Food Giant's Profits On A Diet

These are the times that try cookie makers' sales.

A diet heavy on Oreos, macaroni and cheese, Oscar Mayer hot dogs and Philadelphia Cream Cheese, washed down by Maxwell House coffee and Kool-Aid, has fattened the bottom line for years at Kraft Foods Inc. But now the nation's largest food manufacturer is moving to cut back on some of its indulgences.

An eating revolution that has Americans seeking out healthier food, or at least trying to consume less, has forced Kraft to rethink the way it markets its products and begin reshuffling its lineup.

Growing obesity, the popularity of low-carbohydrate diets and worries about potentially artery-clogging trans fats all have combined to hurt sales at the company, not unlike the plight of other packaged-food makers. Kraft's Oreos, a long-time icon of snackdom, have fairly or unfairly become the bad poster child for trans fats and Atkins and South Beach diet devotees.

Add in soaring commodity costs for milk, cheese, cocoa and coffee and a few other headaches and the result is four straight quarters of profit declines and sluggish revenue and sales volume.

So when the company hosted analysts and reporters for a day-long presentation at its headquarters north of Chicago recently, they got a serving of rare corporate candor from Kraft along with a peek at new items. Chief executive Roger Deromedi admitted the company has been "hammered" lately in four businesses — cereal, cookies, frozen pizza and candy — due to competitors' products and the impact of low-carb diets that forgo sweets and starchy foods.

"We have issues in those categories," he acknowledged in lowering Kraft's estimate for 2004 profits.

But Deromedi insisted repeatedly that Kraft's restructuring plan "remains on track" and will start showing better results by year's end.

"There are several factors that will drive our second-half growth," he said, citing recently introduced snacks in particular. "We also expect our marketing spending to build momentum."

Kraft's push for healthier or diet-oriented food began last year when it moved to reduce the fat content in 200 products in North America, cap portions for single-serve packaged snacks, quit marketing snacks at school and encourage healthier lifestyles.

Now the campaign is becoming more evident on U.S. supermarket shelves, which are being stocked with a variety of new snacks catering to diet-conscious shoppers.

Kraft's cookies and crackers division last month began offering 100-calorie packages of reformulated, "thin crisp" versions of Oreos, Chips Ahoy and Kraft Cheese Nips, along with Wheat Thins "minis." Reduced-carb cookies come out in September as part of the company's new CarbWell line, which unveiled cereals, cereal bars, salad dressing and barbecue and steak sauce in May and June.

Making a bigger play in the healthy drinks market, the company is going nationwide with Fruit 2-O zero-calorie flavored water, which was largely unavailable outside the East Coast before Kraft acquired it this year with its purchase of Veryfine Products Inc.

Meeting consumer demand for more convenient foods remains a priority, too, as reflected in the introduction of DiGiorno microwaveable rising-crust pizza.

But new products are just part of the company's revamped strategy.

Kraft is cutting 6,000 jobs and closing as many as 20 plants this year in a $1.2 billion overhaul to reduce operating costs, putting the savings into marketing. It plans to trim its vast portfolio of products. It is selling more snacks in China and other developing markets. And it is trying to be more price competitive, spending heavily with retailers this year to ensure that its products aren't displaced by cheaper brands.

Analysts generally endorse Kraft's health-oriented actions, although they question its slow move to low-carb products.

"The entire U.S. food industry was caught off guard by the low-carb phenomenon," said David Adelman of Morgan Stanley Dean Witter. However, he added: "You have to be realistic — the food industry environment is very challenging right now."

Tim Ramey of D.A. Davidson and Co., though, sees little evidence that Kraft's struggles have bottomed out. He said that devoting its extra money to short-term marketing spending shows the company is "still in denial of its operating reality."

"I think health and wellness is the right thing to be doing," he said. "I just wish they were putting more of their resources into research and new products."

Numerous new products have fizzled in recent years at Kraft, which bet big on cookies with its $15 billion acquisition of Nabisco in December 2000. The company pulled Ooey Gooey Warm 'N Chewy Chips Ahoy microwaveable cookies from shelves at an estimated cost of $17 million last year after complaints about the taste and high cost; FreshPrep dinner kits also flopped.

All that has contributed to shaky results and turnover and turmoil in Kraft's management.

A pair of key executives quit last summer. Five months later, co-CEO Betsy Holden was demoted to marketing chief in a shakeup that left Deromedi in sole charge. Then, after announcing a companywide restructuring in January, Deromedi was sidelined for six weeks this spring with a viral infection.

Morningstar analyst Mark Hugh Sam said Kraft needs a bit more time to cure itself after facing up to the fact it had lost its industry lead in innovation, technology, talent and timing.

"It's very difficult to turn around a $31 billion company with so many products, but they're trying," he said. "They're focusing first on their health initiative ... which is very good news for consumers. Now we can enjoy our Oreos without having to feel as bad about it."

Merrill Lynch's Leonard Teitelbaum, who has followed the company since 1967, said it's unclear whether Kraft and other companies that were late on the reduced-carb trend can regain lost market share. But he said Kraft shouldn't abandon the products that got it where it is today.

"Their strategy should be to offer a buffet of products that go all the way from the truly healthful to the truly indulgent, and let the consumer make up their mind," he said.