Kraft Foods Group has admitted it is not yet “firing on all cylinders” and will look to increase brand building programmes to address a decline in sales volumes.
The US food group, formed after the former Kraft Foods split in two last autumn, yesterday suggested full-year sales could come in lower than expected after a set of mixed quarterly results, which included an improved forecast for full-year profits.
Go deeper with GlobalData
While sales in the first half edged up 0.5%, organic net revenue fell in the second quarter as volumes dropped.
CEO Anthony Vernon said the results showed Kraft made progress on cost savings initiatives in the quarter but not as much on its top line.
“Across our portfolio, we held and grew market share in more than half of our revenue base during the first six months of the year,” he told analysts on the firm’s earnings call yesterday. “And our shares continue to strengthen as we advance through the second quarter. But it is not enough to simply grow market share. We have an obligation to our customers to drive volume and category growth. And the fact is, in the second quarter, consumption weakness and competitive activity in several categories worked to offset the strong growth we saw in the rest of the portfolio.”
See Also:
The Oscar Mayer deli meats producer, which has been working on creating a leaner structure through job cuts and cost cutting, said the timing of Easter shipments negatively impacted net revenue growth, in addition to product line pruning.
How well do you really know your competitors?
Access the most comprehensive Company Profiles on the market, powered by GlobalData. Save hours of research. Gain competitive edge.
Thank you!
Your download email will arrive shortly
Not ready to buy yet? Download a free sample
We are confident about the unique quality of our Company Profiles. However, we want you to make the most beneficial decision for your business, so we offer a free sample that you can download by submitting the below form
By GlobalDataSales were also down in its grocery division as investments in innovation behind brands such as Velveeta dinners and Planters snack nuts were more than offset by weakness in Kraft spoonable and pourable dressings and Jell-O. The latter, Vernon said, was primarily due to “aggressive” discounting and merchandising by its competitors.
The chief executive said Kraft was “in the midst of a lot of competitive Armageddon activity” in salad dressings. Its namesake Macaroni & Cheese franchise, meanwhile, has also seen heightened competition where Kraft says it has “formidable foes”.
“In cold cuts, we’re working to stabilise share and revenue losses through a strategy that includes better price sized architecture and shifting marketing across our good, better, best lineup,” Vernon said. “Jell-O was down again in the quarter because we hadn’t progressed the marketing proposition to a point where it justified our bit bet, investment levels.”
The CEO said Kraft could have “done more” in these areas to “prop up volume and sales performance” in the quarter.
However, he added: “If a promotion didn’t meet our profitability hurdles or our long-term business objectives, we held back. If a campaign wasn’t ready for prime time, we held back. This is the discipline of focusing on profitable growth.”
Vernon said Kraft’s promotional levels were down 8% versus the second quarter of last year compared to a 1.2% decline for the entire industry.
“The bottom line is this. We are not yet firing on all cylinders in terms of brand building, marketing and promotional programs. We have more to do and more to do consistently across all our categories. But we are making progress and we begin the second half with share momentum from a stronger base. We have a more robust slate of programmes and innovation in place across more categories than we’ve had in a long time. For instance, in our grocery business alone roughly two-thirds of our brands will have on-air support with a 30% increase in advertising versus the prior year.”
Vernon said he expects these initiatives during the second half of the year to “drive greater profitable revenue growth and address some of the softness we saw in certain categories in the first half of the year.”
He did, however, dismiss any suggestion Kraft might look to aggressively increase promotional activity to boost volumes.
“The temptation is to reinstate promotions, and to boost sales. We’re not going to do it. We will remain focused on profitable sustainable growth. I am not going to make the mistake I made on last on last quarter’s call and lead you to believe that I am going to participate in big price wars, because we are not.”
Janney Montgomery Scott analyst Jonathan Feeney said Kraft was battling stiff competition in some categories, as well as caution among consumers. However, Feeney said cost savings could help fund marketing efforts.
“Heavy competition [in] salad dressings, cold cuts, beverages and a price-sensitive consumer continue to weigh on volume growth, suggesting limited near-term earnings upside, though potentially outsized productivity gains and favourable input costs provide extra fuel for Kraft to refill the marketing engine behind its broad-based portfolio of leading brands,” he said.
The analyst added the desire among Kraft’s management to focus on “sustainable” volume growth and the company’s cash flow supported its share price. Feeney has a “neutral” rating on Kraft’s shares.
“Despite rumblings of price competition in certain pockets of Kraft’s portfolio (e.g., salad dressings, powdered beverages), which surely has substantial exposure to private label (e.g., cheese, coffee, powdered beverages), we think management’s focus on sustainable volume growth and its above-average cash flow justify its premium valuation.”
