Kraft profit dips but hopes remain high

By Lorraine Heller

- Last updated on GMT

Related tags: Kraft, Revenue, Nabisco

Snack giant Kraft has posted a further drop in its first quarter
profit, but has maintained its full-year outlook, confident that
its restructuring plan will drive the company forward.

The leading US food and beverage group yesterday said profit fell 30 percent to $702m from $1bn a year earlier. A large cause for the dip in profits were heavy costs incurred as part of a wide sweeping restructuring plan, designed to streamline the business and close up to 40 plants by 2008. However, the firm revealed an overall modest growth in net revenue for the quarter, up 5.7 percent to $8.6bn. "The first quarter of 2007 was an eventful one for Kraft as we became independent from Altria and began executing the strategic plan we announced in February,"​ said Irene Rosenfeld, chairman and chief executive officer. "While our first quarter results reflect improvement in several core categories, we still face many challenges. We expect to see further progress, particularly in the second half of the year, as we set the stage for Kraft's return to consistent growth." ​ As with other food and beverage firms, Kraft has also had to face increased commodity costs, especially for corn, as the grain is increasingly sourced for ethanol production. However, passing on the price increases to consumers has not proved a successful strategy for Kraft, which saw sales of its flagship cookie Oreo fall during the quarter due to recent price hikes. Despite lower Oreo volumes, the group saw a 4 percent growth in net revenues from its Snacks & Cereals division in North America, boosted by product successes in Chips Ahoy! and Newtons franchises. Cracker growth was driven by new products in Wheat Thins and Triscuit lines. The firm's North American Beverages business also saw an increase in net revenues of almost 4 percent, driven by a good performance of its powdered beverages and coffee. However, although Kraft's premium coffee brands - such as Starbucks, Gevalia and Tassimo - showed a continued strong performance, this was partially offset by volume declines in mainstream coffee. Kraft's Convenient Meals business saw net revenues grow 4.8 percent, with volume gains driven by recent quality investments in macaroni and cheese and DiGiorno and Tombstone pizzas. ​However, the firm reported flat revenues for its Grocery division, with market share gains in better-for-you snacks such as Jell-O sugar-free ready-to-eat pudding and sugar-free Cool Whip topping offset by category weakness and share declines in Kraft salad dressings. The firm's European business saw modest revenue growth of 2.9 percent, reflecting strong chocolate revenues. Revenues in developing markets, including Eastern Europe, the Middle East & Africa, as well as Latin America, increased 8.9 percent, driven by coffee, chocolate, biscuits and powdered beverages growth. In its outlook for 2007, Kraft said it expects to incur costs of approximately $625m under its restructuring program. However, the company continues to expect culmulative savings from the program to reach around $700m by year-end. ​A year of restructuring in 2006 was reflected in Kraft's full year figures, announced in September. In 2006, the company's impairment, exit and implementation costs amounted to $243m - a huge jump from the $55m costs incurred in the same period for the previous year. With the burden of increased costs reflecting badly on the company's overall margins, Kraft said in February it would implement several new measures to ensure growth in three stages. The strategies are: rewiring the organization for growth, reframing categories to increase relevance to the consumer base, exploiting sales capabilities and driving down costs while maintaining high quality. The group expects these to be achieved through top line organic growth of between 3 and 4 per cent as well as re-investing growth and savings back into the new initiatives. A $300m to $400m sum has been earmarked for investment into quality, marketing, capability-building and R&D.

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