Philip Morris and the Kraft General Foods Era
Philip Morris’s designs on the packaged-foods industry became clear when the company purchased Kraft in December 1988 for $12.9 billion. In March 1989 Philip Morris merged the Kraft and General Foods units into one giant entity called Kraft General Foods, Inc. Initially, the subsidiary was divided into seven major groups: General Foods USA, Kraft USA, Kraft General Foods International, Kraft General Foods Canada, Oscar Mayer, Kraft General Foods Frozen Products, and Kraft General Foods Commercial Products. At the helm was Kraft’s Michael Miles. As a result of the merger, the company became the largest food marketer in the United States. Profits at Kraft General Foods grew at an average rate of more than 20 percent in its first two years. Size had its drawbacks, however. The company was slow to respond to demand in some markets.
With the U.S. food market in a slow-growth mode, the modest acquisitions that Kraft pursued following the Nabisco purchase centered around seeking avenues for faster growth overseas. In 2001 the company bolstered its coffee businesses in several markets through the purchases of the Nova Brasilia brand in Bulgaria; Nova Brasilia, Classic Brasilier, and Prestige in Romania. That same year, Kraft acquired the Russian and Polish confectionery businesses of the German firm Stollwerck AG. The company in 2002 acquired Australian biscuit producer Lanes Food Group, thereby gaining control of key Nabisco brands in that nation, including Ritz and Premium crackers and Chips Ahoy! cookies. Kraft also acquired the Kar Gida snacks company in Turkey and Family Nutrition Company S.A.E., a leading producer of biscuits and snack cakes in Egypt.
Kraft’s Strategic Turnaround Efforts
Back in North America, Kraft was struggling. In addition to intensifying competition from lower priced, private label brands, which was eroding the market shares of its key brands, Kraft began misfiring on the new product front. Other initiatives concurrently changed the company’s portfolio of brands to bring them more in line with the current trends. To address the increasing interest in more healthful fare, Kraft began reducing the portion sizes of some of its products and launched 100-calorie "snack packs" of several Nabisco products, including Chips Ahoy! and Wheat Thins, to help people keep their consumption of snack items under control. In 2003 the company gained a foothold in the fast-growing organic sector by acquiring the small Back to Nature brand. This brand was subsequently expanded via the introduction of a number of new products, including granolas, cereals, macaroni and cheese dinners, and cheeses. Another growth area was alternative beverages, and in 2004 Kraft purchased Veryfine Products Inc., producer of Fruit2O flavored water and Veryfine juices and juice drinks. After finding only modest success with its low-carb offerings, Kraft attempted to profit from another popular diet, the South Beach diet.
At the same time, Kraft pared from its lineup some of its less-healthful products. In June 2005 the company sold the bulk of its sugar confectionery business, including the Life Savers and Altoids brands, to Wm. Wrigley Jr. Company for approximately $1.4 billion. In addition, Kraft sold its U.K. desserts business that year to Premier Foods plc while also jettisoning several noncore operations, such as its small U.S. yogurt business. In 2006 Kraft sold its Milk-Bone pet snacks brands to Del Monte Corporation for $580 million.
Moving quickly in this direction, Kraft in July 2007 reached an agreement to acquire Groupe Danone’s global biscuit business, maker of cookies, crackers, and other snacks. In addition to filling a hole in its European biscuits portfolio via the acquisition of such brands as LU, Tuc, and Prince, this deal also offered Kraft the opportunity to double its business in China and gain footholds in such emerging markets as Malaysia and Indonesia. Just a month after the announcement of this blockbuster acquisition, the Wall Street Journal reported that Kraft was beginning to explore a possible sale of its Post cereals business.
