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Kraft Foods (KFT)Stock (Consumer Products Industry, Food Industry, Food - Major Diversified Industry)
 Headquartered in Northfield, Illinois, Kraft Foods Inc. (NYSE: KFT) is the largest food and beverage company headquartered in North America and the second-largest in the world after Nestlé SA, generating $34.4 billion in revenue in 2006. With 90,000 employees in over 70 countries, the firm operates in two main segments: Kraft North America Commercial and Kraft International Commercial. In addition to these two geographical divisions, Kraft's products are divided into one of five categories: snacks & cereals, beverages, cheese & dairy, grocery, and convenient meals. The company's largest customer is Wal-Mart Stores (WMT), which accounted for 15% of all sales in 2006. In January 2004, the company announced a three-year restructuring program that is now expected to last through 2008. The entire program is expected to result in the elimination of approximately 14,000 positions and the streamlining of the company's operations. Kraft will discontinue many of its weaker products, like parts of its rice and dessert product lines, in an effort to concentrate on higher-margin, more successful items. A variety of factors impact Kraft's earnings, ranging from dairy prices, exchange rates, and recalls to emerging markets, natural & organic foods consumption, and demand for cellulosic ethanol. [edit] Business Overview & SegmentsHeadquartered in Northfield, Illinois, Kraft Foods Inc. began in 1903 as a cheese manufacturer. The company is now the largest North America-based food and beverage company and the second largest in the world after Nestlé SA. From 1988 to March of 2007, tobacco giant Phillip Morris Company, now Altria Group (MO), owned and grew Kraft Foods, merging the food company with Nabisco and General Foods. Altria Group (MO) took Kraft public in 2001, maintaining an 88.1% stake in the stock until the completion of the spin off in 2007. With operations in 72 countries and sales in over 155, Kraft generated revenues of $34.4 billion in 2006. The company employees approximately 90,000 people worldwide and conducts business in two main segments: Kraft North America Commercial and Kraft International Commercial. North America refers only to the United States and Canada. More specifically, the firm manufactures and markets packaged food products, consisting principally of beverages, cheese, snacks, convenient meals and various packaged grocery products. 
[edit] North AmericaBeverages As a beverage manufacturer, Kraft produces primarily coffee, aseptic juice drinks, flavored water, and powdered beverages. The company's most popular brands of beverages in North America include Maxwell House coffee, Kool-Aid, and Country Time powdered beverages.  From 2005 to 2006, North American beverage sales volumes decreased 7%, primarily due to the discontinuation of certain ready-to-drink product lines and lower shipments of coffee. Net revenues were up $32 million, or 1%, due to higher pricing, increased promotional spending ($36 million), and favorable currency exchange rates ($14 million). The loss of a U.S. coffee plant contributed to a $258 million (55.7%) loss in operating income. Cheese & Food Service As a cheese & food service manufacturer, Kraft produces primarily natural, processed and cream cheeses. The company's popular brands within North America cheese & food service include Kraft Singles, Philadelphia cream cheese, and Velveeta.  From 2005 - 2006, volume decreased 5%, primarily due to the divestitures of Canadian grocery assets, U.S. yogurt assets, industrial coconut assets, and lower margin product lines. Net revenues decreased $166 million (2.7%), due primarily to lower net pricing and were partially offset by favorable currency. Operating companies income decreased $35 million (3.8%), due primarily to higher pre-tax charges for asset impairment and exit costs ($72 million)and higher marketing spending ($20 million). Convenient Meals As a convenient meals manufacturer, Kraft produces primarily frozen pizza, packaged dinners, lunch combinations and processed meats. The company's popular brands within North America Convenient Meals include DiGiorno, Kraft Macaroni & Cheese, and Oscar Mayer hot dogs.  From 2005 - 2006, volume increased 0.5%, driven by higher meat shipments (cold cuts, hot dogs and bacon) and higher shipments of pizza. This increase occurred despite competition in macaroni and cheese dinners and the divestiture of the rice brand and assets. Net revenues increased $144 million (3.1%), due primarily to higher volume ($138 million), favorable currency ($14 million) and higher pricing. In meats, higher net revenues were driven by continued strong results for new products and higher net pricing. Pizza net revenues increased due to higher shipments and favorable mix from new products. Operating income increased $121 million (15.3%), due mainly to the 2006 gain on the sale of the rice brand and assets ($226 million), lower fixed manufacturing costs ($24 million) and favorable currency ($4 million).
