that initiative alone has saved millions of dollars in diesel fuel, because we are not using our trucks as much."

Other companies also are making significant changes to improve their operations in the face of rising costs. Tyson Foods, Inc., Springdale, Ark., ceased slaughter operations at its Emporia, Kas., beef facility because high grain costs have put pressure on feed costs and land costs. As a result, the U.S. cattle herd is not growing and there is too much slaughter capacity, leading to unacceptable inefficiencies.

Richard L. Bond, president and chief executive officer of Tyson Foods, told Food Business News he places the blame on government officials who are currently guiding U.S. energy policy.

"As long as our government mandates stay in place for corn-based ethanol to go up to 15 billion gallons per year, those crops are going to reach new levels," he said. "We are most likely not going back to anything close to $2.50 or $3 a bushel corn. It is a fact we are going to have to deal with much higher priced commodities for an extremely long period of time unless those mandates, from a political and policy perspective, are changed."

Mr. Bond believes the ramifications from the United States’ current renewable energy policy will be far reaching. He estimates consumers will end up paying $300 to $400 more per year for grain and grain-related products.

"That is a big number," he said. "Not everyone can afford $300 to $400, and it will force consumers to make choices between food, utilities and health care.

"As of now, the consumer hasn’t really felt the majority of the price increases that are coming. That is for two reasons. One is we haven’t passed many costs along and, secondly, the retailer has not passed them along in their entirety. So, when we talk about food inflation and what is happening, people haven’t seen it yet."

Insights into innovation

For many of the larger publicly-traded food companies, CAGNY has become a vehicle to show off the new products that will be emerging from the companies’ innovation pipelines during the year. After vowing to "turn Kraft Foods around" during last year’s CAGNY conference, Irene Rosenfeld, chairman and chief executive officer, returned this year with an array of what she hopes will be "$100 million" ideas.

"When I returned to Kraft 19 months ago, our new product pipeline was not robust enough to drive growth," she said. "In fact, when some of you asked me last year how full it was, I said about 20%. And in that 20% were many ideas that were new to Kraft, but not new to the world.

"Today, our pipeline is open, and it’s flowing. More importantly, the ideas in this pipeline are not just single; they’re platforms — $100 million-plus ideas that are highly incremental to our base business, ideas which leverage the power of our portfolio by using our extensive manufacturing, distribution and brand assets; innovative ideas that can be applied across multiple brands, multiple categories, and over multiple years, so that we can amortize our investments in R.&D. and marketing. Overall, we have more than a dozen of these highly promising platforms, either in-market or in the works around the world."

The range of new products featured in the Kraft presentation covered the gamut of trends driving the food industry, from functional to natural and with an emphasis on portioned. But she also admitted not all ideas are great ones.

"Of course, not every idea will be a success," Ms. Rosenfeld said. "For instance, last year, we tested Fresh Creations, a line of single-serve, restaurant-quality salads. In fact, I talked to you about it last year at this conference. After 10 months in-market, we decided to discontinue the test.

"We just couldn’t find a way to make the idea in its current form big enough or profitable enough to have an impact on Kraft’s performance. But importantly, it gave us valuable insights into consumers’ desire for fresher, less processed foods. We’re already using those insights in other applications across the portfolio, like Deli Fresh Meats, Deli Fresh Cheese and preservative-free salad dressings."

At last year’s CAGNY conference Ms. Rosenfeld outlined how Kraft has been reframing and expanding the markets it competes in, noting that the company’s new Ultimate pizza didn’t just compete in the frozen pizza market, but in the entire pizza segment. She added that Oscar Mayer did not just compete in the packaged deli meats market, but with the in-store deli as well.

This year Rick Searer, Kraft’s president of North America, expanded on Ms. Rosenfeld’s efforts.

"We started four years ago by reframing cold cuts to include the in-store deli, doubling the size of the category in which we compete, and thus the size of the opportunity," Mr. Searer said. "Last year, with Deli Creations, we extended our frame of reference further, to compete with restaurant sandwiches. In pizza, we completed our national launch of DiGiorno Ultimate to compete with pizzerias, reframing our category to a larger, $35 billion market.

