Kraft Foods Group

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Foods giant Kraft underwent two substantial changes between 2012 and 2015. In the first of these, it divided into two separate companies in the final quarter of 2012. A slimmed-down Kraft Foods remained one of North America's leading food marketers, but the old group's extensive collection of snack brands was separated out to create a new and even larger global business under the name Mondelez International. Kraft kept hold of a large range of well-established grocery products sold primarily in North America, such as Kraft cheese, Philadelphia cream cheese, Kool-Aid drink mixes, Oscar Mayer meats and Maxwell House coffee. Mondelez took the faster-growing cookie business, comprising the heritage Nabisco portfolio and the substantial Lu biscuits division acquired from Danone in 2007. Mondelelz also houses the extensive Cadbury confectionery and gum division, as well as the Suchard chocolate brands previously owned in Europe by the old Kraft. In another major overhaul in March 2015, Kraft accepted an offer to be acquired by smaller rival HJ Heinz to create what is now the Kraft Heinz Company. That deal was completed with extraordinary speed just four months later. The Kraft name comes first, but it is Heinz's managers and shareholders who are in charge of the combined business.

Recent stories from Adbrands Weekly Update:

Adbrands Weekly Update 2nd July 2015: The merger of Kraft and Heinz was completed this week to create The Kraft Heinz Company. Its board confirmed the management team for that new entity. Heinz CEO Bernardo Hees takes the same role in the combined group, and virtually all C-suite roles go to current Heinz leaders. Only a few divisional leaders from Kraft will remain in situ in the US, most notably COO George Zoghbi, who will lead the merged US business. However, Kraft Canada leader Chris Kempczinski will be leaving the group, and his successor has yet to be named. Heinz North America chief Eduardo Luz becomes president, US ketchup, condiments, sauces, dressings & frozen, reporting to Zoghbi. Heinz executives will also take over responsibility for sales and foodservice for the merged group. Judging by the announcement this week, there will be no C-suite marketer at Kraft Heinz. The most senior marketing role appears to be that of SVP, marketing innovation, research & development, reporting to George Zoghbi. That job goes to Nina Barton, currently Kraft's VP, coffee.

Adbrands Weekly Update 28th May 2015: Ads Of The Week: "Orange Square". They may be processed as hell but they taste like heaven in the right setting. MDC Partners' Canadian agency Union plays mind games with orange squares in a new set of ads for Kraft Singles. This one will get your tastebuds tingling, and there are two more over at Facebook.

Adbrands Weekly Update 26th Mar 2015: Kraft Foods and HJ Heinz will merge to create a new global food giant. The newly created Kraft Heinz Company would have combined revenues of around $28bn, making it the world's 5th largest food company. It will also give Kraft renewed access to international markets from which it has been largely excluded since it was spun out of what is now Mondelez. The deal is the latest in a string of masterstrokes by the three Brazilian investors behind AB InBev and the newly merged Burger King/Tim Hortons. Their 3G Capital investment group took HJ Heinz private two years ago, with additional funding from Warren Buffett's Berkshire Hathaway. Under the proposed arrangement the newly created Kraft Heinz Company would retain Kraft's public listing. 3G and Berkshire will inject Heinz into the existing Kraft, and provide an additional $10bn in capital to end up with a 51% shareholding in the resulting business. Kraft's current public shareholders will have the balance. Heinz CEO Bernardo Hees will lead the merged group as CEO, with 3G's Alex Behring as chairman. Kraft chairman & CEO John Cahill will become vice chairman. Kraft managers beware: the 3G team has a reputation for pruning costs to the bone at the companies they acquire. Over the year and half following the Heinz buyout, more than 7,000 jobs were cut, and a similar strategy is inevitable at Kraft. WPP CEO Martin Sorrell was asked to comment on the deal at an advertising conference in London this week. Although neither Heinz nor Kraft are major customers of WPP, he voiced some concern that the merger is "cost-driven, not revenue-drive". Clients were still, he said, tending to "focus on their boots, not on horizons", so it is up to agencies to draw their attention towards potential growth opportunities.

Adbrands Weekly Update 17th Feb 2015: Kraft Foods announced a big shake-up of its management team in the wake of disappointing 4Q and full year figures. Annual revenues slipped marginally to $18.21bn, but net earnings plunged by almost 62% to $1.04bn, though that was mainly the result of a big accounting adjustment to pension plans. The previous year was flattered by an equally large gain in the same area. Stripping both those adjustments out, operating income was up slightly to $3.2bn from $3.0bn the year before. Yet clearly the flat revenues weren't satisfactory - now operating only in the US and Canada, Kraft can't blame currency fluctuations for flat performance like other packaged goods manufacturers have been able to do. As a result, chief marketing officer Deanie Elsner, R&D chief Chuck Davis and CFO Teri List-Stoll are all leaving the company. In their place, Jane Hilk, currently divisional head for enhancers & snack nuts, will become interim CMO; George Zoghbi was named as COO, and Kraft Canada's Chris Kempczinski was appointed as EVP, growth initiatives and president of international.

