Kraft Foods saw its profits decline 28% in Q4, weighed down by restructuring and higher costs for commodities. While the ongoing restructuring programme is a necessity, it is also essential that the company launches new and innovative products that capture consumers’ imagination.
The 28% decrease took Kraft’s quarterly net income down to US$628m from $869m a year ago. Increased costs for raw materials and marketing and factory closings combined to drive down profits, according to the company. Like other food producers, Kraft has been hit by the buying power of the major discount retailers, both in Europe and the US, which are putting increasing pressure on costs and squeezing manufacturers’ margins.
Kraft is in the midst of a very large restructuring exercise, which was started a year ago shortly after Roger Deromedi became the sole chief executive. As part of the reorganisation, Deromedi pledged to cut 6,000 jobs, sell off non-essential businesses to trim costs and focus advertising on its top brands. The company has made some progress in its aims, citing North American revenue growth of 8.8%, but international performance remains sluggish.
Kraft’s figures did contain some bright spots. Sales increased 7% to $8.78bn but with the cost of essentials like cheese, coffee beans and meat on the rise – increasing by $300m compared to a year ago – the company will need to look to more radical options to grow its bottom line.
In the past few months, Kraft has sold off a number of non-core operations, such as Life Savers and Altoids. The company insists this process is to continue, and has even hinted at potential acquisitions. Yet it seems difficult to envisage how this approach alone will affect a turnaround in fortunes.
The current quarterly announcement marks a sixth consecutive decline in profits. Despite a large ongoing restructuring programme, the company will need to come up with bold, innovative new food products that capture consumers’ imagination. Indeed it could do worse than look to emulate the success of another FMCG major, PepsiCo, which has focused its efforts on the simple but effective idea of giving consumers what they want.
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