Kraft, the US’s largest food company, has announced on-track Q3 earnings thanks to higher volumes, lower interest expenses and accounting changes. However, private-label competition, pension fund woes and upcoming labour negotiations are all bottom-line threats. Kraft must look beyond product innovation if it is to meet its full year target.
Kraft has announced that its pro-forma quarterly earnings increased by 73% to US$869m, up from $503m last year. The company claimed the elimination of most goodwill amortisation this year due to a change in accounting rules as a key driver for this rise.
Other drivers included domestic volume growth of 3% and international division volume growth of 4.2%. In addition, Kraft reduced its interest payments by over 17% through paying down debt incurred during the purchase of Nabisco in December 2000.
While Kraft stands by its projected full-year shipment growth of 3%, some are sceptical, pointing out that the majority of Kraft’s products grew by less than 1%. There are also profitability threats: due to the bear market, Kraft might have to make additional contributions to staff pension plans; and rising healthcare costs could make the upcoming labour contract renegotiations expensive.
Nor can Kraft ignore the threat of private-label brands. Accounting for about 18% of its revenues, cheese is a core component for Kraft. However, the cheese commodity prices dropped 31% in June from the year prior, and retailers were slow in passing on these savings to Kraft customers. Instead retailers pushed their own brands, thus stealing market share from Kraft, with a significant impact to Kraft’s bottom line.
Kraft, like most packaged food companies, is hoping that dedicating significant resources to product innovation will reinvigorate sales, boost volume shipments, and reinforce brand awareness. But it remains to be seen whether innovation alone will help Kraft meet year-end earnings targets. For such a strategy to be successful, Kraft will need aggressive new product initiatives so that significant ROI is seen within the remaining quarter.