KRAFT IN STORMY WATERS

Aslowdown in profits growth, three senior management de-partures and the prospect of more bad news is fuelling speculation that Kraft Foods International will shift control of its European marketing from Zurich to the US.

While the US arm of the company denies any such move, sources at the European operation, which has brands ranging from Philadelphia cheese to Carte Noire coffee and Toblerone chocolate, admit that it is under consideration.

It has been a disappointing year for Kraft’s international food business, and according to the company there is more disappointment to come. Ravaged by soaring coffee prices and damaged by currency fluctuations, its ragbag collection of coffee, chocolate and grocery brands is unable to match the sales and profits growth of its US counterpart, Kraft General Foods.

First quarter figures from parent company Philip Morris show that Kraft’s international food business – 90 per cent of which is in Europe – suffered a five per cent fall in sales compared with the first quarter of 1996. This was accompanied by a rise in profits of just under four per cent to $273m (168m) – way below the ten per cent growth experienced in the US. It contrasts with previous years where Kraft Foods International experienced sales jumps of 15 per cent, and profit hikes of nearly nine per cent.

A spokesman for Philip Morris says: “The international business is still not level with North American food, and the pattern will continue. Work continues to improve the performance of the international business.”

By contrast, the Philip Morris international tobacco business has had another stunning year, with sales up 11 per cent and profits up by 15 per cent to 1.2bn.

This goes some way to explaining why Philip Morris has handed ultimate control of its international food business to one of its senior tobacco executives, president of Philip Morris International, William Webb. Previously, Kraft’s worldwide business was handled by James Kilts, but he stepped down in March. According to the company Kilts wanted “a more direct role in managing a major business” – a phrase which has re-emerged in the past two weeks to explain other senior departures.

Kilts has not yet found such a role. The structure changed after his departure, and the worldwide food business began reporting directly to Webb, who assumed the position of chief operating officer of Philip Morris Group in April.

This could mean some big changes in the way Kraft Jacobs Suchard, the European division, is run. KJS’s three top marketers are quitting the company. Senior vice president for marketing, Albert Freese, is leaving – just like Kilts according to Kraft – because he wants to “pursue opportunities which will provide him with a more direct role in managing a business”. KJS says that Freese’s job will be filled, though there are no announcements yet. It could be that Philip Morris drafts in a top tobacco marketer to the post.

Freese is joined in the exodus by his coffee marketing director Walter Struwe and confectionery director Gerry Reid (MW July 3 and 10). Their departures are seen by some as the consequence of uncertainty over the future direction of the food group. Others view it as a deliberate attempt to strip out costs by cutting out a whole level of manage- ment – the theory is that the savings will be invested in the brands on a local rather than pan-European basis.

While there has been no formal announcement of a restructure at the Zurich head office, top marketers wonder how the company is going to address a deep-rooted structural problem – they have to increase profits on European brands which are in mature markets with little room for growth.

Rumours abound in Zurich as to the direction the marketing of Kraft’s European brands will take. Last year, Kraft Foods International, which oversees all Kraft’s food and beverage interests outside the US, appointed John Bowlin, described as a hard-nosed former Kraft North American president and operating chief, as chief executive.

Just what he plans to do about the lack of growth in Kraft’s international brands is a subject of much speculation in Zurich. Under the tutelage of newly installed chief operating officer Webb, there are suspicions that Bowlin is preparing a major restructure of the international business.

“Bowlin is striving to create power brands to maximise their value on the bottom line,” says one Kraft source, who believes the food company will create a portfolio of global brands managed in local rather than pan-European markets. “There is a worldwide brand review going on, looking at investments in local brands. For instance, why have six brands of coffee in the UK?”

One option being actively considered is to centralise the company’s European marketing in the New York office, taking it away from Zurich, and trying to create synergies by combining marketing for North America with the rest of the world. This would imply the Americans believe KJS’s problem is fundamentally one of management and direction, rather than a result of the organisation’s historical development, which is what the Europeans argue.

