Kraft’s North American grocery business, which today will list on the Nasdaq Stock Market as an independent company, is starting life with a handicap: years of underinvestment in new products and marketing.
The original Kraft Foods Inc., founded in 1909, is becoming two companies -- an international snacks business called Mondelez International Inc. (MDLZ) and Kraft Foods Group, the North American grocery enterprise. While the snacks business has grown almost 30 percent a year since 2009, its spun-off sibling is saddled with a portfolio of aging brands in need of freshening as it confronts potent rivals and rising commodity costs. To goose growth, Kraft Foods will spend more on marketing and research and has unleashed edgy new TV commercials that are already generating buzz on YouTube.
“Parts of Kraft have been undermanaged for a very long time,” said Edward Aaron, an analyst with RBC Capital Markets in Denver. “Part of the merit of the split is to improve resource allocation and make cultural changes that should have been made a long time ago.”
For years, Kraft’s North American grocery business was used to help finance growth in international markets, while the snacks business received a larger share of advertising and research and development money. That’s no real surprise, Kraft Foods Group Chief Executive Officer Tony Vernon said.
“The choice between focusing on growth in China versus Oscar Mayer, anyone would make that call,” he said.
Yet the decision to prioritize overseas growth means Northfield, Illinois-based Kraft Foods has plenty of work to do in the U.S. to spur sales of such brands as Oscar Mayer, Velveeta, Planters and Kraft, Vernon acknowledges.
Kraft’s grocery business has lost ground to French competitor Groupe Lactalis, Saputo Inc. (SAP) of Canada and private- label producers. While sales have increased an average of 4 percent in the past three years -- partly helped by rising food prices and an improving economy -- Kraft Foods has lost market share in key segments. Its share of the North American dairy business fell from 12.6 percent in 2008 to 11.3 percent in 2011, according to data compiled by Bloomberg, sauces and dressings from 11.5 percent to 10.4 percent. Oscar Mayer has retained stable market share in the meat business.
Jell-O is an example of a brand that needs a turnaround, said Michael Osanloo, president of Kraft Foods grocery unit. While yogurt companies pushed their products as a healthy alternative to kids and sold them as single cups or in two- packs, Kraft kept advertising the same snacks and sold them in six-packs. This month, Jell-O rolled out Mix-Ins, which have toppings and pudding in one cup and contain real milk and no artificial sweeteners or high-fructose corn syrup.
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It hasn’t helped that Kraft Foods has spent less on marketing than rivals. From 2009 through 2011, the company spent about 3 percent of sales on advertising, according to filings. By comparison, in 2011, Battle Creek, Michigan-based Kellogg Co. (K) spent 8.6 percent and Minneapolis-based General Mills Inc. (GIS) spent 5.7 percent, according to data compiled by Alix Partners, a New York-based consulting firm.
The underfunding of the North American grocery business is the “handiwork” of Irene Rosenfeld, the Kraft CEO who will now run Mondelez, said Ken Harris, an independent consumer products consultant.
“She made her bet on emerging markets,” he said. “When they start to invest in the Foods Group, they will be pleased with the response because they haven’t had the investment they deserve.”
Rosenfeld said in a phone interview that the combined company spent plenty on developing and marketing new products. New entries generated 9 percent of revenue last year, and Kraft Foods is well positioned to go off on its own, she said.
“They have a jewel portfolio of brands,” Rosenfeld said. “They will continue to grow.”
While Vernon declined to say how much more Kraft will spend on advertising, much of the budget will be lavished on the company’s power brands, including Velveeta, Kraft Macaroni and Cheese, Miracle Whip, Jello-O and Planters.
The company also has abandoned a play-it-safe approach to advertising in favor of edgier commercials that veer into darker and even creepier territory, much as Burger King Worldwide Inc. (BKW) did when it introduced The King -- since retired. Kraft hired the advertising agency Wieden & Kennedy to handle Velveeta. The firm created Chrysler’s “Imported from Detroit” ads featuring rapper Eminem.
Consider a TV commercial for Cheesy Skillets, a dinner kit that includes cheese sauce and shells that can be turned into a quick meal by adding ground beef or other ingredients. The ad features a medieval blacksmith suggestively wrapping his arms around a homemaker while whipping up a cheese dinner.
“Stir in the noodles, seasoning,” he says. “Then smite them with the liquid gold until there can be no more smiting.”
The blacksmith wasn’t supposed to be suggestive, said Ken Smith, Velveeta account director at Portland, Oregon-based Wieden & Kennedy. The character was meant to be weird and awkward, he said. That accomplished Kraft’s mission to get more aggressive. The old campaign used country music and targeted buyers in the Midwest and South, Smith said.
“They were looking to shake things up against an entrenched competitor in Hamburger Helper,” Smith said.
The commercial garnered such comments as “frightening” and “creepy” on YouTube.
A Miracle Whip ad, part of a campaign produced by New York- based Dentsu Mcgarrybowen, pays homage to the Scarlet Letter. The red MW letters are as much a pariah as the letter “A” of adultery in Nathaniel Hawthorne’s novel. The point is to get people to try a brand that trails Unilever NV’s (UNA) top-selling Hellmann’s mayo.
Vernon also plans to improve the innovation process and push more new products. Jell-O and Cool Whip will both get attention. Cool Whip has amped up marketing with an ad campaign that uses characters from “Family Guy,” a sometimes raunchy adult cartoon TV series. This month, Kraft is also adding Cool Whip frosting to the frozen foods aisle.
Kraft will seek new revenue by extending its best-known brands. Planters peanut butter, which debuted last year, is growing sales. Osanloo said he expects Velveeta Cheesy Skillets to more than double sales to about $100 million in the next 18 months.
“I get nervous about a new brand and a new category,” Osanloo said. “I get excited about extending a powerful brand into a new category. We will grow the business.”
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