Additionally, the company’s Toblerone brand received a Gold Quill award from the InternationalAssociation of Business Communicators and a two Anvil Awards from the Public Relations Societyof the Philippines for the brand’s National Thank You Day program in Manila. Its Philadelphia brandwon a Global Effie Award from the American Marketing Association (AMA) for the ‘A Little Taste ofHeaven’ campaign. Strong brand image gives Kraft’s products a powerful brand recall and enablesthe company to command a premium for its products.Focus on research and development The company has been strongly focusing on research and development (R;D) over the past fewyears.The company’s research and development expense was $477 million in FY2009, $498 millionin FY2008, and $447 million in FY2007.The company has more than 2,300 food scientists, chemistsand engineers working primarily in six key technology centers: East Hanover, New Jersey; Glenview,Illinois;Tarrytown, New York; Banbury, the UK; Paris, France; and Munich, Germany.These technology centers are equipped with pilot plants and state-of-the-art instruments.The companyhas a total of 11 R&D centers. Additionally in November 2009, Kraft Foods announced its plans to invest E15 million ($20 million)in constructing a new Biscuit Research & Development (R&D) Center in Saclay, France. Further,the company is also creating a pipeline of new product platforms like Cakesters and Deli Creationsand reinventing iconic brands like Philadelphia, Oreo, Kool-Aid and Oscar Mayer.
The company’sfocus in R;D facilitates development of new products and enhancements to existing products thathelps in maintaining a strong market position.Strong distribution network Kraft’s multi-category distribution and consumer awareness are its primary strengths.The distributionfunction at Kraft currently encompasses two distinct operations and organized around varying go-to-market strategies: warehouse delivery and direct store delivery.The company primarily followswarehouse form of delivery in North America, and distributes its biscuits and frozen pizza productsthrough two direct-store-delivery systems. Kraft’s distribution facilities consist of 313 distribution centers and depots worldwide. In North America,the company has 298 distribution centers and depots, more than 75% of which support the directstore delivery systems. Outside North America, the company has 15 distribution centers in 10 countries. Further, the company supports the selling efforts through three principal activities: consumeradvertising in broadcast, prints, outdoor and on-line media; consumer incentives such as couponsand contests; and trade promotions to support price features, displays and other merchandising. Astrong distribution network enables the company to manage its inventory in an efficient manner.Strong focus on environmental issues Kraft Foods maintains strong focus on environmental related issues. As an indication of its strongfocus on sustainable issues, the company has been named to the Dow Jones Sustainability Index– last five years in a row on the North America Index and four years running on the World Index. Kraft Foods, Inc.Page 6 © Datamonitor Kraft Foods, Inc. SWOT Analysis
The company has been reducing the environmental impact of its own factories preventing pollutionand promoting the sustainability of the natural resources. For instance, the company is working onthe reduction of CO2 from all its operating sites. Further, the company sources all its key agricultural raw materials like coffee, cocoa, cashews,sugar, dairy products, wheat and vegetable oil on a sustainable basis.Through its Sustainable Program, the company plans to cover criteria such as reducing fertilizer and pesticide use, conservingwater, promoting biodiversity and using less energy.The strong focus on environmental issues wouldfoster strong relationships with its suppliers and also improves its brand image. Weaknesses Unfunded employee post retirement benefits The company provides pension benefits and other post-retirement health and life insurance benefitsto employees. During FY2009, the group incurred a total of $535 million for the pension and postretirement benefit expenses.The group also paid a total of $583 million for the pension and postretirement benefit plans during FY2008.
At the end of December 2009, the company’s projected pension and post-retirement benefit obligationsstood at $10,596 million (58.5% of these are for US plans) as compared to the planned assets of$8,893 million, resulting in an unfunded status of $1,703 million, representing 56.4% of the group’snet profit in FY2009. Sizeable unfunded post retirement benefits would force the group to makeperiodic cash contributions towards bridging the gap, which would reduce cash available for growthplans. Increased debt equity burden The company’s debt burden has significantly increased because of the Cadbury acquisition. As ofDecember 31, 2009, the total debt outstanding for the company stood $18,990 million, as comparedto the EBITA of $5,556 million.This represented a debt/EBITDA of 3 times. After the acquisition ofKraft, the company’s total interest bearing debt increased to around 33 billion, indicating a debt/EBITAof around 4 times, indicating higher debt leverage. In order to bride the gap, the company has takenother measures. For instance, the company plans to use the proceeds of $2.5 billion from thedivesture of its frozen pizza business in North America, towards reducing the debt.Though thecompany plans to initiate other measures to curtail the amount of debt level, still it will be a concernfor the company’s solvency and liquidity position. A high debt ratio would result in a lowered creditrating and hamper its additional debt raising capability. Opportunities Acquisition of Cadbury Kraft Foods, Inc.Page 7 © Datamonitor Kraft Foods, Inc. SWOT Analysis
Kraft foods acquired Cadbury to expand its snacks and confectionary business. In July 2009, KraftFoods made a proposal with Cadbury to combine the two companies.The Board of Cadbury hasrejected this proposal. But in November 2009, Kraft Foods revised its offer to acquire Cadbury andgot competition clearance from US government in the next month. Finally in January 2010, the Britishcandy maker Cadbury recommended to its shareholders Kraft’s improved takeover offer worth $19.4billion, ending a months-long corporate battle to create the world’s largest maker of chocolate andsweets. The combined company is targeting a long-term organic net revenue growth of 5%. Further, thecombination of Kraft Foods and Cadbury is expected to provide potential revenue synergies in distribution, marketing and product development. On a combined basis, Kraft could register a pre-taxcost savings of around $675 million annually by the end of 2012. Further, Kraft’s packaged foodmarket share in all regions is significantly higher than Cadbury’s.While in confectionery business,Cadbury has a significant lead over Kraft, except in Eastern Europe.With this acquisition, Kraftwould gain a leading position in many core emerging markets in Latin America, the Middle East andAfrica and Asia-Pacific.Thus, the combination of Kraft Foods and Cadbury would create a globalpowerhouse in snacks, confectionery and quick meals with a rich portfolio of iconic brands.Growing demand for ‘health and wellness’ products
and services Consumers across the US are showing increased preference for fat-free and healthy food products.Food items containing trans-fat are losing market share to low calorie, low fat products as trans-fatis linked to cardiovascular diseases. Keeping this in mind, Kraft is tapping into people’s growinghealth and wellness concerns by improving the nutritional profile of its snacks portfolio. It has reducedor eliminated trans-fat in most of its products; introduced whole-grain versions of snacks including100% Whole Grain Fig Newtons cookies and 100% Whole Grain Wheat Thins crackers.
