Kraft Foods Inc. (NYSE: KFT) is the largest food and beverage company headquartered in North America and the second-largest in the world after Nestlé SA, generating $40.4 billion in revenue in 2009. With 97,000 employees in over 70 countries, the firm operates in two main segments: Kraft North America Commercial and Kraft International Commercial. In addition to these two geographical divisions, Kraft's products are divided into one of five categories: snacks & cereals, beverages, cheese & dairy, grocery, and convenient meals. The company's largest customer is Wal-Mart Stores (WMT), which accounted for 16% of all sales in 2009.
In January 2010, Kraft purchased Cadbury plc (CBY) for $19 billion. The expanded Kraft, with estimated annual revenues worth more than $50 billion, is now able to reach to larger economies of scale in emerging markets. Additionally, the acquisition of Cadbury plc (CBY)'s product portfolio allows Kraft to better compete against candy makers like Hershey Foods (HSY) and Mars.
In December 2010, a battle over coffee distribution emerged between Kraft and Starbucks. Kraft has distributed Starbucks since 1998, growing the brand's sales from $50 million to nearly $500 million in 2010. Currently, the partnership generates approximately $128 million in profit that is split evenly between the two companies. While it is clear that Starbucks wishes to end the partnership, Kraft turned down Starbucks' buyout offer of $750 million and is instead taking them to court for breach of contract. At the heart of the dispute is Starbucks' desire to sell its coffee in other companies' single-cup coffee home brew machines. It is estimated that Starbucks may have to pay up to $1.5 billion in severance fines to Kraft although the final amount will be determined in arbitration. Despite the loss of Starbucks, Kraft will still produce Maxwell House coffee and its Tassimo single-serving coffee machine.
Headquartered in Northfield, Illinois, Kraft Foods Inc. began in 1903 as a cheese manufacturer. The company is now the largest North America-based food and beverage company and the second largest in the world after Nestlé SA. From 1988 to March of 2007, tobacco giant Phillip Morris Company, now Altria Group (MO), owned and grew Kraft Foods, merging the food company with Nabisco and General Foods. Altria Group (MO) took Kraft public in 2001, maintaining an 88.1% stake until the completion of the spin off in 2007.
In January 2010, Kraft purchased Cadbury plc (CBY) for $19 billion. In addition to giving Kraft access to new international markets long inhabited by Cadbury, the company became the world's largest confectioner.
In the first quarter of 2010, Kraft Foods generated revenues of $11.3 billion, an increase of 26% from the previous year; net income for the quarter nearly tripled to $1.88 billion. This quarter saw the essential completion of Kraft's acquisition of Cadbury plc (CBY) and the sale of its frozen pizza unit to Nestle (NSRGY) for $3.7 billion. As of April 16, 2010, Kraft owned 99.95% of Cadbury's shares and was in the process of selling Cadbury's Romania and Poland operations in accordance with the EU Commission's requirement. For February and March, Cadbury's organic growth was 8.2% with increased gum sales in the Americas and strong chocolate sales growth in the UK and Asia. During the quarter, all segments except for US Groceries and US Cheese had increased volume, which combined with $383 million from favorable foreign currency exchange rates to drive the increase in net revenues. Net revenues for US Beverages increased nearly 5% as a result of a 4% increase in volume and mix with higher sales of Maxwell House and Starbucks coffee. US Cheese revenues decreased by 5.5% as a result of lower net pricing, decreased volume, and higher advertising costs. Net revenues for the US Convenient Meals segment increased 4.8% with a nearly 5% increase in volume driven by increased sales of bacon, hot dogs, and Lunchables. US Groceries was flat for the quarter, with a decrease in revenues of 0.2%. The imact of the Cadbury acquisition was seen in US Snacks where revenues increased 16.3%, with more than 15% attributable to the acquisition. The company's Canada segment saw its revenues increase nearly 20% with a favorable exchange rate accounting for 11% and the Cadbury acquisition accounting for almost 8%. The Cadbury acquisition added 31% to Kraft Europe's revenues, which were up 40.5% in total. Favorable exchange rates added another 8% and volume added nearly 5%, but lower net pricing decreased revenues by 2.3%. The Developing Markets segment also benefited tremendously from the acquisition with Cadbury adding 49% to the segment's 67% growth. Favorable foreign exchange rates, higher volumes, and higher pricing drove increases in net revenues for nearly every geography within the segment. Lastly, the company's commodity costs decreased $80 million from Q1 2009.
