INSIGHT: Kraft top line hit by pricing, volumes
Kraft Foods has indicated that its sluggish top-line growth was the consequence of lower pricing in the US and lower volumes in Europe, where the company offloaded under performing businesses.
The US food giant posted a decline in third-quarter sales of 5.7% after the market closed yesterday (3 November) The company said sales at constant exchange rates increased 0.5%.
Speaking to analysts on a conference call, CEO Irene Rosenfeld said that the company's fourth straight quarter of disappointing sales was the consequence of lower pricing due to lower input costs and increased competition, particularly in the US cheese, meat and snacks categories.
However, Rosenfeld emphasised that pricing actions had resulted in positive market share growth in US cheese and meat.
"I think you can certainly see the impact on volume in our cheese business, which as we said was the single biggest contributor to the price reduction," she commented. "Another key contributor was meat and I feel very good about the performance of our meat business in this past quarter."
In snacks, Rosenfeld said pricing actions had allowed it to bridge the price differential between its nut products and the rest of the market, allowing Kraft to stem losses at the unit, while promotional activity in biscuits had pushed pricing actions through.
"I feel quite comfortable where our pricing stands today," Rosenfeld insisted.
Meanwhile, in Europe Kraft management said that its business was being hit by the downturn, particularly in France and Spain.
In order to improve margins at Europe, Kraft CFO Tim McLevish said that the group had offloaded unprofitable contracts and businesses. In pruning unprofitable businesses, McLevish said that Kraft was looking to the long-term "sustainability" of its business.
"We have business there that has a lot of price pressure and we deem it more appropriate to the health of our business, short-term and long-term, or particularly long-term, to decline participation in that particular business," he commented.
Rosenfeld added that the company has got most of the "heavy lifting" from a pruning standpoint out of the way, although she said there were some businesses in Europe that Kraft still plans to walk away from.
"One of the reasons that we are willing to accept less growth on the top line in Europe is because we believe that those decisions that we are making are right for the long-term economics of that business, and you are seeing it play through in our bottom line performance," she insisted.
Kraft said that its operating income margin increased 470 basis points year-over-year to 14.5% and operating income increased 38.7%.
The US food group, which signalled its interest in acquiring UK confectioner Cadbury in September, said that it was still considering the move but insisted that it was taking a "disciplined" approach to any potential deal. One of Kraft's key criteria is that the acquisition would boost EPS in the second year.
Under UK takeover rules, Kraft has until Monday (9 November) to put a formal offer on the table.
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