Sticky Swamps - You just can't get moving - Kraft

Yesterday Crain's Chicago Business reported that Kraft expects its sales volume to fall 5% this quarter (read article here).  Kraft lost market share to competitors in 75% of its businesses!  Do you suppose the demand for food is declining?  How about the demand for groceries?  To the contrary, reports have been that people are eating less at restaurants - leading to the failure of a few chains, and the closing of several units by others - and eating more at home.  We've been led to believe that sales of frozen foods and basics are up due to the poor economy and movement toward thrift.  If so, why would the purveyor of many basics and frozen food say volume is expected to decline more than the economy is contracting?  Why would it be losing share?

The Chicago-area Kraft executives would like to blame this good management decisions to close unprofitable lines.  But do you believe that?  Why would any business voluntarily cut revenues in this kind of economy?  This rings more as an excuse than a real explanation of the problems within Kraft.

What we know is that Kraft has been woefully short on new products for a decade.  What was the last new product you remember from Kraft?  In fact, it was only a couple of years ago Kraft was selling growth businesses to "consolidate" its business behind its largest brands - like Velveeta and Mac & Cheese.  Then the company raised prices last year, blaming rising commodity costs, opening the door for branded and private label competitors.  Kraft is a company with very old products, and higher prices, and no indication of any innovation.

You would think with the economy moving its way, Kraft could capitalize.  But when companies hit a growth stall, they lose the ability to capitalize.  As they focus on optimizing old products, brands and business practices they increasingly become out-of-step with the marketplace.  As markets shift, they miss shifts as they maintain internal focus on the old processes which once produced good returns, but deteriorated.  The more they focus, the bigger the gap between what they do, and what the market wants.  As returns keep struggling, they continue doing more of what they always did - and explain away poor results. 

Kraft is a huge corporation, a recent addition to the Dow Jones Industrial Average.  But the company focus is all from the past, not about the future.  The company insufficiently studies competitors, and clearly eschews Disruptions.  And you can look all over company documents and not find a whiff of White Space to try new things.  Without innovation, and no sign of a process to lead them toward innovation, it would be a mistake to expect better performance.  Even if Kraft is one of the largest consumer goods companies in America.

Comments

[Nathan J Clouden]

I thought Kraft also made the private label brands at the supermarkets?

[Adam Hartung]

Right you are Nathan. Kraft does make private label cheese. The problem is they have not developed a business model to grow that business and gain greater returns. The company remains stuck in old notions of using private label as "volume filler" with branded products as their method of generating higher returns. So they don't take the actions to grow private label - which may have the potential to be a big winner (especially today). Nor are they introducing new branded products to generate growth and greater returns in branded goods. They are stuck trying to increase profits on brands that are no longer exciting. That sort of Defend & Extend thinking has produced below-market returns for more than a decade!