Tony Vernon, chief executive officer of Kraft Foods, warned of challenges in the consumer packaged goods space during the company's second-quarter earnings call.

NORTHIELD, ILL. — It is not the confluence of change, but also the pace of change taking place in the consumer packaged goods space that is challenging the largest food and beverage companies, said Tony Vernon, chief executive officer of the Kraft Foods Group Inc.

“In our view, it's driven by the seas of change that we outlined at CAGNY (Consumer Analyst Group of New York) in February: Consumers focused on value and nutrition and well being,” Mr. Vernon said July 30 in a conference call to discuss Kraft’s second-quarter results. “Our customers (are) coming to terms with changing shopper patterns and channel shifting; the rise of digital media, breaking established marketing principles and best practices.

“In some ways, we have to unlearn what we believed to work in the past and re-learn what will make a difference today. In the short term, adjusting to such momentous shifts favors the smaller, more nimble players that are working from a small base. I think that’s what you’re seeing play out in the most recent set of financial results across the food and beverage industry.”

Mr. Vernon said that the smaller players in the industry are innovating quickly and getting a receptive audience from retailers. He used the company’s Jell-O brand as an example. The business has lost share to sweet yogurts and a similar product manufactured by Land O’Lakes.

“Clearly, in our play-book, across all of our brands, (we have) got to make sure that the health and wellness benefit that our R.&D. group has done such a good job with in many of our cheese categories, that we exercise it our center-of-store categories,” he said. “On the Jell-O business, we’ve got to increase the velocities to give the customers what they’ve come to depend on from Jell-O.”

But Mr. Vernon added that even with the changes in consumer behavior and the tools used to communicate with them, consumer staples will remain an industry that sees real benefits from scale.

Kraft's P3 platform leverages the company's strength in nuts, cheese and meats in one product.

“It is no small coincidence that our cheese, nut, coffee, and meats businesses are all improving,” he said. “They are sharing their best practices to build these businesses to last, even in the face of rapidly rising commodity costs. There’s no better evidence of the benefits of scale than the success of P3, Kraft Cheese, Planters Nuts, and Oscar Mayer meat in one protein pack. Our breadth of expertise, shared insights, and our scale is what will help Kraft win together.”

During the second quarter ended June 28, Kraft’s net income fell 42% compared with the same period during the previous year to $482 million, equal to 81c per share on the common stock. Sales for the quarter were $4,747 million, a slight increase compared with $4,716 million during the previous year.

For the first half of the year, net income fell 23% compared with the previous year to $995 million, equal to $1.67 per share. Sales for the first half of the year fell 1% to $9,109 million.

“During the first half of this year, our sales and share performance were both adversely impacted by the temporary dislocation we typically see when we’re climbing the commodity cost curve,” said Teri List-Stoll, chief financial officer. “We’ve moved aggressively in the space of what are truly unprecedented price levels in certain parts of our commodity basket.

“For instance, dairy prices continue to redefine price ceilings as we progress through the first half of the year. With the average prices of barrel cheese, block cheese, and milk during the second quarter, each at record levels. We responded with price increases of between 5% and 12% across most of our cheese portfolio. These actions took effect at the end of March and we’re seeing competitors priced off at the run up in their in food costs on a typical lagged basis. In meats, beef, turkey and pork prices for our cold cuts have continued to increase and are at record highs as we speak.”

In light of the current market trends, Mr. Vernon emphasized Kraft must operate in a disciplined manner.

“ … We are going back and taking a harder look at some of our smaller innovations, smaller s.k.u.s (stock-keeping units), and marginal marketing programs to decide where we continue to fish and where we need to cut bait and make sure we are living the principal of fewer, bigger, better,” he said.