Snacks & Candy

Kraft Focuses on Healthy Brands

Expects larger margins, sales gains in 2005

NORTHFIELD, Ill.-- Kraft Foods Inc. is actively looking to acquire healthy food and drink brands to tap the growing number of consumers concerned about their weight, said CEO Roger Deromedi. The Northfield, Ill.-based company will probably market the brands under its new South Beach Diet product line, he said, according to a Bloomberg report.

You'll see more products being introduced under the South Beach Diet range through acquisitions and internal development, he said. Kraft is making the South Beach line the focal point of its Healthy Living pavilion [image-nocss] at the upcoming Food Marketing Institute (FMI) show in Chicago next week. The line includes more than 25 products such as frozen entrees, pizzas, cereals, cereal bars, wrap sandwich kit and meal replacement bars, the company said in a media alert.

Kraft, the biggest U.S. food company, is focusing on products such as Oreo Thin Crisps and Tang juice drink as more consumers seek out foods low in saturated fats and sugar. The company's sales have risen an average 3.8% a year the past five years while those of rival Kellogg Co. have gained 6.7% as Kraft has been slower to introduce lower-calorie snacks.

Deromedi said he doesn't plan to sell Kraft's Post cereals and Oscar Mayer meats businesses because they represent opportunities for growth. The New York Post reported last year that the company was considering selling the brands.

He also said there may be some benefits to Kraft being spun off from Altria Group Inc., the owner of Philip Morris. Altria chief executive Louis Camilleri told investors Nov. 4 that breaking the New York-based company into two or three units might reward shareholders. Altria owns 85% of Kraft.

Kraft shares have risen 6.6% since the company's initial public offering in June 2001. Shares of Battle Creek, Michigan-based Kellogg, the maker of Nutri-Grain Cereal bars and Special K cereal, have climbed 49%.

Deromedi has grouped the Post cereals business with Kraft's cookies division to produce a broader snack business, enabling the company to compete more effectively on a global level, he said. With the cereals and biscuit businesses, there is a lot of overlap in technologies and new-product offerings that we can leverage together, he said. With our cereal business, we have a lot of knowledge about dietary fiber which we can now apply to our biscuit business, creating products such as grain and breakfast bars. The same is true for Oscar Meyer, which is grouped into convenient meals business and is doing well.

Deromedi, who has worked for Kraft and its subsidiaries since 1977, said he expects to sell more tail brands this year, brands he describes as smaller in size and slower-growing. He declined to name specific ones.

We're looking to sell those brands that we don't have a sustainable competitive advantage in, he said. The sales will be those that represent less than a mid-single-digit percentage of the company's total revenue, he said. Kraft had $32 billion in sales last year.

Analysts have said the rest of the Kraft stake may be sold by Altria in the second half if tobacco litigation, including class action by light cigarette smokers in Illinois, goes in Altria's favor, according to Goldman Sachs's Judy Hong. Deromedi declined to comment on a timeframe.

Whenever you have a minority shareholder, it limits some of the flexibility you have on your capital structure, Deromedi said. Being independent gives you more flexibility in terms of what you can use your stock for, what you may do with acquisitions. We are ready to be spun if and when that day would ever come.

Deromedi, who received a salary of $1.14 million last year and a bonus of $1.8 million, said Kraft expects to improve gross margin this year because the company has increased prices of products such as Maxwell House coffee to cover commodity-cost increases. On April 19, Kraft said its gross margin, or the percentage of sales minus the cost of the goods sold, narrowed to 36.67% from 38.27% in the first quarter as higher prices for coffee, cheese, nuts and meat added $250 million to expenses.

We expect to see an improving margin through the year given the pricing action we have taken against the costs as we foresee them, Deromedi said. He declined to give further guidance on how much margins will improve.

Kraft, which also makes Tombstone frozen pizza and Chips Ahoy! cookies, has increased Maxwell House prices in the U.S. on two occasions in the last six months, once by 14% in December and the second time by 12% in March, he said.

Deromedi refused to rule out further price rises on Kraft's products amid higher oil and other commodity costs. New York oil futures have risen 37% in the past year amid higher demand and concern about insufficient supplies.

Energy prices have been one of the biggest drivers of higher costs for us this year, Deromedi said. Not only is petroleum important in running our factories and driving our trucks, but it is also a key component in our packaging costs. Commodity costs for Kraft were $1.3 billion higher last year compared with 2003.

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