As with much of the food-processing sector, Kraft's business has been hit by the low-carb diet craze. Kraft, which makes numerous high-carb products such as Oreo cookies and Ritz crackers, earned $698 million in the second quarter of 2004 compared with $949 million in the 2003 period.
This represents a 26 per cent drop in second-quarter profits, a significant downturn for the US's largest food company. The latest results signified back-to-back double-digit earnings drops, following the 34 per cent decline in the first quarter.
The group has also reported a reduced full-year earnings outlook, citing the spike in commodity prices. Most of the group's largest commodities have seen significant price increases, with prices for barrel cheese up 70 per cent on a year earlier.
The increases have been only partly offset by softer prices on other raw materials such as peanuts, sugar and cocoa. In addition, the group has been unable to pass on price increases in some products such as coffee and biscuits due to competitive pressures or weak markets.
But despite poor results, Kraft maintains that it is on course to be well-positioned for the second half.
"We remain committed to improving the long-term health of our brands and will not let short-term commodity market fluctuations distract us from this key imperative," said CEO Roger Deromedi.
Kraft hopes to reverse the downward spiral through spending a projected $500 million to $600 million more on marketing this year than in 2003 in order to boost demand. Kraft says that during the second quarter, the company improved top-line momentum in categories where its marketing spending increased 10 per cent or more versus last year, with aggregate volume in these categories up 4 per cent and revenues up 7 per cent.
"We are pleased with the progress we've made in building a stronger Kraft through our sustainable growth plan," said Kraft chief executive Roger Deromedi. "We're in the early stages, but we're confident that we will continue to build value for consumers, customers, employees and shareholders over the long-term."
But cost cutting also represents a major part of the company's sustainable business strategy. As of this month, Kraft completed its migration in the US to consumption-based trade spending for its retail partners. Under this programme, trade support funds are paid based on what is purchased in-store by consumers versus what is shipped into warehouses, thereby reducing supply chain costs and increasing the effectiveness of trade spending.
The group is also undertaking a significant programme of closures, although according to a company statement, Kraft is "succeeding in driving out costs and assets… including the announcement of 12 plant closings year-to-date. The company expects to further its strong productivity track record by continuing to eliminate unnecessary complexity in its supply chain".
These 'decomplexity' initiatives, as Kraft calls them, also include global sourcing and harmonisation of ingredients, reducing the number of individual varieties of products and streamlining product formulas and packaging designs on a global basis.
Ultimately, the company hopes that these efforts will enable the company to better leverage innovations and bring products to market with greater speed at a lower cost.
Kraft Foods is the largest branded food and beverage company headquartered in the United States and the second largest worldwide. Kraft Foods markets many of the world's leading food brands, including Kraft cheese, Jacobs and Maxwell House coffees, Nabisco cookies and crackers, Philadelphia cream cheese, Oscar Mayer meats, Post cereals and Milka chocolates, in more than 150 countries.