In the second quarter of 2010, Kraft Foods generated revenues of $12.25 billion, an increase of 25% from the previous year; net income for the quarter increased 13% from Q2 2009 to $939 million. Operating income increased 17% to $1.7 billion. Cadbury brands contributed 22.8% to the company's increased net revenues, while a favorable mix and volume increase contributed 2.2%. Losses due to lower net pricing were offset by stronger currency exchange rates. Strong performance in Europe and developing markets countered lackluster results from North America. Net revenues for US Beverages increased 6% with a 6.3% increase in favorable mix and volume; in particular, Kool-Aid, Capri Sun, and Maxwell House grew more than 10% and drove the increase in volume. Net revenues for US Cheese fell 10.1%. Volume fell for nearly every cheese category, which was coupled with higher dairy prices. The US Convenient Meals segment reported revenue growth of 1.6% based on increased volume and offset by lower net pricing. Net revenues for US Grocery fell more than 5%. Higher net pricing for Kraft Macaroni and Cheese was offset by a decline in volume for dressings, Cool Whip, and packaged desserts. Cadbury brands significantly contributed to US Snacks' 17.7% net revenues increase, despite lower volume and lower net pricing. Decreased shipments of cookies and crackers drove the decline in volume. For Canada and NA Foodservice, income from Cadbury brands combined with a favorable exchange rate to account for 19% of a nearly 22% increase in net revenues. Volume and net pricing increases made up the rest of the increase. The company is looking to advertising in North America to boost its results in the second half of the year. The company attributed its results to the continued difficult economic conditions and lower sales at a major retailer. In Europe, net revenues increased 34.1%, with nearly 32% of the increase resulting from the Cadbury acquisition. Volume and mix increased almost 8%, driven by cheese, chocolate, coffee, and biscuits; lower net pricing and unfavorable currency exchange rates depressed revenues by more than 5%. Revenues from Developing Markets almost doubled in Q2, increasing 73.4%. Cadbury's presence in developing markets accounted for 61.4% of the increased revenue with increased volume and mix in Central and Eastern Europe, the Middle East, and Africa. Latin America (Brazil in particular) and Asia Pacific (China, Australia/New Zealand, and Indonesia drove performance) also saw increased volume and mix. A new factory in Brazil will produce Tang, chocolate, and eventually Trident Gum to help supply one of the company's most important markets. Sales of Tang in Brazil, its largest market, grew by 40% while sales of Trident increased more than 30% this year. Kraft's CEO and other officers have repeatedly stated that developing markets will be the largest recipients of investment in the near future.
In the third quarter of 2010, Kraft generated revenues of $11.9 billion, an increase of 26.2% from the previous year; net income for the quarter fell 8.5% to $754 million. Operating income for the quarter grew 13% to $1.5 billion. The entire increase in revenues was due to the Cadbury acquisition since increases in volume and pricing were offset by the effects of unfavorable foreign currency exchange rates. The acquisition of Cadbury accounted for nearly all of the growth seen in the sectors affected by the merger, at times cloaking essentially flat results from most divisions. Discounting the Cadbury effect, Developing Markets had the largest improvement during the quarter with a 5% increase in volume and 2.1% increase in pricing, led by Brazil and China. In Europe, volume and pricing increases of 1.4% and 0.3%, respectively, were nullified by an 8.7% decrease in sales on account of the unfavorable exchange rate of the British pound to the USD. Volume was driven by coffee and cheese with higher pricing seen in biscuits and chocolate. For the Canada & North America Foodservice segment volume decreased by 4.2% but a favorable exchange rate (+3.6%) and higher pricing (+2.8%) led to overall growth in sales. U.S. Grocery Snacks, and Beverages were essentially flat for the quarter with higher pricing canceling out decreases in volume in the three segments. U.S. Cheese was able to pass increases in dairy prices along to customers, resulting in net pricing increases of 8.4%, but volume for the quarter fell 3.7%.
