October 22, 2004

Talk with Kraft Foods CEO Roger Deromedi

Roger Deromedi, CEO Kraft Foods (photo: Peter Rondholz)
Roger Deromedi: "We must accelerate innovation"
Roger Deromedi, CEO of Kraft Foods, Inc., is a pleasant man with a big task on his hands.

Deromedi (51) knows that he has to reorganise the world's second-largest food group (2003 revenues: €25.2bn) in order to create a new growth model and to regain market share.

In a sense, Deromedi also has to fight history. Kraft Foods is a huge conglomerate resulting out of General Foods, Kraft, Jacobs Suchard and Nabisco. Now, that's a lot to focus.

Since 1998, the Northfield/Illinois-based company belongs to US tobacco giant Philip Morris which was renamed Altria Group, Inc. in January last year.

Although Kraft Foods managers will never admit it openly, one could well imagine them secretly yearning to free themselves from the yoke of Big Tobacco.

The lawyers, however, maintain that this would constitute fraudulent conveyance.

Now, don't they call this being between a rock and a hard place?

INTERVIEW


Mr. Deromedi, despite 2003 sales of $31bn and a 99 per cent penetration of US pantries, Kraft Foods has hit a wall of growth, barely managing to stay ahead of population gains. To what extent was this caused by price pressure from the likes of Wal-Mart and growing competition from grocery store brands?


There is increased value consciousness among consumers, driven by economic factors and a lack of confidence in the economy.

However, at the same time retailers such as Wal-Mart in the US, with its slogan "Always Low Prices", or the German hard discounters in Europe are bombarding them with price messages.

The challenge for us in this environment is to improve our "brand value equation" so that the relationship between our product benefits and prices is sufficiently favorable to motivate the consumer to buy our brands rather than store brands.

So we must become even better at finding innovations which differentiate our products and increase our marketing spend in order to build brand image.

Will this also mean price cuts? 

In some cases, where our prices are too high in relation to the competition and to the benefit bundle we are delivering, we need to reduce them in order to gain or regain market share.

I am a big believer in relative market share and market share growth as the ultimate measure of whether consumers are choosing our brands versus the competition.

Recently, Kraft Foods announced its fourth consecutive decline in quarterly profit, and your shares are now trading a third down from their peak in June 2002. Is it crisis time in Northfield, Illinois? 

No. We prefer to take a longer term view of the business and focus on the strategies that will deliver sustainable growth.

The sustainable growth plan that we announced at the beginning of the year is on track, for instance in terms of our restructuring efforts, and our new global organization is responding well to the challenges of the new environment.

If you look at the earnings declines in 2003, they reflected rising costs and the issues we had in managing the price-value equation in several of our categories.

The declines in 2004 partly reflect the increased investments we are making to help improve our momentum on the top line as well as the planned charges from our restructuring program. So we are very consciously managing the business for the long-term.

In July, you also lowered full year EPS guidance for 2004? 

This was a commodities-driven earnings decrease. It was also a strategic choice we made when cheese costs rose to a totally unexpected historic high of $2.17 a pound. We decided to reduce our earnings rather than to fully pass the increase on via a price hike.

Since then cheese costs have fallen to $1.50 a pound. Had we raised prices too much, it would have been difficult to realign prices when cheese costs came back down again. Also, we didn't want to cut our marketing because it is important to build the top line.

What action are you taking to address the obesity issue and improve the nutrition profile of your brand portfolio?

Experts around the world agree that obesity has many causes and that it is a growing problem, not only in developed markets but also in some developing markets.

Changes in diet are a factor, but changes in activity levels are also important. It is really about managing the balance between calories-in and calories-out.

So it's just a matter of personal responsibility?

No, we as an industry and all the other stakeholders involved, have a role to play in helping people find the right balance. The challenge is many-faceted which is why Kraft is focused on multiple things.

We are working hard to transform our product portfolio so that we will provide more choices to include reduced calories and reduced carbohydrates or fats.

For example, we now offer our cookies and crackers in 100 calorie packs, which helps consumers to know exactly what they are eating.

We're also looking for ways to provide more and better nutritional information to our consumers, to adjust our marketing practices and to advocate public policy changes that will constructively address this issue over the long-term.

By offering more product choice via more packaging sizes, aren't you putting more SKU pressure on retailer shelves already flooded with products? 

We are aggressively eliminating slow-moving items from our portfolio via our "de-complexity" program, one element of which we call "SKU rationalization". This year we are eliminating 11 per cent of our SKUs in the US and 12 per cent abroad.

The important thing to remember about elimination is that many suppliers will quote a gross number, i.e., just the ones they have cut, but they don't mention the ones they've added.

