Kraft remarks leave analyst downbeat on food
BakingBusiness.com, December 10, 2010
by Josh Sosland

NEW YORK — Kraft Foods Inc. is “surprisingly cautious about launching new products,” said Robert Moskow, an investment analyst with Credit Suisse, New York. Mr. Moskow said a Kraft presentation at the Credit Suisse Holiday Consumer Conference this week did little to change his dim view of food industry prospects. He characterized Nabisco sales as “disappointing” and more sensitive to the economy than Kraft had anticipated. Kraft margins are expected to improve in 2011, he said.

“They are consolidating purchasing functions in the U.S. for the first time and they are instituting Six Sigma at the Nabisco manufacturing facilities for the first time to attack what they call a reserve of inefficiency,” he said. “They were very frank about the fact that they have trailed their U.S. peers in this regard. “

Expanding on the lean new product pipeline, Mr. Moskow said Kraft does not view the current environment as conducive to product innovation.

“The only news we heard about was a new shredded cheese product ‘with a touch of Philadelphia’ cream cheese,” Mr. Moskow said. “Kraft thinks the consumer is too strapped financially to try the kinds of super-indulgent products Kraft launched in 2008 to reframe their categories (Deli Creations, Bagelfuls, Cakesters). So the funnel for new product launches is quite narrow.“

He said other food companies, notably Campbell Soup Co. and Kellogg Co., recently have expressed a commitment to refilling their new product pipelines after two years of de-emphasis.

Taking a bigger picture view, Mr. Moskow said it was odd that food companies were skittish about consumers’ willingness to spend at supermarkets.

“We found it somewhat ironic to hear from food companies so concerned about the macro environment while surrounded by retail companies flaunting the positive momentum in their businesses during the holiday season,” Mr. Moskow said. “It sounds like consumers are trying to save $5 on their grocery shopping trips so they can spend $100 on IPods and other things that make them feel good.”

Looking at the Cadbury acquisition, Mr. Moskow said Kraft views 2010 as a “transition year” as the company’s “plows money” into the business to set the stage for a stronger 2011.

“They are reducing inventory levels in developing markets and accelerating new product development,” he said. “In the near term, gum is weaker than they expected; chocolate a little stronger. They also face tough comparisons to last year's strong Halls cough drops sales during the height of H1N1 fears.”

While pricing is not expected to move higher during the remaining days of 2010, increases are likely afterward.

“Kroger almost sounded like they were attributing their weak same-stores growth to resistance on the part of their manufacturer suppliers to raise prices across enough categories,” he said. “We think this opens the door for Kraft and other manufacturers to take additional pricing in January. The reality is that all of the grocers want pricing, but they are nervous that the consumers are too weak to absorb it and that their competition won’t follow suit. We expect Kraft’s pricing to remain temporarily depressed as they spend rather aggressively on marketing and merchandising in the fourth quarter to move volume. But pricing will go higher (and volume lower) in the first quarter as they institute another round. We expect price hikes on chocolate and coffee in Europe, Nabisco, Kraft cheese, Oscar Mayer, Planters nuts, and Maxwell House coffee (eventually). Promotional discounting in salad dressing and mayonnaise, however, remains intense.”