Kraft Foods Inc

Kristopher J. Blanchard Crown College KFT www. kraftf oodscompa ny.com

The boarcl of clirectors of Krati Foocls Inc. declarecl a regnlal quarterl5' clividend of 50.29 lter courmon share of Class A stock payable on July l"+. 2009. Accorcling to theil advet'tising. Krafi Foods makes todal,delicious in l-50 countries arouncl the -elobe. Their 100.000 employees u'ork to make delicious loocls col'lsuurers can t-eel goocl about. Klaft's Arnet'icau blancl icons include Klaft chec'ses. clinners. ancl clressin-us. N{axrveli Hottse cotf'ees attd Oscar Nllayer nteats. to _elobal po$'erhouse b|auds like Oreo ancl LU biscuits. Phiiadelphia cream cheeses, Jacobs ar.rd Carte Noile coftees. Tan-g powdered beverages. and VIilka. Cote cl'Or'. Lacta. artd Toblerone chocolates.

The largest fbod courpany in the Unitecl States. Kraft's iilst qualter'2009 protit increased 10 percent and its olganic re\leuues incleasecl 2.3 pelcent. The cornpanl"s Nortlt Aurericatt sales rose 2.9 percent, helped by r-nuch hi-ehel demand tbr its celeals. Krafi's secoucl qttat'ter 2009 earnings increased I I percent to 5827 million but sales clropped -5.9 perceut to Sl0. l6 billion. ]'he q'eakest perfrlrming se-qlnent of the compally was North Amelican Foodsen'ice. which leportecl a l0 percent clrop in sales. Krafi's European segmel)t reported a doublin-e ot'

profit of the qua|ter.

History Krati tbunclecl',vhat is nolv kno$'rl

as the Krati Foocl Company in 1903 u'hen he sold a feu' standard valieties of cheese u,holesale in Chicago. The company grew aud rvas soon distributing some 30 r,arieties of cheese packa-eed under the brancl names of Krafi and Elkhorn. By l9l-1. the cheeses rvele ar,ailable in nrost to\vr1s acloss the Unifeci States. In 1916, Krafi rvas granted a patent tbr u,hat came to be knou'n as processed cheese. Kraft began to lnassproduce a number of specialty cheeses like Goucia and blue cheese and be-uau to export proclucts to Canacla arrd Eulope in 1920: plants u'ould later be established in both Englartd ancl Jan.res

Gerrttan\,.

A ke1, to the success of Kratt Foocl u'as James Krafi's commitrneut to developing 11s11' prodtucts and using innol'ative adveltising rnethods. Kraft u,as au earlv user of all courmunicatiotts meclia ancl. as ealll' as I 9 1 1 . ri'as atlvertising on Chicago elevatecl trains. using outdoor billboarcls and mailing circnlals to retail gl'ocers. He u'as arnong the tirst to advertise in consnrneriourttals and was also tl.re t-lrst to use colorecl aclvertisernents in national magazitres. In 1933. the con.rpany stalfecl to use radio on an exteusive scale. It sponsoled the one-houl rveeklS, urusical ancl variety slrorv Krzrli X,lusit'ti Rcllerl u'hicli heacllined notable shorv business personalities. Klati's commitment to innor.ation n'as clenronstratecl thlough the valiety of proclucts that n,ere introdtlced. These proclucts include items like Velveeta (1928). Milacle Whip salacl ch'essin-e (1933), Kiati macaloni and cheese dinner'(1937). Parka)'nrar'-ualine (1940). sliced plocessed cheese (i95 1), and Cheez Whiz ( 1952 ). Even though Krati Foods has a failll' u'ell-documentecl company history. it has primarily operatecl as a subsicliar), to other lalger corporations. The tirst of these u,as the National Dairy Courpanf in 1930: Krati ri'oultl lirter be purchased b1'Philip Nlollis in 1988 fol S12.9 billion. In Malch 1989. PhilipMon'is mergecl Kraft ancl its Genelal Foods r-urit into one entity called Klafi General Foocls. Inc. As a result of the urelger'. the cornpan)' became tlre lar-uest fbocl cort.rpanf in

4

KRISTOPH ER J.

