Kraft Foods Inc. 2009 Case Notes Prepared by: Dr. Mernoush Banton Case Author: Kristopher J.

Blanchard

A.

Case Abstract

Kraft Foods Inc. (www.Kraftfoodscompany.com) is a comprehensive strategic management case that includes the companys calendar December 31, 2008 financial statements, competitor information and more. The case time setting is the year 2009. Sufficient internal and external data are provided to enable students to evaluate current strategies and recommend a three-year strategic plan for the company. Headquartered in Northfield in the U.S. state of Illinois, Kraft Foods Inc. is traded on the New York Stock Exchange under ticker symbol KFT.

B.

Vision Statement (Actual)

One company growing by nourishing lives and finding a better way today one bite at a time.

C.

Mission Statement (Actual)

Make Today Delicious.

Mission Statement (Proposed)

As a global company (3), we pride ourselves in producing superior products and services (2) to our customers. With superior technology (4) and dedicated employees (9), we are constantly working on introducing new and innovative products, meeting our customers expectation (6) and ensuring to achieve higher than expected return to our shareholders (5). Our desire is to be the number one choice for our loyal customers (7, 8). 1. 2. 3. 4. 5. 6. 7. 8. 9. Customer Products or services Markets Technology Concern for survival, profitability, growth Philosophy Self-concept Concern for public image Concern for employees

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D.

External Audit

CPM Competitive Profile Matrix

Critical Success Factors Price competitiveness Global Expansion Organizational Structure Employee Morale Technology Product Safety Customer Loyalty Market Share Advertising Product Quality Product Image Financial Position Total

Weight 0.14 0.08 0.02 0.03 0.08 0.11 0.10 0.08 0.09 0.10 0.11 0.06 1.00

Kraft Weighted Rating Score 2 3 2 3 3 1 4 3 4 4 4 3 0.28 0.24 0.04 0.09 0.24 0.11 0.40 0.24 0.36 0.40 0.44 0.18 3.02

Nestle Weighted Rating Score 3 4 3 2 4 3 3 4 3 3 3 4 0.42 0.32 0.06 0.06 0.32 0.33 0.30 0.32 0.27 0.30 0.33 0.24 3.27

ConAgra Weighted Rating Score 1 2 1 1 2 2 2 2 2 2 2 2 0.14 0.16 0.02 0.03 0.16 0.22 0.20 0.16 0.18 0.20 0.22 0.12 1.81

Opportunities 1. More people are dining out, and food producers are devoting more attention to products designed for restaurants, vending machines, and other foodservice providers 2. Be able to sell to restaurants at a higher margin 3. Consumers are shifting toward food containing less trans fat or fewer calories, or those containing only organic ingredients 4. Bottled water has become well established in the market and enhanced waters containing vitamins or supplements are gaining popularity 5. Consumer prices for baked goods increased 10.7 percent in January 2009 compared to January 2008 6. Input costs for bakers, including commodities such as wheat, eggs, and natural gas, have declined recently 7. The U.S. market for packaged and processed foods has seen large profits in retail sales, and this number is expected to see steady growth 8. Worldwide, demand is also on the rise for packaged type of food as more people adopt a lifestyle that includes less time for the preparation of food 9. The greatest asset of any retail and consumer product company is its reputation and perceived value among consumers

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Threats 1. Obesity is increasing drastically in both children and adults and accordingly consumers are deviating from having snacks, cheeses and such 2. Rising costs of petroleum cause an increase in cost for companies in the food industry and in the agriculture end 3. Food safety programs have been adopted recently as issues of chemical and bacterial contamination and new food-borne pathogens remain a public health concern 4. Because the industry is so competitive, it is difficult for these companies to raise their prices accordingly, and profit margins have suffered as a result due to weak economy and increase in unemployment, many consumers have switched from brand name to generics 5. Due to increase in fuel charges, the cost of distribution can increase as well 6. Global warming becoming a major political issue and food producers are simultaneously cast as perpetrator and potential healer External Factor Evaluation (EFE) Matrix Key External Factors Opportunities 1. More people are dining out, and food producers are devoting more attention to products designed for restaurants, vending machines, and other foodservice providers 2. Be able to sell to restaurants at a higher margin 3. Consumers are shifting toward food containing less trans fat or fewer calories, or those containing only organic ingredients 4. Bottled water has become well established in the market and enhanced waters containing vitamins or supplements are gaining popularity 5. Consumer prices for baked goods increased 10.7 percent in January 2009 compared to January 2008 6. Input costs for bakers, included commodities such as wheat, eggs, and natural gas, have declined recently 7. The U.S. market for packaged and processed foods has seen large profits in retail sales, and this number is expected to see steady growth 8. Worldwide, demand is also on the rise for packaged type of food as more people adopt a lifestyle that includes less time for the preparation of food 9. The greatest asset of any retail and consumer product company is its reputation and perceived value among consumer 0.06 4 0.24 Weight Rating Weighted Score

