Pricing actions bolster Kraft's U.S. cheese business

by Staff
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NORTHFIELD, ILL. — Kraft Foods’ U.S. Cheese division’s operating income during fiscal 2008 was $622 million, a 56% increase over the division’s fiscal 2007 operating income of $400 million. Sales for the division were $4,007 million during fiscal 2008, an increase of 7% over fiscal 2007.

"In U.S. cheese, revenue growth reflected double-digit price increases, partly offset by a decline in volume u ," said Tim McLevish, executive t vice-president and chief financial c officer, during a conference call with w financial analysts on Feb. 4. "" Three factors drove this decline. First, through the end of Q4, list prices remain near historical highs across most cheese categories, negatively impacting consumption. Second, we took the lead on pricing to the cost curve on the way up, and competition was slow to follow, expanding our price gaps, and third, we made a conscience decision not to chase unprofitable promoted volume during the holiday season, particularly in the natural cheese business.

"As a result of the last two actions, we lost some share in Q4. On the other hand, we were successful in better aligning our pricing with input costs not just in Q4 but all year, and our pricing and trade efficiency efforts contributed to a strong rebound in profit margins from 2007 levels."

Looking to fiscal 2009, Mr. McLevish expressed confidence in the business’ ability to weather the current market volatility.

"We expect that our new pricing paradigm will better maintain optimal price gaps, improve volume mix and deliver more stable margins in the mid- to high-teens," he said. "And as barrel cheese costs have dropped to near government support levels, we have lowered our prices accordingly. We will maintain our price gaps versus competition within our targeted ranges while still delivering solid margins."

In the conference call, Irene Rosenfeld, chairman and chief executive officer of Kraft Foods, said value will play a role going forward for Kraft’s U.S. cheese business.

"…We are essentially deemphasizing natural cheese in favor of products like Singles and Velveeta, which particularly in the current economic environment are doing exceptionally well, and as a result you’re seeing our margins come back to the mid-teens levels which we think is a sustainable level for our cheese business," she said.

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