B

LANCHARD

the United States and the second largest in the rvorld. Initially the met-uet'cleated a competitive advanta-se fbr the nen'l)' fblmecl subsiclian,: the company u'as able to save 5400 million tht'ouglt consol iciations ancl i ncreased purchasin-e po\\'er.

Philip llolris acquilecl Nabisco tbr S1.i.9 in cash plus the assurnptiorl of 54 billion in debt. Philip Nlolris con'rpletecl its acquisition of Nabisco in December' 2000 ancl irnrnediately began inte-sl'atiu-s the Nabisco opelations into those of Klal't Foods and Klatt Foods International. In 2001. Philip X,lorris created a neu, holclin-t cor.npany' tbl the combined operations kttorvtt as Klati Foocls Inc. (lackin-s the comma of the pler,ious Krati Foocls. Inc.). The previ0us Krafi Foocls rvas Krali Foocls Nolth Anierica. givin-u the nerv Kraft Foods tu'o maitt rinits: Krali Footls North America ancl Klalt Foocls International. The trvo CEOs of these rinits. Betsy D. Holclen ancl Rogel K. Deromedi. lespectiveh'. \\/ere named co-CEOs of Krafi Foocls Inc. In June 2001. Philip N4otris solcl a 16. I percent stake in Kratt Foods to the public. retaining the retnainin-g shales. The seconcl largest initial public ofl-eling (IPO) in U.S. iristory. the oft-erin-s raised 58.68 billion. rvhich Philip l,lon'is ealmarkecl to recluce clebt it hacl incurred in acquiring Nabisco. The

reniimecl

result of this IPO is that Kt'afi Foods Inc. is a compall.y that is less than l0 yeats old.

lnternal Information Organizational Structure It took several ),ears to complete the spin-otf of Klaii Foods Inc. tlorn the Philip N4orris Con.rpanl'. DLrring that pl'ocess. Klait Foods lrtc. san' a nuruber of changes in its ieadelship tealn. The most si,enificant u,as that Irene Rosenf'eld *'as appointed CEO in June 2006; she assumed the position of chairuran clf the boarcl in l,Iarch 1007. The organizational stnicture of the ntana-eelnent teattt is pror,iclecl in Exhibit l. Note the chart is clir.isional by geographic l'egion. Some atrall'sts t'eel that a by-ploduct clivisional structure u'ould be mole etl'ective fol Krati. Company Mission and Ethics Statement

The Klatt Foods Inc. urission stilteulent was pl'eseuted to the general public dulin-u the CAGNY Cont'erence in Febmary 2009. Accordin-s to the Kratt Foods Inc. Web site (http://rvrvrv.klatifboclscoutpany.com/About/u'ho-u'e-ale/). the rnission stateurent consists of thlee u,ords ancl reads as iollorvs:

llake Today Delicious.

In order' lo tull'1ll this mission Kratt Foods Inc. focuses on consumers irt everythittg that they do. The colltpan)' also unclerstancls that actions speak louder tltatr u'ords. so at Klati Foods:

. . . . . . .

We iuspile tlusl. We act like ou'ners. \Ve keep it siurple. We itre open and irtclrtsive. \\re tell it like it is. We leacl ti'our the heacl ancl the heat't. l We cliscuss. \\'c clecicle. \\1e cleliver.

Structure of Management Team at Kraft Foods

lt1c.

iiiih.rrd Scrrci-

lliilv llcst \\ c:i

\'i) .ttid illcritierti \r'r ili

l:rr'c. \'lt ltntl t-hief .\I.ilkclirrir

l:rcc. .\

tt.l

r

r.i

i.t

(

)liice

r'

CASE

1

Kraft's Sales by Segment/Percent For the Years Ended December 31 2008

2006

2AA7

(2007 & 2006 restated)

Kraft North Arnet'ica: 8.50(,i

L60( t

1-l 30qr

9.60(:i

.10(,t

9,30r'i

Li.S. Bet'erases U. S. Che ese

LI.S. Convenient i\'leals

9

U. S. Grocer'\'

13.O(x,,i

lJ.