"And in terms of using quality as an offensive weapon, Oscar Mayer Deli Fresh cold cuts have set a new standard of quality in prepackaged cold cuts. In pizza, we upgraded our mainstream pizzas with higher-quality toppings. And in mac and cheese last year, we reformulated blue-box, Deluxe and Velveeta to improve taste.

"Our innovations have not only contemporized existing offerings, but they’ve built platforms that we can extend in ways that are highly incremental to our business. For instance, we’re now building further on our Deli Fresh platform by introducing several new forms and package sizes. They include carved, thick-sliced meats, single-serve portions and family-size packaging."

In 2008, Kraft is moving beyond bun-style hot sandwiches by launching flatbread varieties, products Mr. Searer called "very much on-trend in quick-serve and casual restaurants." Each averages only about 300 calories apiece.

To further expand its presence in the pizza segment, Kraft is launching single-serve varieties of its DiGiorno and California Pizza Kitchen products under the For One banner to capitalize on the rapid growth of smaller households. In addition, the company plans to roll out DiGiorno Ultimate Focaccia.

Kraft also is growing its cheese business by launching new products under the Deli Fresh brand.

"We’re building on what we’ve learned in Deli Fresh meats," he said. "We’re now launching a new breakthrough package for natural cheese slices that allows consumers to easily open and close the container, while preserving product freshness.

"We’re using the Deli Fresh name, and we will co-market meat and cheese in-store, an idea that has been enthusiastically received by our customers. In addition, we’re especially excited about the conversion of our 2% milk products — both natural cheese and singles — to a new rBST-free formula. We’re the first national brand to do this.

"For context, about 75% of all fluid milk consumed in the U.S. is reduced-fat or skim, while only about 11% of the cheese in this country is reduced-fat or fat-free. Moreover, consumers who are interested in lower-fat dairy products also express an interest in dairy products from cows not treated with hormones.

"Kraft is uniquely well positioned to meet this need with an rBST-free offering which will result in growth for both Kraft and the reduced-fat cheese segment."

Mr. Searer said the new rBST-free products will launch next quarter.

Companies without borders

Of special note during this year’s CAGNY conference was the emphasis placed on emerging markets. Companies are placing a greater emphasis on growing their market share in numerous regions around the world.

Jim Lawrence, the chief financial officer for Unilever, London, said his company is well positioned to capitalize on growth around the world, noting Unilever currently derives 44% of its sales from emerging markets and has No. 1 category positions around the world in dressings, tea, ice cream and spreads. He cited the company’s recent acquisition of Inmarko, the leading ice cream brand in Russia, as an example of how Unilever is positioning itself for further growth.

In the developing and emerging economies around the world, Mr. Lawrence broke the markets into three categories — the "have lots," "haves" and "not yets." Noting the "have lots" and "haves" total approximately 3.1 billion people and the "not yets" approximately 2.6 billion, he said Unilever is positioning its product portfolio to compete in each segment as each segment’s economic situations improve.

For Mr. Bond of Tyson Foods, China and India are of particular interest.

"If you think about what we can do on an international basis in an area like China with a population of 1.3 billion people, where over the next 8 to 10 years we expect consumption of protein to go from 19 lbs to 26 lbs, that increase alone is about the size of Tyson," he said. "I think there are tremendous opportunities for us to invest in an area like China and potentially in India.

"India is an area where some people will tell you it will have a greater population by 2050 than what China has. It is those types of opportunities that lead us to believe we can, through acquisition and organic growth, have substantial growth as we go into 2010 and beyond."

Sara Lee Corp., on the other hand, is taking a wait-and-see approach to China, in particular.

"We actually have some small interests in China, but nothing significant," Ms. Barnes said. "Developing a business in China takes a many, many year commitment and a platform you can use to support yourself while establishing your business in the market.

"We don’t, right now, have that area of entry. In addition, there are a lot of companies looking at the market and everybody is looking to acquire in China so the price of acquisition is quite high."

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