Why Kraft Is On A Crash Diet

With private labels eating into share, the CEO wants its brands either No. 1 or gone

Kraft Foods Inc. (KFT ) sure has bulked up. In the past five years, the company has gobbled up 10 rivals, including Nabisco Holdings Corp. for $19 billion in late 2000. The result: the biggest packaged-food maker in the U.S., with expected 2004 sales of $32.3 billion and products in almost every aisle of the grocery store, from Kraft cheeses and Oreo cookies to Oscar Mayer meats, Post cereals, DiGiorno pizzas, and Maxwell House coffees.

Now Chief Executive Roger K. Deromedi has decided it's time for Kraft to slim down. He began with the Nov. 15 sale of Kraft's Life Savers and Altoids candies to Wm. Wrigley Jr. Co. (WWY ) for $1.5 billion in cash. And more will follow, he says, as Kraft divests itself of other laggard and peripheral product lines to concentrate on the blockbuster brands that can be tops in their categories worldwide. Says Deromedi: "We want the products that consumers and retailers are more excited about."

Clearly, the pressure is on the 51-year-old Deromedi, who became Kraft's sole CEO a year ago, when Co-Chief Executive Betsy Holden was demoted to global marketing president. Like other consumer-goods companies, Kraft is scrambling to give Wal-Mart Stores Inc. (WMT ) and other retailing giants what they want. Bulking up to gain leverage with the retail behemoths fueled much of Kraft's expansion in the first place, but that strategy hasn't worked. With Wal-Mart and others increasingly interested only in the briskest-selling products, it turns out that suppliers are better off with a clutch of category killers than a cartful of so-so sellers.

But dealing with Wal-Mart isn't Kraft's only problem. Many are of its own making, from turmoil within its executive suite to oversaturating store shelves with too many variations of the same old product. How many different kinds of Oreos do consumers really want? At the same time, other consumer-products companies, notably Procter & Gamble Co. (PG ), have been far more skillful in navigating the retailing shoals with nifty new products. What's more, management at Kraft's parent, Altria Group Inc. (MO ), is putting the squeeze on Kraft to shape up in advance of a possible spin-off of its controlling stake next year.


While investors generally endorse Deromedi's new focus, trimming the weakest links alone won't be enough. He will also need to bolster sales and margins at the brands he keeps to lift Kraft from a profit slump that goes back to 2003. That won't be easy. Private-label brands are undermining Kraft's ability to charge premium prices, and the consolidating retail sector leaves Kraft with fewer outlets. At the same time, many of its staples, such as Nabisco cookies and crackers, are verboten under low-carb diets, while its own low-carb alternatives haven't scored.

But Deromedi says the asset sales will help. Already, the Northfield (Ill.)-based company has bumped up its 2004 marketing budget by some $550 million, swelling outlays on marketing, administration, and R&D to more than $6.5 billion. And as Kraft raises more money, Deromedi promises to further boost spending on ads and product development, such as its new DiGiorno microwaveable pizzas. Says Deromedi: "Where we think we can win is the key."

Now Deromedi is evaluating which brands to auction off next. As with the sale of Altoids and Life Savers to Wrigley, he'll look at secondary brands or those where Kraft lacks the clout with retailers to turn things around. Analysts and consultants figure Oscar Mayer is most likely. Despite being the leader in bacon, hot dogs, and luncheon meats in the U.S., with $2.1 billion in annual sales, it has been losing out to cheaper store brands and has little brand recognition overseas. Kraft's $1.2 billion-a-year Post cereals division, a distant No. 3 that also is ceding market share, could also be on the block. Michael A. Crowe, a senior managing director of Mesirow Financial, which owns 200,000 Kraft shares, hopes the sales come soon. "It's not long overdue," he says. "But it is overdue."

Long-term, of course, Deromedi cannot make Kraft grow by slimming down. In fact, he says he might take some proceeds from divestitures and make acquisitions. But for now, it seems, Kraft may do well to drop a few more pounds.

By Michael Arndt in Chicago

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