As a beverage manufacturer, Kraft produces primarily coffee, aseptic juice drinks, flavored water, and powdered beverages. The company's most popular brands of beverages in North America include Maxwell House coffee, Kool-Aid, and Country Time powdered beverages.
Cheese & Food Service
As a cheese & food service manufacturer, Kraft produces primarily natural, processed and cream cheeses. The company's popular brands within North America cheese & food service include Kraft Singles, Philadelphia cream cheese, and Velveeta.
As a convenient meals manufacturer, Kraft produces primarily frozen pizza, packaged dinners, lunch combinations and processed meats. The company's popular brands within North America Convenient Meals include DiGiorno, Kraft Macaroni & Cheese, and Oscar Mayer hot dogs.
In early January 2010, Kraft sold its frozen pizza business to Nestle (NSRGY) for $3.7 billion, approximately 2.3 times its total sales in 2009. The sale gave the company the extra funds necessary to increase their bid for Cadbury.
As a grocery product manufacturer, Kraft produces primarily enhancers and desserts. The company's popular brands within North America Grocery include Jell-O, Grey Poupon, and A1 steak sauce.
Snacks & Cereals
As a snacks & cereals product manufacturer, Kraft produces primarily ready-to-eat cereals, cookies, crackers, salted snacks and Chocolate confectionery. The company's popular brands within North America Snacks & Cereals include Oreo, Planters nuts, and Ritz crackers.
With the acquisition of Cadbury, Kraft now owns the second-largest market share for gum - Trident and Dentyne - and the top market share for cough drops - Halls. The new brands also have majority market shares in Canada and Latin America. In 2010, the company is expected to control 15% of the world's chocolate and candy market.
In early September, Kraft and Barry Callebaut signed a deal whereby Kraft will outsource the majority of its cocoa products and industrial products to the Swiss company. Barry Callebaut previously had a supply contract with Cadbury but this new contract will double the value of the company's previous contract with Kraft.
European Union Sales
Kraft Foods sales products from each of the five major food product categories, featuring brands familiar and unfamiliar to North America. With the acquisition of Cadbury, Kraft now owns the leading gum, chocolate, and candy brands in much of the EU. Its candy and gum brands are sold throughout the continent, but it also has significant presence in the chocolate markets of Poland, Russia, and France.
Developing Markets, Oceania, & North Asia Sales
The Developing Markets, Oceania & North Asia segment manufactures and sales many of the popular North American brands across each product category as well as some foreign brands. With the addition of Cadbury's brands, Kraft now has majority market shares in Australia, New Zealand, India, Thailand, and Malaysia for chocolate, gum, and/or candy.
Kraft's developing markets strategy is based around growing ten "power brands" in ten countries. Tang, Oreos, and Jacobs Coffee are some of the brands that have are particularly successful abroad and have allowed developing markets' to account for 21% of Kraft's total revenues. Tang sales increased 30% in these ten countries last year and organic sales have increased an average of 12.9% per year since 2006.
Middle East and Africa Sales
The Middle East and Africa region is a rapidly growing market for Kraft. The company plans to continue growth by increasing investments in the region and producing more of its power brands locally. The purchase of Cadbury has given Kraft the leading share of the African confection market.
With the purchase of Cadbury (CBY) in 2010 for $19 billion, Kraft is expected to have annual revenues of more than $50 billion. The acquisition makes Kraft the world's largest chocolate and sugar confectioner, with a solid second place in the gum category thanks to Cadbury's Trident label. Perhaps more important than Cadbury's brands is the company's geographic reach; Kraft now has inroads into many developing world markets where it formerly had no presence. In India, for example, Cadbury (CBY) has had a presence for the past 60 years, selling chocolate, snacks, dairy, and other candies. The merger is also expected to affect players further down the supply chain, such as cocoa producers. It is possible that the producers may consolidate their operations in response to expected increased pressure for lower raw material prices.