Lr.S. Suacks

12.)0(,r

I

Canada ct N.A. trooclsen'ice

r

-1(X'i

+.5(X,i

.+

1

.7 0(,'{

5.10,,i 9.5

0li

I ti .80ri 1

0.l0tt

0.00{a

9.70(,i

9.80"

9.50%

I 3.601?

11.60(i

Krnft hlternational: Eurolleart Uniou IJer,c-l opi n g I,l lrrket s

Total Kraft Segnrent Operating .Sorlle. n's

u'.

I

3.+0(t

l(X).(X)ti

I

il+0?

9.20n

00.00(,c

100.00{ii

kr-atiiilrtdscorttpant'.coru. rtrci Corupitn-v F o n t l ( ) K.

Operating Segments Krafi Fclods Inc. rnirnages ovel 100 ditlelent bland-name tbocl products ancl tlacks operating income tcl tive specific consulnel' segmeuts. Exhibit 2 pror,ides a sunlmary of the Krati Brands ancl

.

operating segnreuts.

Snacks-prinialily biscuits (cookies

ancl

crackels). saltecl snacks. ancl chocolate conf'ec-

tionery

. Ber,erages-prirnarilt'cofl'ee. packa-uecl juice clriuks. ancl pou,deled bevera-res o fhsgqs-plimarill' natulal. process. aurci cream cheeses . Grocely-plimarily s;roonabie and pourabie dlessings. cor.rcliments. and clesserts . Convenient Meals-primarily ti'ozen pizza. packa-red dinners. lunch combinations. and processecl rneats

Exhibit 2 provides a pel'centage breakdorvn of the segn.rent sales tbr the U.S. ancl international opelatious. Note that U.S. Grocerl'conrprises the largest segrnent follou,ecl b1' U.S. Cheese. According to rhe Neilson Comiranv. Klati Foocis onlr, klst 0.3 pelcent malket share during 2008 rlespite t 9.8 pelcent ine rease in pricin-r:. Marketing

The leintloduction of Krafi Foods Inc. in Febnrary 2009 u'as accompaniecl b1' the launch of a lue\\'corporate Web site: http://n'rvu'.neq,krafi.com. Visitors at tht-- site cau r,ielv commercials ti'om arouncl the g,orld rvhile learning about nerv ploclnct innovations. Krali Foocls lnc. has also launched sevelal Web sites that u't.rulcl be consiclelecl vilal iu uature. One of these is the Oreo Double Stuf Racin-u League (DSRL) site: http://u,n'n'.dsrl.coml visitors san u,atch r,ideos. play galnes. ancl of course the1, can join the league. Even the main Web site fbr Klati Foocls Inc. hiis uncler-uone a tirceliti. The neu, site acldless is httl'l://rvrvu'.kratitbocls.corn. In its revieu'of the site. blandchannel.com saicl the fbllou,itt,c:

The site is rvell conceived as a portal fbr an audience thal nright access the lnternet through a clial-up rnodem. Staf in-u au'ay tionr loll-ovc'r images. the HTN,IL-based honre page is etlicient. using tbilll,colnpact pictures-except tbl a plomotional 180 x 150 bannel that flirts s,ith a surprisin-rl1' high 30K, Surfing throu-rh the site. the visitol ri ill enjo1, the siune consisteut experit'nce. Besicles recipes. llote\\'orthv t'eatures inclucle Product Inlb and a Recipe Box. If the fbrmel is self-explanator)'. the latter is a snlafi u,ay of cleating some interactivitl, u,ith the visitor. The Recipe Box allorvs one to store

.

KRAFT FOODS lNC.

*-2009

KRISTOPHER J. BLANCHARD

and retl.ie\ie tavorite recipes. u'hether personal ones (ttp to 100) or

tiom Klaii. The reg-

istfation pl'ocess is in line $'ith the overall bro$'sin,e experience: Ilainless alld respectful. To illustrate this point. it is u,orth mentionin-s thrit the visitot'is not askecl to provide ir lerst uame and the neu'sletter(s) options ale otT by' cletault.