Adbrands Weekly Update 29th Dec 2014: After a difficult year's trading, Tony Vernon stepped down abruptly as CEO of Kraft Foods Group, and was succeeded, on an interim basis at least, by chairman John Cahill. Vernon will remain at Kraft as a special advisor for the first quarter of the year. Formerly chairman & CEO of Coca-Cola Bottling Group, Cahill said "The industry is undergoing a great deal of rapid change, and it is important that we keep pace and indeed stay ahead of these changes as we build a stronger Kraft. While our immediate priority will be to remain focused on delivering results, we will also take a fresh look at the business to prioritize our investments and focus on sustainable profit growth." That suggests the possibility of a sell-off of slower brands.

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Brands & Activities

Despite its size and its remaining strength in North America, Kraft found it hard to develop exciting new brands in the first few years of the new century, and instead depended heavily on milking its existing products for all they were worth, with a steady stream of spin-offs and variants. A far more productive route, especially outside North America, was acquisition. Kraft bolstered its international portfolio considerably in Europe and Asia with the purchase of sweet treats Lu and Cadbury. As a result, the proportion of sales generated outside North America rose from less than a third in 2006 to more than half by 2010. To resolve this imbalance, and also to enhance the group's value, Kraft announced plans to split into two entirely separate businesses during 2012. The heritage collection of grocery products sold mainly in North America, including the Kraft masterbrand, were demerged into a new company which adopted the name Kraft Foods Group. At the same time, the old corporate parent renamed itself Mondelez International. The split was completed at the beginning of October 2012.

Yet separated from its more innovative snack products, the slimmed-down Kraft continued to coast through the next couple of years, with little positive development. This resulted in an overhaul of the management team at the end of 2014. This prompted the private equity owners of smaller rival HJ Heinz to negotiate a bold deal to acquire Kraft in March 2015 and merge it into their existing business. The takeover was completed just four months later in July, leading to the departure of many of Kraft's remaining managers in favour of their counterparts at Heinz.

Prior to its acquisition by Heinz, the New Kraft operated only in North America. International sales of products such as Philadelphia cream cheese and Tang drinks mix have been managed under license by Mondelez, while in return Kraft held a license from Mondelez to market the Tassimo coffee system in the US. Both of the latter arrangements are likely to change following the takeover of Kraft by Heinz and the demerger of Mondelez' coffee operations.

Several other food businesses had already been sold or shuttered prior to the Mondelez split. Until 2007, Kraft was the US #3 player in breakfast cereals market behind Kellogg's and General Mills, with around 15% share. The company's main brand in this segment was Post cereals, with annual sales in excess of $1bn. Sub-brands included Honey Bunches of Oats, Pebbles, Shredded Wheat, Selects, Grape Nuts and Honeycomb. However, in 2007, Kraft finalised a deal to spin off its entire breakfast cereals business into competitor Ralcorp, already a leader in private label cereals. The effective deal value was around $2.6bn. Post was itself subsequently spun off by Ralcorp as a separate company, Post Holdings.

Until 2009 Kraft was also the US #1 in frozen pizza with brands including DiGiorno, Jack's, Tombstone and California Pizza Kitchen (under license from the restaurant chain of the same name). Kraft's combined market share in 2009 was around 39% (excluding Wal-Mart), well ahead of nearest rival Schwan. However, at the end of the year, Kraft announced plans to sell the frozen pizza business to rival Nestlé for $3.7bn. It used that cash to fund its takeover of confectioner Cadbury. 

Until 2010 it had held grocery distribution rights for the Starbucks packaged coffee brand for almost a decade, having steadily extended this relationship to include Starbucks' Seattle Best coffee and Tazo Tea brands as well. Starbucks was the #3 brand at US retail in 2009, with around 8% share. However, in 2010, Starbucks announced its intention to dissolve this partnership and take back control of its brand in mass market channels. This led to a bitter legal battle. In 2013, an independent arbitrator ordered Starbucks to pay $2.7bn in damages for improper termination.

Financials

The old Kraft's total revenues for 2009 dipped 4% to $40.4bn, but net earnings climbed 5% to just over $3.0bn. That was seen as a good performance, especially since the previous year's figures were helped by a one-off gain of almost $1.1bn from Post cereals and other discontinued operations. However it was still below the $3.1bn reported in 2006 and even stronger results in 2002 and 2003. The addition of Cadbury gave topline a significant boost in 2010, but the British company's profit contribution was disappointing. Reported group revenues rose 27% to $49.2bn, and although net profit jumped 36% to $4.1bn the most significant contribution came from the sale of North American pizza, with a one-off gain of $1.6bn. Excluding that item, net earnings from continuing operations slipped 11% to $2.5bn. There was a stronger performance in 2011, with revenues rising 10.5% to $54.4bn, and an impressive lift in underlying operating performance. Although the net figure fell back to $3.5bn, because of the previous year's pizza gain, comparable earnings jumped by more than 42%.

