Kraft CEO still tepid on food/beverage demand

by Josh Sosland
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NORTHFIELD, Ill. — A sluggish consumer environment in 2013 for the packaged foods business has bled into 2014 and is likely to continue for the near term, said W. Anthony Vernon, chief executive officer, Kraft Foods Inc.

Vernon offered an update on Kraft and the food business overall in a May 1 conference call in connection with first-quarter financial results.

“We expected to see some of the same headwinds that impacted the North American food and beverage market in 2013 continue as we enter 2014, and what we saw in quarter one was indeed consistent with our expectations,” he said. “Industry consumption growth lagged population growth, both in the US and Canada, and we would expect unit growth to remain below population growth in the near term.”

Net income of Kraft Foods Group, Inc. in the first quarter ended March 29 was $513 million, equal to 86 cents per share on the common stock, up 13 percent from $456 million, or 77 cents per share, in the first quarter of 2013. Net revenues were $4,362 million, down 3.3 percent from $4,513 million in the comparable quarter last year.

Nearly mirroring the net income gain, operating income in the first quarter was up 12 percent. Results included a $49 million benefit in connection with the company’s post-employment benefits plan and a $47 million gain from unrealized gains associated with hedging activities.

Excluding these gains operating income was flat.

Also helping income was reduced spending on the company’s cost savings initiatives and gains from productivity, but these benefits were offset by lower volume/mix and the timing of marketing expenses versus the prior year.

Vernon was cautious but directionally positive in his assessment of the quarterly results.

“We continued to make steady progress during the first quarter of this year,” he said. “We still have more work to do, but we’re confident that our focus on brand renovation, marketing excellence and total cost management will drive the profitable growth that both we and our shareholders expect.”

Breaking down the 3.3 percent decline in total revenues, Kraft said organic revenues were down 2.4 percent, including a 2.8 percent decline attributable to lower volume/mix partly offset by 0.4 percentage point of higher pricing. The company attributed virtually the entire decline to the later timing of Easter shipments in 2014 versus 2013 and “normalization of retail customer inventories” from unusually high levels at the end of 2013.

Still, in breaking down results for its key business areas of Cheese, Refrigerated Meals, Beverages, Meals and Desserts, Enhancers and Snack Nuts, Canada and Other, none showed strong sales volume trends. The best performer was Refrigerated Meals, with volume/mix unchanged during the quarter and the balance of segments in the red, capped by a 9.1 percent decline for Beverages.

In the conference call, Vernon said many of the factors weighing on consumer demand in 2013 remained in play in the new year.

“The impact of reductions to the SNAP program continue to be significant for the many American families receiving those benefits, and the employment ratio and underemployment continue to lag the improvement in the headline unemployment rate,” he said. “More recently, we’ve even seen evidence of cost pressures on lower- and middle-income households due to higher heating bills and even middle- and upper-middle-income consumers incrementally impacted by larger 2013 tax bills. This was most visible as we got into March and April, but we’d expect these more recent factors to fade as we move forward into the remainder of the year.”

One analyst, Eric Katzman of Deutsche Bank, took issue with Vernon’s broad brush assessment of the overall market. The analyst said instead that retail pressures were not uniform but were most severe in center-of-store categories where Kraft’s presence is heaviest. The Kraft CEO did not disagree.

“It’s very important to reinforce that yes, we believe health and wellness, the perimeter of the store, the ability to offer choice, the importance of getting our fair share of alternate channels where this consumer is shopping, the capitalizing on the growing cohorts that none of us have really done well with, Hispanics, millennials,” he said. “I think we’re all learning together how to do this.

“Eric, I take the critique very well. You’re absolutely right. Consumption is going from the center of store to other areas. We feel strongly when we introduce a Kraft Singles with no preservatives or double the protein in Philly or bring out P-3 with fresh meat, fresh cheese and fresh nuts, that we’re addressing some of these growth trends.”

In his prepared remarks, Vernon highlighted innovation at Kraft by discussing focusing on lunch meat business, including the P-3 Portable Protein Pack introduction from Oscar Mayer as well as new introductions.

“We’ve taken our best-in-class innovation model and have been extending it to brand renovation,” he said. “A great example is Lunchables. This franchise continues to be on a roll as the launch of Lunchables Uploaded has expanded the brand’s appeal to an older teen demographic and led to strong growth throughout last year and continuing into first quarter this year. This success is complemented by the launch of our newest innovation in quarter one, Lunchables Kabobbles.

“Kabobbles. That’s just fun for me to say, as it must be for the kids to eat. We’re planning to take that kind of success and extend it to our protein platforms. As we pointed out at CAGNY, protein continues to be hot, and we’re delivering innovation and renovation in response to this growth trend. We launched P-3 in quarter one, protein power packs that bring together Kraft’s Holy Trinity — Oscar Mayer’s Selects meat, Kraft natural cheese and Planters nuts. P-3 is bringing buyers to the Oscar Mayer franchise; new ones, like millennials, as it extends the brand into the wholesome protein snacking area. It is early days, but as P-3 continues to build trial in market, we’re encouraged in that we’re seeing it successfully source volume from a variety of protein snacking categories while also creating new protein usage occasions.”

Vernon said Kraft is renovating its Deli Fresh line with a new look and campaign. In cheese, the company is renovating the Kraft singles franchise, with Kraft American singles made with no artificial preservatives and a new marketing and public relations campaign.

Looking forward to the second quarter, Vernon said the period will feature a “rejuvenation campaign” for Maxwell House coffee, new Planters flavored peanuts and a campaign touting the new Philadelphia soft cream cheese, a product update the company previewed earlier this year at the annual Consumer Analyst Group of New York meeting.
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