The company also showed that private label is no stronger in Kraft Foods’ categories than in food and beverage overall. Rosenfeld emphasized that the company’s investments to differentiate its brands are enabling Kraft Foods to outperform its branded competitors. In reviewing progress against the company’s strategies, Rosenfeld highlighted benefits from rewiring the organization. She explained how general managers are now empowered with full profit-and-loss and balance sheet responsibility and metrics aligned with shareholder value. As a result, they are reacting faster to market changes and delivering improvements in revenues, operating income and cash flow. Next, Kraft Foods spotlighted efforts to reframe categories, its second growth strategy. In 2008, the "growth diamond" guided investments aligned with key consumer trends in quick meals, health and wellness, snacking and premium products. These efforts have helped revitalize Kraft Foods’ new product growth through more than a dozen platform-based innovations, like Cakesters snack cakes, Biskuat affordable nutrition biscuits and Oscar Mayer Deli Fresh meats.
Improvements to Kraft Foods’ portfolio driven by strategic acquisitions such as the LU biscuit business, key divestitures of slow-growth businesses and the pruning of less-profitable products. Taken together, these actions enhance growth on both the top and bottom lines. The company also reinforced its clear focus on priority categories, core brands and key markets. With clear portfolio roles, Kraft Foods is now better able to skew investments to maximize growth opportunities. As a third strategy, Kraft Foods has been investing in sales as a sustainable competitive advantage. Rosenfeld announced High-Visibility Wall- to-Wall, the next evolution of its successful sales initiative in North America. The enhanced program will drive 1 percent of incremental revenue annually, adding to the 1 percent increase delivered by the current program. Regarding its fourth strategy, reduce costs without compromising quality, Rosenfeld recapped benefits from the company’s restructuring program that ended in 2008. Over the past four years, the company streamlined operations by closing 36 manufacturing facilities and simplified the organization by eliminating 19,000 positions. This delivered $1.1 billion in savings to date and will deliver $200 million in incremental savings in 2009.
Kraft’s Foods Innovation Drive as Strategic Competitive Edge
According to the “Innovations in Confectionary” report published in June 2009 by Business Insights, key issues facing the global confectionary market are:
- Emerging markets: Growth in the confectionary market will largely take place in emerging markets.
- Natural: Consumer demand for products that are free from artificial colors, flavors and additives and concern over the long term effects of artificial ingredients has driven growth in the confectionary industry.
- Heritage and provenance: For chocolate manufacturers a key growth opportunity is for premiumization through either high quality country of origin (or even single estate) ingredients or by focusing on the quality of production methods.
- Healthy and functional confectionery: Health continues to be a key innovation opportunity for confectionery managers in line with an ageing population and an obesity epidemic.
Even if retailers develop the operational capabilities to manufacture and sell chocolate and gum based on these issues, they may not be perceived to have the brand credibility that are owned by more established confectionary manufacturers. A potential acquisition of this magnitude during a sluggish economic recovery implies Kraft’s commitment to grow its extend its brand in growing global markets while evaluating other products in its brand architecture.
At Kraft, innovation is successfully implementing an invention or creative idea that creates value to consumers or our customers. Consumer needs are always changing, so Kraft’s need to constantly adapt and anticipate their needs. Innovation is helping Kraft return to reliable growth, create new product platforms, reinvent iconic brands, and improve product features. Innovation can apply to products, processes, packaging, ingredients, and more. It can come from many sources within Kraft business units; corporate R&D; consumer insights and consumer relations, and elsewhere. Kraft has a Research, Development & Quality team of more than 2,000 scientists, chemists and engineers who all have a vital role in inventing the new Kraft.
Kraft is developing innovative new products that broaden frame of reference and compete in new categories. For example, Bagel-fuls—the first nationally-available all-in-one bagel and Philadelphia cream cheese. Cakesters snack cakes platform is a new area for Kraft, and it’s on its way to becoming a $100 million business. Kraft has a long history of developing innovative new products to meet consumer needs. Open innovation is about connecting with these external innovators to extend both innovation capacity and capability. Over the last two years, Kraft has made a more focused and organized effort to step up open innovation activities. Innovation is not new to Kraft, but now more focused and have it better integrated into business. One area of innovation accomplishment is the capability and framework that built within the company—established a hub and spoke model where a centrally led team focuses on the overall strategies, systems, enabling tools, networks and metrics.