As part of the deal's approval by European regulators, Kraft sold Cadbury's Romanian and Polish divisions. In Romania, Kraft sold Cadbury’s Kandia-Excelent chocolate, soft cake and candy business to Oryxa Capital, an investment fund. In Poland, Kraft sold Cadbury's E. Wedel brand of chocolates and candies to Lotte Group, however Kraft will retain Cadbury's other brands and two factories in the country.
For the years ended December 31, 2009, 2008 and 2007, Kraft's five largest customers accounted for approximately 27%, 27% and 29%, respectively, of its net revenues, and the company's ten largest customers accounted for approximately 36%, 36% and 40%, respectively, of its net revenues. The company's largest customer, Wal-Mart Stores (WMT), accounted for approximately 16%, 16% and 15% of net revenues for 2009, 2008 and 2007, respectively. Manufacturers like Kraft Foods are becoming increasingly dependent on a small number of retailers for sales volume, which gives these retailers (i.e. Wal-Mart Stores (WMT)) significant leverage to bargain for lower prices. This can negatively impact any firm whose goods are sold in supermarkets.
The company uses hedging techniques to minimize the impact of price fluctuations in its principal raw materials; however, such techniques do not completely protect Kraft Foods. Kraft is a major purchaser of milk, cheese, plastic, nuts, green coffee beans, cocoa, corn products, wheat, pork, poultry, beef, vegetable oil, sugar, other sweeteners and numerous other commodities. Kraft's commodities expenses are expected to rise $2 billion, or 13%, in 2008. In 2010, Kraft raised the price of its coffee products three times in an attempt to offset ever-increasing commodity costs. In 2010, the cost of coffee increased nearly 60%, the largest single year increase since 1994. If the company is unable to increase its prices to offset increased cost of commodities due to consumer sensitivity, Kraft Foods may experience lower profitability. Raw materials prices to watch are:
Dean Foods Company (DF), Kraft, and other companies that sell dairy products in the U.S. are being harmed by an increase in natural & organic food consumption. Dairy farmers in the U.S. commonly use artificial growth hormones to increase milk production, which is not in keeping with organic practices. Companies such as Whole Foods Market (WFMI) benefit from organic demand.
In December 2010, a battle over coffee distribution emerged between Kraft and Starbucks. Kraft has distributed Starbucks since 1998, growing the brand's sales from $50 million to nearly $500 million in 2010. Currently, the partnership generates approximately $128 million in profit that is split evenly between the two companies. While it is clear that Starbucks wishes to end the partnership, Kraft turned down Starbucks' buyout offer of $750 million and is instead taking them to court for breach of contract. It is estimated that Starbucks may have to pay up to $1.5 billion in severance fines to Kraft although the final amount will be determined in arbitration. Despite the loss of Starbucks, Kraft will still produce Maxwell House coffee and its Tassimo single-serving coffee machine. The booming demand for single-serving coffee home brewers is at the heart of this dispute. Under its contract with Kraft, Starbucks is limited to selling "pods" of its coffee only for the Tassimo brewer, which holds only a paltry 2.6% of the market. Keurig Home Brewer, owned by Green Mountain Coffee Roasters (GMCR) controls the market with 71% market share. The single-cup coffee market is still small, with approximately $200 million in sales in 2010, however it is growing twenty-eight times faster than the overall coffee market.
Kraft Foods Inc., is the largest food, beverage, and candy company headquartered in North America and the second largest in the world after Nestlé SA. The company's principal competitors include Pepsico (PEP), General Mills (GIS) , and Nestlé SA. Kraft produces foods and beverages across a wide variety of product categories, making way for competition with many specified, smaller companies.