Financials

Krafi'r.ecent income statelneuts are plovicied in Exhibit 3. Note the cotnpan;/'s reventle: ipcreasecl to S.12.2 billion 2008. rvhile eamin-us iucleased to 52.9 billion. Krafi rveatherecl the 2008 global recessior.l lealll' u'ell frotn a revetttte/earuin-us perspective' Kraft's recent balance sheets are plovidecl in Exhibit 4. Note the compauy has ovet' 527.,5 billi6l in gooclu,ill. u'hich is not good. ancl also ltas over $18.5 billion in long-terrtr clebt. rvhich is also not goocl. Kraft's long-term debt increased about 50 pelcent in 2008 flom 2007. e

urrent Strategy

CEO lkrseutelcl has L'reen leadirlg the Kratt throu_uh a turil-arolltrci process tlesigned to retttrtl the colnpan\i tr) sllstainable gro\\'th.

Kraft Foods Inc. and Subsidiaries Consolidated Statements of Earnings For the Years Ended December 31 (in millions of dollars, except per share data) Net revenucs Ct-lst

tli'ritle s

2AQ7

$ -12.201

$ 30,t3+

18.1 86

24,05 7

I I .3-l,t

f-i.015

12.{)7 7

11,912

Glos\ lxofit \,lltrkctirtg. urhttitti:tt'atitttt ail(l researcil costs ;\sset intllrirrneltt

Gilin

()11

alt{-1

rc(1etlq)tit)ll

9.059 I

exit costs

of Llniteti

B

33.156

.s

.613

7

(251

(n7)

13

-| I

1?

3.9{16

4. 15-i

.l+0

604

-!

3.361

7rq

r.001

1.8-r9

I.360

-!1 ,J

--3..3

_

Interc:t i.in(l ()thef e\l)ellst--. llct E ulrtings fl'ottt c()ittiltllitt-u olteriltiolls hcfore ittcotne taxes

r

2.57

Pi'uvisiott 1or ittct)nle ta\es L,ut'ttings tl'otu colttintrillg opel'atiotts

i:at'rtings alt(l gililt ll'ortr tli scotttitttretl olleflititlll

)

(15)

92

atiort of i trtitttg ibles

.120 999

4+0

iscuits itrvesttrtetlt

Olreratins iltcoltte

__

510_

3.6-l-l 816 r.82

8

s.

s

Nct eut'ltitlss

231

230

i.051

net rll'

irer'

7

.01'i

I-osses/(gains ) ()lt clivcstitttt'es. tlet .,\rt-tort iz

2006

2008

1.90I

s

.l.l

s

1.590

s

1.50

s

3.060

:ititre rlittit: IJirsic eilntittgs

I')e

l- sltitt'c:

s

Cottti ituiltg ()pet'lttiotr: D i scr-lrtt

i

l

0 r1

0.7 |

rtttetl operiitiolls

$

Net earnings

1.95

$

1.64

t.72 t).

$

l'l

1.86

Dilutetl eal'nirtgs pet' sltat'c, Ccttt

in

I) :ctltt i

N

u i lt

g ()l)el'itti tttis

ti tt tretl ()l)et'ttt i tllt s

et ciu'nin

{\

\\'\\, krat't ftlotlscrlttt

l .+8

t.1

0. l-+

0.

:_L?r_

s

Dir irlcrtris ilcc litl'etl \\"

l.ll 0.7 4

l'ril1t \'. c()

tll . Lttttl Ctltill

lLt tt

r f:rtt'nr I()K.

l.1l

s S

1.61 1.OJ

I

l+

S iBi s t),96

CASE

1

.

KRAFT FOODS lNC.

2009

-

Kraft Foods lnc. and Subsidiaries Consolidated Balance Sheets at December 31 (in nrillions of dollars) 2008

2006

2AA7

ASSETS Cash ancl casit ecprivalent:

lrt!