As a grocery product manufacturer, Kraft produces primarily enhancers and desserts. The company's popular brands within North America Grocery include Jell-O, Grey Poupon, and A1 steak sauce.  From 2005 - 2006, sales volume decreased 21.6%, due to the divestitures of fruit snacks and Canadian grocery assets, the discontinuation of certain Canadian condiment product lines and lower shipments of ready-to-eat and dry packaged desserts, and spoonable salad dressings. Net revenues decreased $293 million (9.7%) thanks to lower volumes. Operating income increased $195 million (26.9%), due primarily to lower pre-tax charges for asset impairment and exit costs ($206 million, including the $113 million asset impairment charge in 2005 related to the sale of the Canadian grocery assets and the $93 million asset impairment charge related to the 2005 sale of the fruit snacks assets), lower marketing, administration and research costs ($30 million), favorable currency ($8 million) and higher pricing. Snacks & Cereals As a snacks & cereals product manufacturer, Kraft produces primarily ready-to-eat cereals, cookies, crackers, salted snacks and chocolate confectionery. The company's popular brands within North America Snacks & Cereals include Oreo, Planters nuts, and Ritz crackers. In November of 2007, Ralcorp Holdings, a private-label cereal maker, agreed to purchase the Post cereals division from Kraft in a deal worth $2.6 billion.  From 2005 - 2006, sales volume decreased 3.4%, thanks to the divestitures of the pet snacks brand and assets, and a small biscuit brand, and lower shipments of snack nuts. Net revenues increased $108 million (1.7%), primarily due to higher pricing, promotional spending and favorable currency ($38 million). This increase was partially offset by rising energy prices. In snack bars, net revenue increases were driven by new product introductions. Operating income decreased $101 million (10.9%), due primarily to higher pre-tax charges for asset impairment and exit costs ($138 million) related to divestitures such as the pet foods divestiture. [edit] International SalesEuropean Union Sales Kraft Foods sales products from each of the five major food product categories, featuring brands familiar and unfamiliar to North America. From 2005 - 2006, sales volume increased 2%, primarily due to the acquisition of the Spanish and Portuguese operations of United Biscuits ("UB"). Net revenues decreased $42 million (0.6%), mostly thanks to unfavorable currency ($93 million) and the divestiture of the U.K. desserts business. Operating income decreased $174 million (24.1%), due primarily to higher pre-tax charges for asset impairment and exit costs ($273 million, including $170 million of asset impairment charges related to Tassimo), increased promotional spending, higher marketing, administration and research costs. Developing Markets, Oceania, & North Asia Sales The Developing Markets, Oceania & North Asia segment manufactures and sales many of the popular North American brands across each product category as well as some foreign brands. From 2005 - 2006, volume decreased 0.9%, mostly due to lower sales volume in Asia Pacific, contrary to higher volumes in Eastern Europe and Latin America. Net revenues increased $460 million (11.2%), due in part to higher pricing ($178 million) and favorable currency ($85 million). Operating income increased $16 million (4.0%), due to higher pricing, lower costs, and favorable currency ($16 million), partially offset by higher marketing, administration, fixed manufacturing and research costs. [edit] Trends & Forces[edit] Detrimental Supermarket ConsolidationFor the years ended December 31, 2006, 2005 and 2004, Kraft's five largest customers accounted for approximately 29%, 26% and 28%, respectively, of its net revenues, and the company's ten largest customers accounted for approximately 40%, 37% and 38%, respectively, of its net revenues. The company's largest customer, Wal-Mart Stores (WMT), accounted for approximately 15%, 14% and 14% of net revenues for 2006, 2005 and 2004, respectively. Manufacturers like Kraft Foods are becoming increasingly dependent on a small number of retailers for sales volume, which gives these retailers (i.e. Wal-Mart Stores (WMT)) significant leverage to bargain for lower prices. This can negatively impact any firm whose goods are sold in supermarkets. [edit] Increasing Raw Materials Prices Hurt EarningsThe company