Our figures are net-net, and we're giving consumers more of the right choices by eliminating those slow-moving items which are not working collectively for either of us while providing more health and wellness choices.

Isn't downsizing packs counterproductive for a brand manufacturer trying to maximize top line?

Obviously, we're here to drive shareholder value, but this is driven by what the consumer chooses to buy. At the end of the day we work for consumers who desire both choice and variety. As their needs change, we must move rapidly to address them.

In order to achieve our top-line growth target of 3 per cent ongoing revenue, we must provide more and different offerings which people want to buy and that are in- line with consumer trends. So we can create a win-win situation, if we approach change with the right mindset.

What are you doing as regards consumer information? 

We have decided to provide nutrition labeling on our products on a global basis, even in countries where this is not required by law.

We were also one of the first companies to move to multi-column labeling in the US that makes it easier for consumers to choose the portion size of the foods they eat.

In response to FDA demands for clearer communication on smaller packages, we now plan to offer information regarding calorie content and nutrients contained in the entire pack in addition to the information we already provide on the basis of standard serving sizes so that consumers don't have to do the maths.

Furthermore, we offer extensive information on our websites about what's in our products. We have also been working very hard to enhance the nutrition profile of our broad portfolio as well as developing new products that meet consumers' health & wellness needs.

And we are looking at ways that we can communicate this more clearly to our consumers.

But doesn't giving extra information on labeling create space difficulties on your packaging?

This is a challenge. We are therefore trying to simplify our pack graphics so that, if we include enhanced nutrition information and advice, we provide consumers with a consistent place and shape to facilitate recognition.

In the US, where there is already very extensive mandatory nutritional labeling, one can use a truncated or shortened version for smaller packets, or, if they are very small, refer customers to a hotline or website for more detailed information.

So there is a range of ways one can communicate information, but overall the art is to communicate with consumers in a simple way.

Due to the importance of nutrition, we are increasingly printing health & wellness or nutritional information where we might formerly have had marketing texts.

How do you react to Tesco's experiment of labeling foods red, yellow or green in order to traffic-light their nutrition profile for consumers? 

Our understanding is that Tesco is still evaluating the options. How any food fits into an individual's diet is a complex matter. If an item is color-coded red, then it is telling the consumer not to eat it at all.

In fact, for most people, just about any food can be incorporated within a balanced diet. Much depends on who you are, what type of metabolism you have, what else you're eating etc.

I do nevertheless agree that nutrition labeling needs to be made simpler to help consumers in their choices. This is something that we are continually looking at.

What marketing changes have you made? 

We have eliminated all in-school marketing of our brands and have established product guidelines for in-school vending as well as clear policies on how we market our products.

We also sponsor many health & wellness community programs oriented towards nutrition and activity such as the Triple Play after school program with the Boys & Girls Clubs of America in the US.

Four years ago, Kraft Foods made a big bet on high-fat snacking when it purchased Nabisco and promised double-digit growth rates. The deal was made just as consumers were becoming obsessed about obesity and other food-related health issues. In retrospect, do you think your timing was wrong?

No, I don't think it was. I still have great belief in the biscuit category. We are going through a challenging time with consumers trying to avoid carbohydrates.

As a company, we need to respond more quickly to these challenges, and we are now making different product offerings to meet those demands. For instance, this year we've just introduced two cookies with whole grains which are already best-selling items.

People still have a need for snacking because they live busy lives, and there will always be room for treats as part of any balanced diet.

Cookies and crackers can be a terrific snack, and we have some wonderful brands, but the challenge is to make them more in tune with consumer health and awareness concerns.

Incidentally, it's worth noting in this context that our "Triscuit" crackers, which are very popular in the US, have always been a whole grain product. So we're now informing consumers more about their health benefits.

Many of your increasingly health-conscious customers are turning to fresh produce. Millions of US consumers shop at Whole Foods Market and other such organic-oriented players, while natural foods and gourmet products boast the best growth rates in the industry. How are you changing Kraft Foods to adapt to this?

We are transforming our portfolio in this direction internally via new product developments and externally via tack-on acquisitions. A good example of the latter is our purchase last year of the trademark "Back to Nature".

At the time we acquired the business, it only had a few cereal and granola items. In only nine months, we have developed a range of over 30 items in seven different categories.

These ideas will address the needs of new consumers who are looking for products which are natural and organic and are now being sold in Whole Foods Markets and Wild Oats.

As you review your portfolio, how likely are you to make divestures? 

One of the criteria to look at is category scale. There is real benefit in being strong in certain categories because one can gain leverage from one's technologies. A great example of this is in coffee where we obtain huge benefits across many countries by having global scale.