Philip Morris admits that it has “an ongoing strategy of leveraging scale”, or as one US analyst puts it, the company is “constantly on the move in searching for economies”. One example is the unification of the salesforces of Kraft General Foods in the US. Where once there were many, there is now just one.

And Kraft says it “hopes for similar benefits from similar actions in European markets”. The spokesman refuses to say whether there are similar moves afoot to centralise marketing in the US, but admits “there is not an overriding vision which says we must centralise marketing”.

Kraft’s European problem is that the sectors of the packaged grocery market where it operates are not growing. It is hard to boost profits in the mature markets of confectionery, in coffee or in niche grocery brands, but this is what Philip Morris shareholders are demanding.

In the US, Kraft operates in relatively high margin growth areas such as breakfast cereals, soft drinks and frozen pizzas. Over the past year, Americans have stuffed themselves with a fifth more Kraft-made frozen pizzas, pigged out on at least ten per cent more of the company’s Jell-O Cheesecake Snacks and Del Monte Pudding Cups and slurped more of its Kool-Aid and Tang soft drinks than ever.

The European division, with a turnover of some $9bn (5.5bn), operates in three major areas: confectionery, with Toblerone, Milka and the Dime bar; in spreads and cheeses such as Dairylea and Philadelphia; and in coffee, including Kenco and Maxwell House brands, which accounts for two-thirds of its profits and 40 per cent of volume. “The arithmetic of KFI is driven by coffee. But it is a low margin, non-growth business,” says one insider.

Philadelphia is undoubtedly leader of its market and is one of Kraft’s strongest brands, but is worth only $200m (123m) across Europe, a mere four per cent of total turnover. Germany is Kraft’s biggest European market, accounting for some $3bn (1.8bn) of the company’s annual turnover.

But Kraft has been unable to take its top brands into new markets. The attempt to launch the Milka confectionery brand in the UK at the end of the Eighties failed. The company has introduced its classy Carte Noire brand into the UK, but insiders say “it hasn’t exactly set the world alight”, although it is now a 12.5m brand according to IRI Infoscan – which gives figures for multiple supermarkets and Co-ops. Across all outlets, it may well have already achieved Kraft’s goal of making it a 15m brand by the end of this year.

In the UK, where Kraft turns over close to $1bn (617m) each year, the company has failed to establish any major confectionery brands.

Rivals Nestlé and Cadbury are locked in an expensive battle in the UK, and are both launching lookalike versions of each others’ brands. Marketing Week revealed Nestle’s plans to introduce a bar called Maverick, almost identical to Cadbury’s Fuse bar, launched last year with a 6m marketing budget (MW July 3). Cadbury, in its turn, is working on its own copy of Smarties called Astros (MW June 26). Against this, Kraft has its speciality gift bar Toblerone, the tiny Dime countline and little else. The need for new product development is immense.

Kraft’s problem is not that it is doing badly in Europe – it is still making profits of $250m (154m), but that it is hard to see how it can do any better. One solution is to readjust its portfolio, through acquisition and divestment of brands, through developing new products or by making further attempts at internationalising existing brands.

It needs a couple of fast growth areas, such as frozen pizzas or some revolutionary kind of dessert – areas which have helped lift Kraft in the US. It is unlikely US bosses would be prepared to splash out for acquisitions to add to a business which they already see as a poor return on investment.

Developing strong new grocery brands is a risky business, but a risk that may be worth taking. Making its brands more international is a route Kraft is already pursuing in Europe, and sometimes it works – as in the case of Carte Noire – and sometimes it doesn’t – as with Milka.

According to sources Bowlin believes that more efficient use of marketing could give the brands a greater international focus, and they could start to think about taking on the big brands in Europe. But he will also have to adjust the portfolio to give the international division a chance to bring in some real profit growth if the disappointment, which Kraft expects in the coming months, is to be reversed.