uses hedging techniques to minimize the impact of price fluctuations in its principal raw materials; however, such techniques do not completely protect Kraft Foods. Kraft is a major purchaser of milk, cheese, plastic, nuts, green coffee beans, cocoa, corn products, wheat, pork, poultry, beef, vegetable oil, sugar, other sweeteners and numerous other commodities. Kraft's commodities expense rose $800 million and $275 million in 2005 and 2006, respectively. If the company is unable to increase its prices to offset increased cost of commodities due to consumer sensitivity, Kraft Foods may experience lower profitability. Raw materials prices to watch are: [edit] Weakening Dollar Benefits Earnings Product sales abroad represent over 33%, or more than $11 billion, of Kraft's total revenue. With more than 1/3 of its business conducted in a different currency and financial data reported in U.S. dollars, the company's performance fluctuates with changes in foreign exchange rates, especially the euro, Swiss franc, British pound and Canadian dollar. Foreign exchange had a positive $39 million impact in 2006 and positive $34 million impact in 2004, primarily because the U.S. dollar weakened relative to the euro. As the dollar weakens, each sale in euros translates to more dollars when returned to the United States. In 2005, exchange rates negatively impacted Kraft by roughly $4 million. Over the past few years, the dollar's value relative to other currencies has been declining consistently; if the dollar continues to weaken, it will continue to benefit Kraft's earnings. Although the dollar vs. euro relationship has the greatest impact, Kraft has operations in 72 countries and sells its products in more than 155 countries, often making the impact of exchange rate fluctuations very complicated. [edit] Product Recalls Hurt Both Reputation & EarningsThe recall of one of Kraft's products not only temporarily terminates revenue generated by that product while costs continue to run high, but in a popular enough product or on a large enough scale, the impact can spread to other products as the public loses trust in the brand. Kraft's most recent recall took place on August 8th, 2007, when the company recalled their Knudsen cottage cheese in seven states. Fortunately, Kraft told consumers not to worry: the affected cheese isn't making people sick, it just doesn't taste right. [edit] Growth in Emerging Markets Stimulates DemandCoca-Cola Company (KO), Pepsico (PEP), Kraft Foods and other food and beverage manufacturers have seen strong growth in emerging markets in recent years. As incomes rise, packaged food becomes more accessible for a larger percentage of the population, stimulating demand for these companies' products. Kraft's Developing Markets, Oceania & North Asia sector has scene robust growth in recent years, generating $3.6 billion in 2004, $4.1 billion in 2005, and $4.6 billion in 2006. [edit] Rising Demand for Organic Foods Hurts KraftDean Foods Company (DF), Kraft, and other companies that sell dairy products in the U.S. are being harmed by an increase in natural & organic food consumption. Dairy farmers in the U.S. commonly use artificial growth hormones to increase milk production, which is not in keeping with organic practices. Companies such as Whole Foods Market (WFMI) benefit from organic demand. [edit] Increased Ethanol ProductionIncreased production of corn ethanol negatively impacts Kraft as farmers that previously grew wheat and soybeans for food processors devote their land to corn ethanol production, pushing up prices. Large purchasers of amounts of corn will benefit from the rise of cellulosic ethanol, as this will relieve the pressure on corn prices which has been increasing their raw materials costs. Companies that use significant amounts of corn syrup (e.g., Coca-Cola Company (KO), Pepsico (PEP)) and corn-based oils (e.g., makers of heavily processed foods, such as Kraft Foods) are the most likely beneficiaries. [edit] Competitors In 2007, Kraft Foods Inc., is the largest food and beverage company headquartered in North America and the second largest in the world after Nestlé SA. The company's principal competitors include Pepsico (PEP), Sara Lee (SLE), and Nestlé SA. Kraft produces foods and beverages across a wide variety of product categories, making way for competition with many specified, smaller companies.
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