For instance, we have just introduced our latest innovation. The "Tassimo" proprietary hot beverage system in our French lead market is a platform that we intend to take throughout the world.

However, if you're in a category in only one country, one must consider what one's sustainable competitive advantage actually is versus more global competitors within that category.

Additionally if you don't have enough scale within a country, you can't support the infrastructure, and your sales force and revenue base are too small, so you need to balance category and country scale with your sustainable competitive advantage.

Your former co-CEO Betsy Holden was generally considered a virtuoso at line extensions. But do you think Kraft was so good at building brands that it forgot to create enough new ones? 

Across our company, both in North America and internationally, at some point in the cycle we probably did too many line extensions of ideas that weren't incremental volume building. Just having new products which are cannibalistic doesn't drive overall revenue growth.

This is why one of our key criteria when we look at new products today is what incrementality they will give us and our retail customers over the long-term.

You need to keep a brand fresh via new flavors and new products in order to keep the consumer interested, but we're trying to ensure that we also have some big break-out ideas, whether that be the "Tassimo" beverage system or the "Back to Nature" range of organic and natural foods.

We look for ideas from every source, but most importantly from our consumers. 

In fact, you have had no successes of note since mid-1990?

We had a terrific success with our frozen pizza range "DiGiorno" pizza which now achieves annual sales of over half a billion dollars.

A truly transformational idea for frozen pizza we've just introduced to the US is the "DiGiorno" microwave rising crust pizza. This uses proprietary dough technology and oven props to raise crusts in only five or six minutes versus the 20 to 22 minutes you need in a standard oven!

Another category which has done very well for us is Ready To Drink beverages in the US with convenient packaging formats including pouches. Although the category itself has slowed down somewhat, we'll continue to innovate with new forms, shapes, sizes and beverage types.

One of the categories which has also slowed down is Lunchables, which we invented in the early 90s, but we are going to adjust the product offerings to create future growth.

To what extent was your reorganization in January inspired by similar restructuring plans at Gillette and P&G? 

We reorganized Kraft to compete on a global basis and leverage our scale. Organizational structures need to be different for different types of companies reflecting their history, culture and the categories they compete in.

However, all consumer goods companies face the same challenge, i.e., how they work the matrix of categories versus countries versus the various functions which drive that business system: from technology to procurement, from manufacturing to distribution and from sales to marketing.

Were these changes motivated by plans for a full spin-off of Kraft from your holding company Altria Group, Inc. in 2005? 

This is for Altria to decide what it thinks would best enhance its own shareholder value.

But surely as CEO of Kraft you have your own preferences? 

There are pluses and minuses to being associated with Altria. We have a tax-sharing agreement with them and share some services which have been beneficial to us over the years.

On the flipside, we don't participate in some of the stock indices because of their ownership. But the most important thing we can do is to drive our top-line growth and create overall shareholder value.

Whether Altria owns 84 percent or 100 percent doesn't make a difference to me in terms of business strategy.

In March this year, employees and investors were informed that their chief executive had been admitted to hospital with an "undiagnosed medical condition". How is your health today? 

Excellent! I was hit by a viral infection and dehydration, so I now drink lots of water and especially Fruit O2 fruit flavored water from our recent US acquisition of Very Fine Products, Inc.!

What personal vision inspired your major reorganization of Kraft Foods? 

My definition of leadership is the ability to communicate a vision and gain commitment to it. The vision that we established for Kraft at the beginning of the year is to help people around the world eat and live better.

We have spent a lot of time in communicating what this means to our employees and I believe that they generally understand and are committed to what it will take to drive towards that vision.

As part of this, I want the corporate culture of Kraft to embrace change more fully. We must accelerate innovation and execution, as well as the speed of driving through a productivity idea and of taking an idea from one market to another market.

We must also continue to simplify our business processes.

Finally, as the driver of our business is the consumer, we must get more and more of our employees talking with and being part of the lives of consumers in order to find new ways to delight them. If we can do this, then we'll be very successful.

What type of boss is implementing the reorganization today? 

As regards my style of leadership, I like to help and coach people to understand what will make the business better.

I like to hear lots of different points of view, but I like to hear them quickly, decide and move on quickly. I also like to be fact-based. Many people say I am detail-oriented, but I like decisions to be based on facts.

Intuition is an important driver, but in today's environment having the appropriate facts helps you drive the right decisions. After all, my job is to ensure that the vision and the strategies are right, that the right resources are in place and that there is commitment to growing the business.

But, in the end, the most important thing I can do is to make sure that we've got the right people driving the different parts of the business.


Related article in German: Interview by Mike Dawson in Lebensmittel Zeitung, no. 43, 22.10.2004


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