Vernon: Kraft will defend gains in mac and cheese

by Josh Sosland
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NORTHFIELD, ILL. — With competitive entries emerging in the market, Kraft Foods Group Inc. is poised to make investments to defend and grow a number of product lines including macaroni and cheese, said Tony Vernon, chief executive officer.

In a May 2 conference call with financial analysts, Mr. Vernon discussed areas of the Kraft business encountering intensifying competition as well as other highlights for the company’s business. He emphasized that Kraft will not ignore emerging competition in areas where the company has achieved success.

“Waking up sleeping giants attracts attention, and others want a piece of their success,” Mr. Vernon said. “Here I’m talking about products like Kraft macaroni and cheese, Kraft salad dressing, Oscar Mayer cold cuts, Miracle Whip and Kraft Mayonnaise, where we’ve seen new, aggressive, competitive entries. We will be investing to both defend and grow these franchises with every page in our playbook — better marketing, innovation, and good, better, best differentiation versus the competition. In select instances, defending our success may also mean getting sharper on price points, to show that we will not tolerate incursions into our market share or irrational behavior that would disrupt the long-term health of our categories. Fortunately, in those instances, we are still at a point in our productivity curve that will allow us to take action without having to take a step back in terms of profit growth.”

In addition to defending brands where competition is heating up, Mr. Vernon identified significant steps the company is taking to invest in its major brands. The company created a chief marketing officer position during the quarter “in order to leverage deep experience on the front lines of brand marketing across our entire organization and help make our brands shine in new and powerful ways,” Mr. Vernon said. He pledged to revitalize and contemporize more of the company’s iconic brands.

During the first quarter, Grey Poupon had “its first big dose” of advertising spending in 15 years, Mr. Vernon said. Kool-Aid responded well to new product introductions and the launch of a new look and voice for the Kool-Aid man.

“In the coming months, you’ll see more reinvestment, and the commitment to revitalize brands like Jell-O and Planters,” he said. “In fact, in the first half alone we’re launching 10 new brand advertising campaigns across our portfolio.”

Commenting on Kraft’s first quarter, Mr. Vernon said the “results are the first to reflect business as usual at Kraft.”

Product innovation was central to the first-quarter sales improvements, he said, including a 30% gain in the Velveeta cheesy skillets line, versus last year.

“And that’s coming off strong double-digit growth throughout 2012,” Mr. Vernon said.

“Lunchables also are continuing a strong growth trend, up in the mid-single digits, driven by smoothie innovation and increased advertising investment,” Mr. Vernon said. “In coffee, newly launched Maxwell House and Gevalia cups, compatible with the current system, are helping us to expand our presence in the on-demand segment. All of our new coffee s.k.u.s are showing good velocities and distributions in line with our expectations. And we continue to grow strongly in the category that we created, liquid water enhancers. We introduced MiO Fit earlier this year, and we’re now following it with our newest entries under our Crystal Light and Kool-Aid brands.”

Mr. Vernon described sandwich cheese as a “shining example” of success the company has achieved with this good, better, best strategy.

“To date, Velveeta has been an untapped gem in our portfolio,” he said. “It’s always been a value in the dairy case, and a nice flanker to our other offerings. But through product formulation improvements, new flavors, updated packaging and increased distribution, Velveeta has strengthened its relevance and expanded its role into the cheese slices category. And as to good, better, best, Velveeta slices are priced at $1.99, complementing Kraft singles at $2.99 and Deli Deluxe at $3.99. So in the first quarter, the good work done with Velveeta slices helped us deliver a profitable 2 point share gain in this category.”

While noting overall improvement in Kraft market share performance, Mr. Vernon said the company is not yet where he would like.

“In the first quarter, we outpaced the industry on a unit basis, but not in as many categories as I know we’re capable of,” he said. “Also, our dollar growth lagged the industry in the first quarter. Now, as you may recall, we priced up with commodity costs earlier than most of the industry last year, and this has negatively impacted comparisons versus the industry this year. Nonetheless, we expect to do better on both a dollar and unit basis versus the industry, as this year progresses. The growth we delivered in the quarter was driven by innovation, stepped-up advertising, and investments in our Big Bet franchises. A. and C. (advertising and communications) was up mid-teens for these brands, and collectively they grew revenue in the mid-single digits in the first quarter. But there’s more work to do.”
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