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Kraft spending its way out of trouble?

26-Jul-2004

Increasingly health conscious US consumers chose to bypass the snack packs of food giant Kraft in the second quarter, a trend which weighed heavily on profits at the country's biggest food maker. But a major marketing push highlighting the healthiness of many Kraft products could help the situation improve in the second half, suggests Sibonelo Radebe.

The unrelenting pursuit of a healthier lifestyle by many US consumers has been underway for sometime, and snack and biscuit makers such as Kraft have been under increasing pressure to revamp their portfolios to meet this shift in demand.

Indeed, the company has already reviewed its product mix to address these new demands, but the changes clearly came too late to help boost profits at the snack division. Combined sales of Kraft's biscuits, salted snacks, nuts, fruit snacks and related products account for about 20 per cent of Kraft's total revenues in the US, but turnover dropped by 1.4 per cent in the quarter to $1.1 billion as consumers shifted their consumption to healthier products, including low-carb foods popularised by the Atkins diet regime.

Sales of the company's biscuit brands such as Oreo and Chips Ahoy were particularly hit by the low carb trend, leading to a double-digit decline in volumes during the quarter.

Operating profit from the snacks division was even more badly affected, dropping 27 per cent to $183 million in the quarter, impacted by a number of factors, including rising commodity costs and an adverse product mix.

But the biggest impact on operating profits was the steep rise in marketing expenditure as Kraft fought back against low-carb and other dieting trends. Total marketing spending increased by $170 million in the second quarter, with some immediate results. Products like Planters nuts, which were the subject of a nutrition-focused advertising campaign during the period, benefited from a 10 per cent increase in marketing spend, in turn lifting revenues by more than 7 per cent.

Advertising costs are likely to rise further with the company's major portfolio review already leading to the introduction of a range of new products with more appeal to the new demands of the consumer. For example, Kraft's biscuit maker subsidiary Nabisco recently launched 100-calorie packs for its most popular products, allowing the consumer to keep calorie intake under check while indulging.

CEO Roger Deromedi confirmed that this would be the company's highest priority going forward. "We remain committed to improving the long-term health of our brands, and will not let short-term commodity market fluctuations distract us from this key imperative," he said.

A recent link up with the company behind the South Beach diet highlights another approach adopted by the company to combat the fad diet threat - promoting alternative weight loss systems. As part of this, Nabisco has commissioned a number of well known dieticians to challenge the low-carb diet, arguing the only balanced dieting can achieve long term results without damaging dieters' health.

If Kraft and its peers can get the public to believe that there is no harm in moderate snacking - as part of a balanced diet - then half the battle will be won. But this is unlikely to come cheaply, and increased advertising costs could continue to take their toll on margins even as sales recover.

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