0.07 0.07 0.07 0.06 0.04 0.09 0.09

3 2 3 3 2 4 3

0.21 0.14 0.21 0.18 0.08 0.36 0.27

0.06

0.18

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Threats 1. Obesity is increasing drastically in both children and adults and accordingly consumers are deviating from having snacks, cheeses and such 2. Rising costs of petroleum cause an increase in cost for companies in the food industry and in the agriculture end 3. Food safety programs have been adopted recently as issues of chemical and bacterial contamination and new food-borne pathogens remain a public health concern 4. Because the industry is so competitive, it is difficult for these companies to raise their prices accordingly, and profit margins have suffered as a result due to weak economy and increase in unemployment, many consumers have switched from brand name to generics 5. Due to increase in fuel, the cost of distribution can increase as well 6. Global warming becoming a major political issue and food producers are simultaneously cast as perpetrator and potential healer Total Positioning Map
Price (High)

0.08

0.24

0.09 0.07

4 4

0.36 0.28

0.04

0.16

0.06 0.05 1.00

3 2

0.18 0.1 3.19

Nestle Kraft Foods Inc. ConAgra

Brand Loyalty (Low) Brand Loyalty (High)

Price (Low)

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E.

Internal Audit
Strengths 1. After two incidents of contamination, the company voluntarily recalled more than 2 million pounds of nuts and has temporarily shut down its manufacturing plants 2. Increase in sale in the developing international markets by 2 percent 3. The company operates in 5 different business segments: snacks, beverages, cheese, grocery and convenient meals 4. Despite economic downturn, the companys revenues increased to US$42.2 billion 2008, while earnings increased to US$2.9 billion 5. Increase in current asset from 2007 to 2008 by almost US$600 million 6. Decrease in current liabilities by around US$6 billion from 2007 to 2008 7. Kraft sells over 100 different brand names Weaknesses 1. Workers at one of Krafts manufacturers in Illinois turned up a batch of fruits and nuts that were contaminated with salmonella in December 2007 with a similar incident in September 2008 2. Drop in sales in the companys snack division from 2007 to 2008 by 2.30 percent 3. Drop in sales in the European Union market by 4.1 percent from 2007 to 2008 4. Despite 9.8 percent increase in price, Kraft Foods lost 0.3 percent market share during 2008 5. The company has over US$27.5 billion in Goodwill 6. Increase in long-term debt by about 50 percent in 2008 from 2007 7. No new innovative product introduction in recent years 8. New CEO in 2006

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Financial Ratio Analysis (December 2009) Growth Rates % Sales (Qtr vs year ago qtr) Net Income (YTD vs YTD) Net Income (Qtr vs year ago qtr) Sales (5-Year Annual Avg.) Net Income (5-Year Annual Avg.) Dividends (5-Year Annual Avg.) Price Ratios Current P/E Ratio P/E Ratio 5-Year High P/E Ratio 5-Year Low Price/Sales Ratio Price/Book Value Price/Cash Flow Ratio Profit Margins % Gross Margin Pre-Tax Margin Net Profit Margin 5Yr Gross Margin (5-Year Avg.) 5Yr PreTax Margin (5-Year Avg.) 5Yr Net Profit Margin (5-Year Avg.) Financial Condition Debt/Equity Ratio Current Ratio Quick Ratio Interest Coverage Leverage Ratio Book Value/Share Adapted from www.moneycentral.msn.com Kraft -5.70 33.00 59.40 6.71 -11.36 11.16 Kraft 16.8 NA NA 1.00 1.60 12.20 Kraft 34.5 8.2 6.0 34.9 9.9 7.1 Kraft 0.82 1.1 0.7 3.7 2.7 17.02 Industry -3.30 20.70 17.90 6.41 -5.09 10.54 Industry 18.6 5.7 1.6 1.05 2.87 12.10 Industry 31.1 8.9 6.4 33.5 9.7 6.8 Industry 1.16 1.2 0.7 8.9 3.2 8,096.92 S&P 500 -4.80 -6.00 26.80 12.99 12.69 11.83 S&P 500 26.7 16.6 2.6 2.25 3.48 13.70 S&P 500 38.9 10.3 7.1 38.6 16.6 11.5 S&P 500 1.09 1.5 1.3 23.7 3.4 21.63

