NORTHFIELD, ILL. — A change in benefit plans contribute to a 38% increase in earnings at Kraft Foods Group, Inc. during the second quarter, but revenues declined slightly on lower prices and weaker sales for some products.
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Sales for Crystal Light powdered beverage mixes, Oscar Mayer cold cuts, Jell-O and spoonable and pourable dressings dropped during the quarter, due in part to heightened competitive activity and lack of marketing support.
“The bottom line is this: We are not yet firing on all cylinders in terms of brand-building, marketing and promotional programs,” said Tony Vernon, chief executive officer, during an Aug. 1 call with financial analysts to discuss earnings. “And we are still not at share of voice, share of market, benchmark advertising levels, behind a number of our biggest brands. We have more to do consistently across all our categories. But we are making progress.”
Unfavorable pricing of commodities and a very strong prior-year comparison resulted in a 5% drop in operating income for the cheese segment, but Kraft gained category share for “the first time in a very long time” from improved advertising and brand renovation for Philly, Velveeta, Kraft slices, Cracker Barrel and shredded cheese.
In beverages, higher marketing costs contributed to a 7% decline in operating income. Crystal Light powdered mixes fell due to cannibalization from Kraft’s liquid water enhancers as well as price-based competition from other players in powdered beverages.
The refrigerated meals segment saw income decline 21%, impacted by commodity costs and strong prior-year comparisons.
Competition is strong across Kraft’s categories, including what the company has identified as “probably one of our most important franchises” – macaroni and cheese.
“We have formidable foes, and some of the bigger players are getting into this with some of the entrants,” Mr. Vernon said. “We’ll continue to battle. … So I'm looking for some real category growth, and I think we’ll defend ourselves nicely.”
Kraft also is struggling to regain share in pourable and spoonable dressings, a category in the “midst of a lot of competitive Armageddon activity,” Mr. Vernon said.
“You’ve got five or six big players,” he said. “You’ve got two that are rumored to be for sale or are for sale. You’re seeing significant promotion, 10 for 10, in merchandising and pricing. And, frankly, we’re electing not to go deep in play. … And we’re probably going to ride this out until we have all elements of our program ready to go and let the marketplace battle it out for a while.”
But Kraft is prepared to compete in the cold cuts category, where Oscar Mayer brand has lost share over the past year “on the strength of a very good launch from a formidable foe,” Mr. Vernon said.
“Cold cuts remains a pitched battle, and the category, honestly is soft,” he said. “The better deli fresh segment is seeing some consumers trading down to good, and some consumers are trading back to the deli counter, as deli suppliers are bringing product news and new flavors, and aggressively sampling, after a few years of decline.”
However, trends are improving for the brand, he added.
“I feel very good about what Oscar has got coming,” he said. “… we’ve got a lot of good hot dog offerings and our Selects line and with the full-test Oscar line. So, I feel good we’re going to compete.”
While promotion, marketing and innovation hurt revenues during the quarter, Kraft expects those investments to pay off in the second half of the year.“You're going to see Mr. Peanut going to town,” Mr. Vernon said. “You're going to see Jell-O come in with its first big campaign in many years. We got the salad dressing and mayonnaise wars with good, better, best pricing, and better advertising. So, I think you'll see focus there as the year goes on. Those categories are billion-dollar categories for Kraft. And those are the four I'd call out. There are more, but those are four that you're going to see us working hard to execute the playbook against.”