Kraft Foods Inc. announced an expanded turnaround plan Tuesday that includes selling more packaged meals to compete with restaurants as it seeks to revive slumping sales.
Chief Executive Irene Rosenfeld told analysts that the plan will help Kraft cut costs and try to become more relevant to consumers by reframing its business categories, targeting emerging markets and driving growth in popular products such as coffee, pizza, cheese and cold cuts.
“We all understand that now, more than ever, the future of Kraft rests on our shoulders,” she said during a speech in Scottsdale, Ariz. “It’s up to us to make this company great again.”
The world’s second-largest food and beverage maker has struggled in recent years with increased competition and commodity costs and has been working to fix its financial performance. Earnings fell 19 percent during the most recent quarter.
Rosenfeld, who took the company’s helm in June, has spent the last seven months developing her plan. She said late last month that the company’s current turnaround effort wasn’t yet producing acceptable results. She hopes the updated restructuring plan will help Kraft hit its stride by 2009.
“No, Kraft is not going to open retail outlets, but it is going to better compete with foodservice via greater innovation like microwave pizza and sliced cold cuts,” Prudential analyst John McMillin wrote in a research note. “While this approach makes some sense, the bigger picture here is that Kraft is probably still playing ’defense’ against the McDonald’s, Starbucks and Domino’s of the world.”
But the total turnaround effort comes with a hefty price tag: about $3 billion by the end of 2008.
During 2007, the reforms are projected to cost Kraft about 25 cents per share, lowering projected earnings even further below Wall Street forecasts to between $1.50 and $1.55 per share including the charge. Excluding the charge, earnings should be between $1.75 and $1.80 per share.
In exchange, Kraft said it hopes to save about $1 billion a year and increase its revenue by 3 percent to 4 percent, while investing up to $400 million this year — roughly 1.1 percent of sales — in research, marketing and other efforts to enliven the company.
Long term, the company said it hopes to have about 4 percent organic revenue growth while increasing its earnings per share between 7 percent and 9 percent.
Kraft is developing all-in-one meals — such as sandwich and salad kits made with Oscar Meyer meat, Kraft cheese and salad dressings and Planters nuts — some of which are in test phases.
“Our opportunity is to make it easier for consumers to get restaurant-quality food in their home or office at a fraction of the cost,” said spokesman Charlie Simpson.
Analysts remained skeptical about the prospects for the maker of cheeses, Oscar Mayer hot dogs, Maxwell House coffee, Oreo cookies and Jell-O desserts.
“Does anyone believe that an incremental 1.1 percent of sales spent behind the brands is enough to turn this battleship around?” D.A. Davidson analyst Tim Ramey wrote in a research note.
McMillin said he was disappointed that Kraft didn’t announce plans to sell portions of its product portfolio to better focus the company.
“Can Maxwell House, Oscar Mayer, and the rest of the company’s brands all win against the Starbucks of the world and make Kraft sustain sales growth of 4 percent?” he wrote.
Tuesday’s announcement comes as Kraft’s parent company, Altria Group Inc., prepares to spin off its majority stake in the Northfield, Ill.-based company next month.
Kraft said it will begin a two-year, $5 billion share repurchase program after the spinoff is complete.
Kraft shares fell $1.09, or 3.1 percent, to close at $33.86 in trading Tuesday on the New York Stock Exchange.