One big Open Innovation success is Kraft Bagel-fuls, a combination bagel and Philadelphia cream cheese, introduced nationally in the late spring. It is a solution for consumers providing convenience and portability, while leveraging our Philadelphia cream cheese quality and heritage. It came as an unsolicited idea from a third generation bagel maker with a niche market. It was a win for him because it became an opportunity to expand that product much more broadly, and it was a win for Kraft because it helped address some of the past technical challenges that we encountered with regard to the delivery of both a bagel and the cream cheese together. Open innovation is good for Kraft and good for the partner. Partnering with Kraft means access to our brands, technology, marketing expertise and distribution channels to bring scale. We can help smaller companies or entrepreneurs take a great innovation and make it bigger and even better.To drive meaningful results, Kraft now needs to make sure it organizes its efforts in the appropriate way. It should make sure that it comes to consensus around what a “good” idea looks like and that it ensures there is a process to shape nascent ideas into viable growth businesses.
The creation of a global leader in the food and confectionery industry
The acquisition of Cadbury will significantly enhance the strength of Kraft Foods’ presence in the confectionery sector, enabling Kraft Foods to leverage Cadbury’s product development capabilities. Kraft Foods believes that confectionery markets are consolidating and scale is becoming increasingly important, in part due to retailers’ increasing bargaining power, control of the supply chain and growing portfolio of their own retailer brands, which have benefited from the global economic climate. The combination of Kraft Foods and Cadbury provides the Combined Group with important additional scale to compete even more effectively in the confectionery sector. Kraft Foods and Cadbury have highly complementary geographic footprints. Importantly, a combination would increase scale for both companies in developing markets such as Brazil, Russia and China, where Kraft Foods has a stronger presence, and India, Mexico and South Africa, where Cadbury holds leading positions. The Combined Group would also benefit from an improved position across Europe, including in France and Spain. The combination of Kraft Foods and Cadbury is expected to provide the potential for meaningful revenue synergies over time from investments in distribution, marketing and product development.
Global collaboration enables Kraft Foods’ culture change
As part of its sustainability strategy, Kraft Foods has selected six key areas in which it feels it can have the greatest impact. These are transportation/distribution, agricultural commodities, energy, water, waste, and packaging. As a tangible goal around packaging, Kraft Foods has pledged that it will reduce packaging materials by 150 million pounds by 2011, as measured against 2005 figures. Having clear, measurable goals that are easily understood is essential to driving action, the company says. The challenge for Kraft Foods is to meet these goals while maintaining the level of integrity and quality of its products that consumer have come to expect.
CONCLUSION
Kraft vision is always to make today delicious. They make some of the best-known brands around the globe. Brands like Kraft cheeses, dinners and dressings; Oscar Mayer meats; Philadelphia cream cheese; Maxwell House coffee; Nabisco cookies and crackers and it’s Oreo brand; Jacobs coffees; Milka chocolates; and LU biscuits. They managed to creating reliable, consistent growth. That’s what they’re doing at Kraft, and their strategies are focusing efforts on build a high-performing organization, reframe segment/ categories, exploit sales capabilities (by merging or acquisition etc) and drive down costs without compromising quality. As they have sustained for many years and continued progress and growth, it is an icon of strategic management organization. They have made wise decision in their sales and marketing strategies, policy on globalization, organization structure, channel distribution, strategic management, human resources etc that enable to gain competitive advantages over their rivals. They are well ahead over their competitors in terms of market share, acceptance, product innovation, revenue, etc due to the fact that Kraft Food really understand factors and matters to sustain and excel in food industry and supported by strong business acumen and entrepreneurial spirit of Kraft organization.