Reccivable s (uet of alion,unces of .\ l2L) in l(]Ofi anti S9J in l(X)7t

Ittt'etttolies.

rtu't

s

567

l -1r)

+. 7( )-{

5.r97

3.869

3.719

-i.096

35Ofi5

Defen'cd iuconrc ti.r\es

8(r

I

575

3,37

Othcr cLrrrt--nt asscts

,81,9

3t)l

153

*_!g?31

8.I5-l

Totiii cun'cnt

assets

1

Prolrerf\'. planf arrcl eclrriprne rrt

r ilIL 9.1)17

I0.778

9.693

Gooclu'ili

17.581

3 r.193

:5.553

Intungible assets. net

I

ll.l00

1A.1,7]

.6-i8

I . 1{r,\

l.9l(r

Prellaitl peusiou ilsscts

56 I 11"r

Othcr itssct\

t._J

TOTAI-, ASST''TS

I

7)q

l.-+37

'

$ 63.()78

t!1{5_

.b

3f .5 /,+

s

s

s

1.715

Bd

t:\

I

-E

I-lAB II-l'f I f:S S

ltort -terrtt l'lornttv

Cun'e nt portion

i rt g s

897

of long-tenu delrt

,,\c ct'rLl t'rt s pltvalr le

7.:185

7(r5

72)

1.4i8

3.373

.i.065

160:

1.803

i.s33

l.(rl6

95i

9r3

75{)

Due to Altriu Group. Inc. aucl all'iliutes ,,\cc

rtrcrl

601

tit itrkc-t i n g

i\ccnrcd e mplovn"rcnt tosts Othe r current liabilitie

3.155

s

Total cur"r'eut liiibil ities

1r

.0+-i

|

I-ong-telur clebt

1ti.589

I

Detclretl i ncornc tiixes

-i.i)6-l

l. I 6ll

1755

7.0ti6

r0+73

l.9r)l

7.()8

-r.876

3.930

I

Aucrttctl pertsion c()sts

1.3(r7

810

Aeclircrl postretilclric-nt hciilth cill'c costs

l.(r78

1.S-lfr

Otlrr:r liirhilitir-s

1.13(r

t.1 7E

7I

+0.698

17.0 l 9

I3

13

TO-f.\I - LIABILITIES

-10.8

1

.011

3.0I+ _*1._192_.

Contin genc ies

SFIAREHOLDERS' EQLiIT\' Contntrlrt Stock. rlo llal' r alue ( 1 .735.00{).(XX) shitre s issuctl iu 1008 anci l(X)7 ) Aclclitionul paici-in callital

13.5(r3

r\ c c u nr

u i atc

cl ot

irc'

3.3J5

ll.l09

5.99-i i

(1.835)

{

li.7 l-t

i

I r'

co

nr llt'e he n s i ve I o s sr-

:

'ft'eitsur'\' .\ttick. itf cr).\i

TOTAL SI{;\REI IOLDERS' EQtilT\'

."+-i5

t

Rctainecl earniugs

r

: l.100

6.5]"i I

7.

.616

ll.llfi r

3.069

)

r

{:1.130}

t95

18.5s5

TO1,.\I- I-IAI}II,ITTTIS AND

SHARIIHOT,DIIRS' EQUITY .\rtttt'r '(,.' \\'\\ \\'.hntl'tfotttiscotttl-riit'I\'.c()nr. ltnrl Contl'llirt

$ 63.(|78 \ l:ttt'tii lOK,

$ 67.993

,5

I

b 3J.J /+ -E

-q

KRISTOPHER J. BLANCHARD

At year-encl 1009. the colnpan\.hircl sar,ecl a total of Sl.l billion through streatt.tlinetl pranuthcful'iug ancl a sinrplilierl organizational stt'uetrrre. These savings wel'e realizecl. iu palt. to tl're closing of -16 plants ancl the eliurination of 19.000 positions. The contpanl' plaus to see an aclclitioual savitt,es of 5200 rnillion in 2009'

External lnformation Industry Trends and Information

tr{orc people ale clining out. and toocl prochtcers are clevotiug lnore attentioll to pl'oducts ciesignecl tbl'restallraltts. r'enclin-u machines. ancl other tboclservice ploviders. Thus. cotnpref'elences at ltirnies ale spencling lllore nloue\. r'esearching consLltlrers' eating habits ancl honte iurcl af restaLll'allts. This is bncl neu's till grrrcery retailels" hut tbocl tllakers realize tbocl eateu a\\,a)' tr