Kraft Foods Inc. Chief Executive Officer Irene Rosenfeld saw a lesson in the company's $245 million fourth-quarter writedown of its Tassimo coffee unit. So she sent an e-mail to employees.
``Nobody likes to point out what's not working,'' Rosenfeld wrote Jan. 16, after managers were slow to tell headquarters that Tassimo's sales weren't meeting forecasts. ``People need to speak up when something isn't going the way we planned.''
Investors applaud Rosenfeld, who took charge of the world's second-largest food company in June, for recognizing that Kraft has overspent on developing and marketing products that don't sell well. At the same time, they doubt the former CEO of PepsiCo Inc.'s Frito-Lay division can quickly boost sales growth to match that of PepsiCo, Nestle SA and other rivals.
``We don't know what Kraft can accomplish with its new leader, but we don't believe it comes out of the gate as a sprinter,'' said Douglas Lane, who owns 125,000 Kraft shares among the $1.9 billion he oversees as president of Douglas C. Lane & Associates in New York. ``The question is, on the far turn, can it pick up momentum?''
Shares of Northfield, Illinois-based Kraft, which will be spun off by Altria Group Inc. on March 30, fell 21 cents to $34.22 yesterday in New York Stock Exchange composite trading. The stock has increased 10 percent since the initial public offering of a 12 percent stake in 2001, behind gains of 82 percent by Kellogg Co. and 34 percent by General Mills Inc.
Rosenfeld, 53, returned to Kraft after running Frito-Lay for three years and turning the unit into PepsiCo's most profitable. To spur sales, she increased advertising of Tostitos, Doritos, Cheetos and Lays chips.
`Culture Change'
Rosenfeld plans a similar strategy at Kraft, saying last month she intends to spend more on marketing and on developing new foods and beverages that are healthier and more convenient than those of competitors. Forcing a ``culture change,'' as Rosenfeld described it to analysts in a Jan. 31 conference call, will enable Kraft to produce ``more trajectory-changing ideas, not just small line extensions,'' she said.
Demand for the Tassimo single-serve coffee brewing machines Kraft started selling in Europe and the U.S. in 2004 didn't materialize as fast as the company expected. The fourth-quarter charge covered the writedown of assets after Kraft spent too much on technology and production capacity, Chief Financial Officer Jim Dollive told analysts Jan. 31.
Wilted Salad
Other product disappointments included last year's introduction of bottled versions of Good Seasons packaged salad dressings. They didn't ``bring a new benefit to consumers'' who could already buy rivals' bottled dressings, Rosenfeld said on a conference call in October.
What Rosenfeld wants more of are products such as Kraft's thin-sliced Oscar Mayer ham and turkey in resealable plastic containers. Demand for the meat line has been rising, she said.
Rosenfeld plans to detail her strategy Feb. 20 at the Consumer Analyst Group of New York conference in Scottsdale, Arizona. Analysts expect her to discuss planned advertising spending, acquisitions, divestments and share buybacks after New York-based Altria spins off 89 percent of Kraft in March.
Kraft may also provide forecasts for 2007 in Scottsdale. The company will earn $1.95 a share this year, according to the average estimate of 16 analysts surveyed by Bloomberg. Last year, the food concern earned $1.94.
``It is that presentation that will make or break the share price,'' Christopher Growe, an analyst at A.G. Edwards & Sons Inc. in St. Louis, wrote in a note Jan. 31. He rates Kraft shares ``hold.''
More Spending
Eric Serotta at Merrill Lynch & Co. in New York, who has a ``neutral'' rating on Kraft, was among analysts who last month lowered earnings estimates to reflect Rosenfeld's plan to spend more. She made it clear on the Jan. 31 conference call that Kraft will increase marketing spending. How much and on what are subjects she'll detail in Arizona.
Rosenfeld, a native New Yorker, faces skepticism she can change the culture of an organization as large as Kraft, which had 2006 sales of $34.4 billion. That's slightly less than the combined revenue of U.S. cereal companies Kellogg and General Mills and Sara Lee Corp., maker of Ball Park hot dogs. It also trails Nestle.
Roger Deromedi, Rosenfeld's predecessor, also increased spending on new products such as 100-calorie packs of Ritz crackers and Oreo cookies, South Beach diet foods and powdered Capri Sun flavors that consumers pour into bottled water.
Rosenfeld cited those as examples of innovations she wants to cultivate. This year's extra spending includes more for marketing new versions of Ritz.
`Time and Again'
``Kraft has done this time and time again,'' said Herb Achey, an analyst at U.S. Trust in New York, which manages $98 billion. It reduced its Kraft holdings by 1.1 million shares to 379,494 shares in the fourth quarter, according to Bloomberg data. ``There's no reason to believe profit is going to accelerate from here.'' Rosenfeld plans to do the same thing as Deromedi, he said, only faster and presumably better.
Rosenfeld acknowledged investor frustration after fourth- quarter sales dropped 3 percent to $9.37 billion, reflecting an extra week in last year's fourth quarter and lower demand for Velveeta cheese, salad dressings and Planters nuts. It was the first revenue decline in 4 1/2 years.
The Tassimo charge lowered net income to $624 million, or 38 cents a share, from $773 million, or 46 cents, a year earlier.
``This is a long road we are on,'' Rosenfeld told analysts Jan. 31. ``The challenge is whether we are spending on the right things and whether or not we are spending at adequate levels to get the message out.''
Focus on Oreos
Asset sales will slow revenue growth, according to analysts who expect Rosenfeld to divest additional businesses after agreeing to sell its Cream of Wheat hot cereal division to B&G Foods Inc. for $200 million last month. Kraft said Jan. 23 it's selling the unit, which had $60 million in 2006 sales, to focus on bigger brands including Oscar Mayer deli meats, Capri Sun beverages and Oreo cookies.
``In a couple of years, our expectation is that we will be a predictable growth company delivering attractive returns to shareholders,'' Rosenfeld said in a Jan. 31 interview. She declined a subsequent interview request. ``What it takes to get there remains to be seen.''
source:www.bloomberg.com
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