Kraft: innovation, portability and health drive growth in core categories

US food company Kraft Foods has a recipe for financial growth that is feeding Wall Street's appetite, Reuters reports.

According to the recent report, Kraft is attempting to outsmart the slow-growing food sector with breakneck innovation. The company is not only transforming old brands, such as Oreo cookies and Macaroni & Cheese, but it is also adding new products to its portfolio that emphasise convenience, portability and health.

Helped by its $18.9 billion (€21.6bn) acquisition of biscuit maker Nabisco in late 2000, the largest North American food company is playing with a host of new foods. It boosted sales nearly 30 per cent to $34 billion with Nabisco, and it remains on the lookout for smaller acquisitions that can add scale in growing areas such as snacks and beverages.

Kraft , the maker of foods as wide-ranging as Philadelphia cream cheese, Oscar Mayer meats and Maxwell House coffee, is banking on revenue growth of 3 per cent to 4 per cent in 2002 and beyond, ahead of the industry's 1 per cent to 2 per cent average.

The company, which went public in June, is now co-mingling the Kraft and Nabisco lines with ideas such as Ritz crackers made with Kraft cheese and versions of its childrens lunch meal kits with Oreos and Chips Ahoy cookies. Oreo is expected to soon reach the $1 billion mark in yearly sales.

"They've got a litany of new product successes,"​ said Kenneth Harris, a partner with food consultant Cannondale Associates. "Kraft's mantra is to be at least 18 to 24 months ahead of the curve in new thinking."​

Last year about $1.1 billion, or 3 per cent, of Kraft's sales came from new products, as it added new sizes to its Capri Sun drinks, new shapes to foods like Macaroni & Cheese, and new flavours and formulations to its Boca meat alternatives and Balance Bar energy bar businesses, both bought in 2000 to build scale in growing categories.

Kraft aims to take tired foods such as American cheese and add more kid appeal with new portable products, such as its tearable Rip-ums. It is also boosting education for the benefits of cheese and other foods that fulfill dietary deficiencies such as calcium and vitamins, especially in developing markets.

"Whether it's through internal development, whether it's through acquisitions, or whether it's through licensing, you'll see us use whatever is the best variety for driving growth,"​ co-chief executive Betsy Holden told Reuters in a recent interview. Holden runs Kraft's $25-billion North American business, with 75 per cent of sales. "You'll continue to see a variety of ways for us to grow in our core categories."​

Keeping pace with trends, as well as its financial promises, has earned Kraft top billing on Wall Street and kept it the leader in 21 of its top 25 categories in the United States. The company met the high end of its earnings guidance in 2001, and is calling for 14 per cent to 16 per cent earnings per share growth in 2002, to $2 to $2.05 a share.

"Kraft is clearly one of the few companies in the (food) group that has strong top and bottom line growth,"​ said Keith Patriquin, an analyst with Loomis Sayles, which holds 370,000 Kraft shares as well as stock in its majority owner, tobacco giant Philip Morris. "They're in large, growing categories. They've got a good reputation with the consumer."​

Since the company's June trading debut, Kraft's shares have risen 20 per cent to close at $38.01 on Friday. The stock has outperformed the Standard & Poor's Packaged Food Index by nearly 15 per cent.Analysts have been impressed by Kraft's ability to offset downturns in its big commodity-sensitive cheese and coffee businesses with cost savings from the Nabisco deal, which exceeded company targets of $100 million 2001.

"Kraft has been one of the strongest companies in a difficult industry in the past decade,"​ Prudential Securities analyst John McMillin said. "I think coffee is better and cheese costs have come down, and Nabisco is starting to hum."​

The company, which is now integrating Nabisco's distribution and buying operations, has eliminated some unprofitable product lines, closed 16 plants and cut nearly 2,700 jobs.

Kraft has emerged as a winner among food stocks, but its future is not without hurdles, analysts said. The Northfield, Illinois-based company operates in some mature categories. Besides cheese and coffee, its Post cereal line is faced with waning category demand as consumers opt for more grab-and-go choices.And while the company is the North American leader, it trails overseas rivals Nestle and Unilever in big Western European markets such as Germany and France. Internationally, it also faces a host of regulatory complexities.

Still, Kraft's $8.77 billion international business dwarfs most US competitors, and the company has been progressively building scale in growing markets such as Central and Eastern Europe with smaller acquisitions. Earlier this year, it bought the Russian and Polish confectionary business of Germany's Stollwerck, part of its strategy to buy local brands and infrastructure, and later introduce its own higher-margin foods.

"By maintaining both (local and Kraft) brands, over time, as per capita income rises in developing countries, consumers trade up,"​ said co-chief executive Roger Deromedi, who heads Kraft's far-reaching international unit.

Some analysts would like to see Kraft build scale more quickly, especially in developing markets such as Latin America, where the middle class is growing.

"From a longer-term perspective, I still do not believe that Kraft has enough exposure to non-European markets, and I think the only way to address this issue is through an acquisition,"​ Goldman Sachs food analyst Romitha Mally said.

One attractive potential target, analysts said, is French food and drink conglomerate Group Danone, the world leader in dairy products such as yoghurt and cheese.Deromedi declined to comment on Danone. He and Holden said Kraft's near-term focus will be to complete Nabisco's integration, but he would not rule out a bigger move.

"Our free cash flow is very strong; we have the wherewithall, if and when the right thing comes along,"​ he said.