Avg P/E 12/08 24.80

Price/ Sales 0.96

Price/ Book 1.78

Net Profit Margin (%) 4.4

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12/07 12/06 12/05 12/04 12/03 12/02 12/01 12/00 12/08

22.60 18.80 18.30 20.70 15.80 20.40 27.90 NA 24.80 Book Value/ Debt/ Share Equity

1.44 1.78 1.40 1.90 1.83 2.31 1.87 NA 0.96 Return Equity (%) 8.3 8.6 9.9 9.8 8.9 11.8 12.8 8.0 14.2

1.83 2.05 1.59 2.03 1.94 2.61 2.51 NA 1.78

6.5 8.5 8.5 8.3 11.1 11.3 6.4 8.7 4.4

on Return on Interest Assets (%) Coverage 2.9 3.5 5.1 5.0 4.5 5.7 5.8 3.4 3.8 2.9 3.0 5.4 6.8 7.2 6.8 8.9 7.0 3.4 6.5 3.0

12/08 12/07 12/06 12/05 12/04 12/03 12/02 12/01 12/00

$15.11 $17.80 $17.45 $17.72 $17.54 $16.57 $14.93 $13.53 $9.65

0.91 0.77 0.36 0.36 0.41 0.45 0.52 0.61 1.78

12/08 $15.11 0.91 8.3 Adapted from www.moneycentral.msn.com

Internal Factor Evaluation (IFE) Matrix Key Internal Factors Strengths 1. After two incidents of contamination, the company voluntarily recalled more than 2 million pounds of nuts and has temporarily shut down its manufacturing plants Weight Rating Weighted Score 0.18

0.06

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2. Increase in sale in the developing international markets by 2 percent 3. The company operates in 5 different business segments: snacks, beverages, cheese, grocery and convenient meals 4. Despite economic downturn, the company's revenues increased to US$42.2 billion 2008, while earnings increased to US$2.9 billion 5. Increase in current asset from 2007 to 2008 by almost US$600 million 6. Decrease in current liabilities by around US$6 billion from 2007 to 2008 7. Kraft sells over 100 different brand names Weaknesses 1. Workers at one of Krafts manufacturers in Illinois turned up a batch of fruits and nuts that were contaminated with salmonella in December 2007 with a similar incident in September 2008 2. Drop in sales in the company's snack division from 2007 to 2008 by 2.30 percent 3. Drop in sales in the European Union market by 4.1 percent from 2007 to 2008 4. Despite 9.8 percent increase in price, Kraft Foods lost 0.3 percent market share during 2008 5. The company has over US$27.5 billion in Goodwill 6. Increase in long-term debt by about 50 percent in 2008 from 2007 7. No new innovative product introduction in recent years 8. New CEO in 2006 Total

0.08 0.06 0.08 0.08 0.08 0.05

4 4 4 4 4 3

0.32 0.24 0.32 0.32 0.32 0.15

0.06

0.06

0.07 0.06 0.06 0.06 0.07 0.09 0.04 1.00

1 2 2 1 1 1 2

0.07 0.12 0.12 0.06 0.07 0.09 0.08 2.52

F.