Following new Kraft's spin-off from what is now Mondelez, the slimmed-down company reported revenues for 2012 of $18.34bn, down almost 2% on a like-for-like basis from the year before. Net earnings slipped 7% to $1.64bn. For 2013, revenues slipped back to $18.22bn as a result of disposals, but were essentially unchanged on a like for like basis. However net earnings jumped by two-thirds to $2.72bn as a result of cost-cutting programmes and an adjustment to retirement benefits.

Revenues for 2014 slipped back marginally to $18.21bn, but net income plunged by almost 62% to to $1.04bn, though that was mainly the result of a big negative accounting adjustment of $2.9bn to pension plans. The previous year was flattered by an equally large gain in the same area. Stripping both those adjustments out, operating income was up slightly to $3.2bn from $3.0bn the year before. Walmart accounted for around 26% of revenues (approx $4.7bn). The group generated 87% of revenues in the US in 2014, most of the rest from Canada, with a small contribution from exported goods and royalties. Total debt at the end of the year was $8.6bn.

Management

Tony Vernon, previously EVP & president of the old Kraft North America division, became CEO of the new Kraft Foods Group following the Mondelez split, with former Pepsi Bottling CEO John Cahill appointed initially as executive chairman. Cahill moved to non-executive chairman in 2014. At the end of a difficult year, though, Vernon retired, and Cahill was appointed as CEO. Another clutch of executives departed the company in early 2015, and virtually all of those remaining C-suite managers left following the merger with Heinz. The most senior survivor from the current Kraft team was George Zoghbi, appointed Kraft COO in early 2015. He remains COO, US commercial operations in the Kraft Heinz Company.

Other senior officers at Kraft prior to the takeover included James Kehoe (CFO, from early 2015), Howard Friedman (EVP, cheese & dairy), Dino Bianco (EVP, beverages & Canada), Tom Corley (EVP, US sales), Bob Gorski (EVP, integrated supply chain), Sam Rovitt (EVP, Oscar Mayer) and Michael Osanloo (EVP, meals & desserts). 

Deanie Elsner was appointed as EVP & chief marketing officer of the new Kraft Foods Group in Feb 2013. However she left the group two years later and was succeeded on an interim basis by Jane Hilk, previously divisional president of enhancers & snack nuts. Hilk left the company following the Heinz takeover. Nina Barton, formerly VP, coffee at Kraft, became SVP, marketing innovation, research & development in Kraft Heinz.

Background

By 2012, Kraft Foods was the end result of a long series of mergers and amalgamations, as a string of separate entrepreneurial businesses gradually consolidated into today's food giant. The oldest brand in the portfolio is Baker's chocolate, first marketed in 1780. One hundred years later Philadelphia Cream Cheese was invented by the Empire Cream Cheese Company of New York. Also in the 1880's Oscar Mayer's meat business was established. Maxwell House was first developed in 1892, a special blend produced for the Maxwell House Hotel in Nashville, Tennessee. (It was reportedly President Theodore Roosevelt who invented the brand's long-serving ad slogan in 1907 - after finishing a cup of it at a function, he said that it was "Good to the last drop". Maxwell House Instant Coffee was developed to serve the Armed Forces in the Second World War, and marketed to consumers from 1946.)

But while these were products were acquired over the years, the real cornerstone of Kraft was laid in 1895, with the foundation of CW Post's cereal company in Battle Creek, Michigan. One of the many competitors to the fast-growing Kellogg's business, Post developed two breakfast cereals, Postum and Grape-Nuts, in the closing years of the 19th century. The Post cereal company grew rapidly in the early years of the century and began to diversify during the 1920s. Gelatine brand Jell-O was bought in 1925, followed by Maxwell House three years later. In 1929, the company bought Clarence Birdseye's frozen food business (sold during the 1990s), and changed its name to General Foods.

Running parallel to Post Cereals, James Kraft set up his wholesale cheese business in Chicago in 1903. Kraft's cheese business really took off during the First World War. He had developed his first tinned cheese in 1915, and substantial quantities were purchased by the US government to feed American soldiers in Europe. Business boomed and Kraft began to introduce other products, including Velveeta in 1928 ("Digestible as milk itself!") and Miracle Whip in 1933. Prepared meals came four years later, followed by Kraft cheese slices in 1950 and Cracker Barrel in 1954.