Kraft Foodsreformulated fat-free cookies by launching low-fat Oreo; and Nabisco 100 Calorie Packs. As part of its health and wellness strategies, Kraft is focusing on four key opportunity areas thatmeet consumer needs: weight management, nutrient delivery, performance nutrition, and naturaland organic.The company reduced the sodium in many of its products, including Oscar Mayer OvenRoasted White Turkey, Dairylea, regular Triscuit crackers and Triscuit Hint of Sale. For weight management health concern the company launched the South Beach Living line in the US.With atraditionally strong investment in R&D and a new line of low-fat products, the company is in a strongposition to capitalize on the rising demand for healthy food.Growing global confectionary and savory snacks markets The confectionary and savory snacks markets are witnessing significant growth in the global market.The global confectionary market is anticipated at CAGR of 2.9% for the five-year period 2008-2013,to lead the market to a value of $147.7 billion by the end of 2013. Similarly, the global savory snacksmarket is expected to reach a value of $76.3 billion by the end of 2013, at a CAGR of 4.5% over2008–13. Kraft Foods is one of the leading players in the respective markets. Further, the companyis focusing on growth categories to transform into a leading snack, confectionery and quick meals Kraft Foods, Inc.Page 8 © Datamonitor Kraft Foods, Inc. SWOT Analysis
company.Therefore, the company is likely to benefit from its significant presence in the growingmarket conditions for confectionary and savory snacks. Threats Dampened consumer demand Kraft Food’s business is dependent on continuing consumer demand for its products and brands.The economic downturn adversely impacted its business by reducing the demand for some of
itsproducts.The current economic climate is forcing shoppers to watch their expense and look forcheaper options of discounted brands or own label merchandise. Branded goods suppliers like Kraftare facing pressure from the big retail chains like Tesco.These big retailers, for sustaining theirrevenue growths and margins, are promoting their own-labels. Further, the economic conditions areexploiting the price volatility for commodities, which is a significant challenge for the companies likeKraft.The dent in the disposable income of consumers caused by the global economic slowdownis making it increasingly difficult for branded product manufacturers like Kraft Foods to maintain theirsales volume and revenue growth.Intense competition The food industry is highly competitive. Kraft faces fierce competition in all its segments from largenational and international companies and numerous local and regional companies.
The companyfaces stiff competition from Nestle and Groupe Danone in its key markets. Nestle is one of the leadingproducers of food products in North America and Europe, both key markets for Kraft.The companyalso faces competition from other major players such as Campbell Soup Company, ConAgra Foods,H.J. Heinz, Hershey Foods, Kellogg Company, Sara Lee and Clorox. Further, the products of KraftNorth America Commercial and Kraft International Commercial also compete with generic productsand private-label products of food retailers, wholesalers and cooperatives. Increasing competitioncould adversely affect Kraft Food’s market share and margins.Increasing labor costs In recent years, the labor costs are rising in the US and the UK. Because of this, the governmentsmandated increase in minimum wages resulting in an increase in labor costs. For instance, thefederal minimum wage provisions are contained in the Fair Labor Standards Act (FLSA).The federalminimum wage rate in the US, which remained at $5.15 per hour since 1997 reached $6.55 per hourin July 2008, and further increased to $7.25 per hour in July 2009.The minimum wage in the US isexpected to increase further in 2010. Similarly, In the UK, the national minimum wage was increasedto £5.8 (approximately $9.4) in October 2009. In the UK, the minimum wage had gone up by 60%since the government introduced the minimum wage policy in 1999.The company employs around97,000 employees worldwide, with majority of them in the US and Europe.The increased labor costsincrease the company’s operational costs and affect its profit margins. Kraft Foods, Inc.Page 9 © Datamonitor Kraft Foods, Inc. SWOT Analysis