Kraft at Work Burnishing Its Brands

With hungry investors circling and profits at a low ebb, CEO Rosenfeld is sticking to a growth plan of new products for the food giant's array of classic brands

In her spare time, Irene Rosenfeld likes to head from her home in the suburbs north of Chicago and take a kayak out onto nearby Lake Michigan, where the waters often are tricky. It's good training for her job. As the chief executive of Kraft Foods (KFT), Rosenfeld has been battling some strong currents in the office, too, trying to propel an enterprise with 90,000 employees.

So far, it's been a stubbornly slow voyage. Fifteen months after Rosenfeld took over at the packaged-food company, profits are slumping and revenue growth is sluggish. The company's stock price has barely budged in a year. Meanwhile, shareholders with a history of mutiny have boarded, including food industry specialist Nelson Peltz.

The Three-Year Plan

But Rosenfeld, in an exclusive interview with BusinessWeek, says the Kraft gunboat is picking up steam. "We're making terrific progress on all of our strategies," she says. Sitting at a conference table in her spacious, well-appointed office at Kraft's headquarters in Northfield, Ill., she adds: "I'm encouraged that we are seeing sequential improvement in all geographies of the world. The pace is accelerating."

Still, she cautions, patience is necessary. "This is a work in progress," she says. "The facts are we're six months into a three-year plan. I don't mean to diminish in any way the challenges in front of us. This is a very large ship." By 2009, she promises Kraft will be able to hit her long-term goal, with 7% to 9% annual growth in earnings per share and sales from the company's existing brands—Nabisco, Oscar Mayer, and Post, among others—reliably rising 4% annually.

Rosenfeld, 54, has the training and mettle for the helm. Hired as a market researcher in 1981, after earning a PhD in marketing and statistics at Cornell University, she spent the next 22 years working her way up toward the top at Kraft. She then left to run PepsiCo's (PEP) Frito-Lay division before returning in mid-2006 as Kraft's third CEO in three years. Asked whether Kraft is a great company, she answers without pause. "Kraft," she says, "is a fabulous company."

For all her efforts, however, Kraft isn't delivering fabulous financial results. Rosenfeld forecasts revenues will increase at least 4% in 2007, to $35.7 billion, excluding the pop from the company's $7.2 billion purchase of Groupe Danone's (GDNNY) cookie and cracker unit. That's higher than the company's 0.7% growth in 2006, but it's well short of her targets and shy of the 5% increases the company delivered from 2002 to 2005.

Staving Off Restless Investors

The sales increase isn't paying off for investors either. Kraft will earn $2.85 billion this year, or $1.80 to $1.82 a share, leaving out one-time items, she says. Add those in, and Kraft's net income will drop to $2.45 billion, its poorest year since 2001. Rosenfeld attributes the decline to a $400 million bump in marketing spending, which she says is vital in "contemporizing" the company's mostly aged brands. A runup in dairy prices and other ingredients is crimping margins, too.

The question is how long shareholders will wait. Kraft, which became fully independent from tobacco-industry giant Altria (MO) last March, has become a magnet for big-name investors who like undervalued stocks. Warren Buffett, whose Berkshire Hathaway (BRKA) owns a 3% stake, according to published reports, is known as a patient shareholder banking on long-term gains.

But two others who also are said to have bought 50 million shares each—Peltz and Carl Icahn—have well-earned reputations as agitators hungry for quick returns. Peltz, who is now mulling a takeover of Wendy's International (WEN) after taking on H.J. Heinz (HNZ) and Cadbury Schweppes (CSG), is urging Rosenfeld to sell off Kraft's underperforming Post cereals and Maxwell House coffee lines.

As their investments became public over the summer, Kraft stock shot up to more than $36 a share, a 20% rise from its 52-week low in mid-March. Since then, though, the stock has drifted lower. It closed Sept. 25 at $34.42, down 2.5% from its year-earlier close of $35.30. The Standard & Poor's 500-stock index, by comparison, has advanced 14% year over year.

Updating Classic Brands

Rosenfeld, who met with Peltz in July, says big divestitures are not part of her strategy. Nor are big acquisitions. Purchases like the July agreement with Paris-based Danone will be done as the opportunities arise, she explains. Instead, Kraft will hit her targets by pumping out more products under its existing panoply of brands, with an emphasis on macaroni and cheese, cookies and crackers, pizza, coffee, and snacks. "There is benefit in having a broad portfolio," she says. "Our scale is a competitive advantage."

She highlights Oreos as an example of how Kraft can extend and refresh brands that go back to the early 20th century. In August, the company introduced a soft version of Oreos, called Cakesters. Its bakeries can barely keep up with demand, she says. Kraft also teamed up with Domino's Pizza (DPZ) to create a novelty dessert, an Oreo-topped pizza. And in September, Kraft began selling traditional Oreos in a resealable package. Rosenfeld predicts this patented innovation will be a big sales-booster, too.

David Palmer, a food-industry analyst with UBS Securities (UBS), has boosted his rating on Kraft twice this year, to a buy. He sees the stock reaching $39 a share as its financial performance improves in 2008.

Ousters for Innovation

But while Oreos may be getting a new lease on life, most Kraft products are losing market share in the U.S. In the second quarter, the company's operating-profit margin excluding one-time items shrank by 210 basis points, to 14.5% from a year earlier, and Rosenfeld says margins will be squeezed for the remainder of the year by increased marketing spending and ingredient prices.

Rosenfeld understands Kraft needs to step up its performance. When she came back to Kraft, she says, it had become too centralized and fixated on cost-cutting. Now she's shifting the emphasis to innovation and, to get there, she has replaced more than half the people in Kraft's top two levels of management. "It is critically important that our innovations be bigger and more distinctive to consumers," she says.

It's critically important for investors, too. Unless Rosenfeld is able to speed Kraft along, she may be in even rougher waters.

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