In 1981, General Foods bought up the Oscar Mayer business. It was itself swallowed up by Philip Morris four years later at a cost of $5.6bn. Following the group's $13bn acquisition of Kraft as well in 1988, the two businesses were merged to form Kraft General Foods, which became the largest food company in America. Although they shared the same umbrella Kraft and General continued to operate independently until they merged in 1995. The subsequent restructuring led to a huge hit to the company's financials in 1998. 

Meanwhile, on the other side of the Atlantic Ocean, another set of mergers had led to the creation of European chocolate and coffee company Jacobs Suchard. Philippe Suchard opened his chocolate shop in 1827 in Neuchatel, Switzerland; Johann Jacobs began serving coffee, tea, chocolate and biscuits in Bremen, Germany in 1895. In the 1970s, the latter business came under the control of its founder's grandson Klaus Jacobs, who expanded the business dramatically through a number of acquisitions, of which the biggest was Suchard in 1982. After several years of further growth, Jacobs sold the company to Philip Morris in 1990. (Jacobs himself used the proceeds from that deal to establish wholesale chocolate manufacturer Barry Callebaut, as well as the temporary employment group Adecco, formed in 1996 from the merger of his own company Adia with Ecco of France). After operating independently for three years, Jacobs Suchard merged with Kraft's European division in 1993 to form Kraft Jacobs Suchard. 

In 2000, Kraft was the winning bidder in the contest to acquire US food company Nabisco. [See Nabisco profile for more]. Despite competition from a European consortium of Cadbury and Danone, Kraft offered the highest bid of $14.9bn in cash. A year later, following completion of the Nabisco purchase, around 16% of the Kraft equity was floated in what became the second largest IPO in US corporate history (although Philip Morris retained virtually all the company's voting stock).

The group spent much of the year consolidating its enlarged portfolio, selling off a number of non-core brands, and acquiring others. It acquired US pasta brand It's Past Anytime in early 2001, and strengthened its coffee businesses through a series of acquisitions including the brands Nova Brasilia, Classic Brasilier and Prestige in Central and Eastern Europe; Samar and Gaouar in Morocco. Also in Eastern Europe, it acquired the confectionery business of Stollwerck, Russia's biggest candy company, with brands including Alpen Gold, Pokrov, Tibi and Americana. The group also set about regaining control of some of the international licenses for its Nabisco brands. In late 2001 it bought back Canadian rights to LifeSavers from Beta Brands for around $12m. In early 2002 Kraft acquired Australian cookie company Lanes, who had manufactured various Nabisco products under licence since 1991. 

Brands sold included Nabisco's gelatine brand Knox, the Tres Estrellas, San Antonio and Sorpresa bakery brands in Mexico (to Grupo La Moderna), and the Yemina and Vesta pasta brands (to Barilla). The Farley and Sathers confectionery businesses in the US were sold to private equity fund Catterton Corp. In 2002 Kraft acquired leading Turkish snacks company Kar Gida. 

In recent years the company's most pressing competition, especially in the US, has been from lower-priced own-label or unbranded products in supermarkets. Kraft promised to increase its US marketing spend and promotional discounting on cheese, cold meats, coffee and biscuits by as much as $600m annually from late 2003. However the structuring of Kraft as two more or less separate companies, one US and the other international, had serious limitations, not least a run of generally flat sales and a distinct lack of interesting new launches. Instead Kraft had tended to rely on developing extensions to existing brands. As a result many of its brands were over-extended, especially in segments which could be easily replicated by private label manufacturers. At the beginning of 2004, the group adopted a more streamlined structure, with regional operating divisions, supported by a centralised marketing and product development division. At the same time, the management team was overhauled. Co-CEOs Roger Deromedi and Betsy Holden took on new roles, with Deromedi promoted to overall CEO. Betsy Holden became president of global marketing & category development in 2004, but announced her resignation from the company a year later.

In perhaps the most blatant attempt to kickstart growth, Kraft launched a campaign in 2006 to encourage consumers to suggest their own ideas for new products, under the banner Innovate with Kraft. Also in 2006, Kraft reacquired from British company United Biscuits UK rights to the various crackers and cookie brands under the Nabisco umbrella, including Ritz, and also took control of UB's operations in Spain and Portugal. Kraft had inherited a 25% shareholding in United Biscuits as part of the Nabisco takeover. However, also that year, Roger Deromedi was replaced as group chief executive by Irene Rosenfeld, previously chairman & CEO of rival Frito-Lay, the snacks unit of PepsiCo. 

Until early 2007, Altria controlled a little over 98% of voting stock in Kraft and around 89% of equity. The rest was publicly held. Plans to spin off Kraft entirely as a separate company had been delayed by concerns that the business could remain subject to tobacco-related litigation. However the threat from this has reduced considerably. After several months of speculation, Altria spun off all its remaining shares in Kraft to shareholders at the end of March 2007. 

Last full revision 14th October 2015


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