SWOT Strategies
Strengths 1. After two incidents of contamination, the company voluntarily recalled more than 2 million pounds of nuts and has temporarily shut down its manufacturing plants Weaknesses 1. Workers at one of Krafts manufacturers in Illinois turned up a batch of fruits and nuts that were contaminated with salmonella in December 2007 with a similar incident in

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2. Increase in sale in the developing international markets by 2 percent 3. The company operates in 5 different business segments: snacks, beverages, cheese, grocery and convenient meals 4. Despite economic downtime, the companys revenues increased to US$42.2 billion 2008, while earnings increased to US$2.9 billion 5. Increase in current asset from 2007 to 2008 by almost US$600 million 6. Decrease in current liabilities by around US$6 billion from 2007 to 2008 7. Kraft sells over 100 different brand names Opportunities 1. More people are dining out, and food producers are devoting more attention to products designed for restaurants, vending machines, and other foodservice providers 2. Be able to sell to restaurants at a higher margin 3. Consumers are shifting toward food containing less trans fat or fewer calories, or those containing only organic ingredients 4. Bottled water has become well established in the market and enhanced waters containing vitamins or S-O Strategies 1. Develop a new product line, focusing on organic ingredients (O3, O6, S4, S5, S7) 2. Acquire a small competitor that sells to restaurants and / or intermediary channels (O1, O2, O6, O8, S2, S3)

September 2008 2. Drop in sales in the companys snack division from 2007 to 2008 by 2.30 percent 3. Drop in sales in the European Union market by 4.1 percent from 2007 to 2008 4. Despite 9.8 percent increase in price, Kraft Foods lost 0.3 percent market share during 2008 5. The company has over US$27.5 billion in Goodwill 6. Increase in long-term debt by about 50 percent in 2008 from 2007 7. No new innovative product introduction in recent years 8. New CEO in 2006

W-O Strategies 1. Improve the quality by educating the workers on how to test and sample products before they are shipped (W1, O9)

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5.

6.

7.

8.

9.

supplements are gaining popularity Consumer prices for baked goods increased 10.7 percent in January 2009 compared to January 2008 Input costs for bakers, included commodities such as wheat, eggs, and natural gas, have declined recently The U.S. market for packaged and processed foods has seen large profits in retail sales, and this number is expected to see steady growth Worldwide, demand is also on the rise for packaged type of food as more people adopt a lifestyle that includes less time for the preparation of food The greatest asset of any retail and consumer product company is its reputation and perceived value among consumers S-T Strategies 1. Improve distribution in European market with new and innovative organic products (S2, S3, S4, S5, T1, T2, T3) 2. Open additional small distribution center in Europe and other regions where sales are increasing in order to reduce distribution costs (S2, S3, S7, O1, O2, O8) W-T Strategies 1. Implement a better quality control internally and with suppliers to reduce food contamination (W1, T3, T6) 2. Discontinue products in snack division that are not selling (W2, W4, T1, T2, T5, T6)

Threats 1. Obesity is increasing drastically in both children and adults and accordingly consumers are deviating from having snacks, cheeses and such 2. Rising costs of petroleum cause an increase in cost for companies in the food industry and in the agriculture end 3. Food safety programs have been adopted recently as issues of

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chemical and bacterial contamination and new food-borne pathogens remain a public health concern 4. Because the industry is so competitive, it is difficult for these companies to raise their prices accordingly, and profit margins have suffered as a result due to weak economy and increase in unemployment, many consumers have switched from brand name to generics 5. Due to increase in fuel charges, the cost of distribution can increase as well 6. Global warming becoming a major political issue and food producers are simultaneously cast as perpetrator and potential healer

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G.

SPACE Matrix

FS
Conservative
7 6 5 4 3 2 1

Aggressive

CS

IS
-7 -6 -5 -4 -3 -2 -1 -1 -2 -3 -4 -5 -6 1 2 3 4 5 6 7

Defensive

-7

Competitive

ES
Financial Stability (FS) Return on Investment Leverage Liquidity Working Capital Cash Flow Financial Stability (FS) Average Competitive Stability (CS) Market Share Product Quality Customer Loyalty Competitions Capacity Utilization Technological Know-How Competitive Stability (CS) Average 3 1 4 4 4 3.2 Environmental Stability (ES) Unemployment Technological Changes Price Elasticity of Demand Competitive Pressure Barriers to Entry Environmental Stability (ES) Average Industry Stability (IS) Growth Potential Financial Stability Ease of Market Entry Resource Utilization Profit Potential Industry Stability (IS) Average -5 -3 -2 -4 -4 -3.6

-2 -3 -3 -4 -4 -3.2

5 3 4 4 4 4

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Y-axis: FS + ES = 3.2 + (-3.6) = -0.4 X-axis: CS + IS = (-3.2) + (4.0) = 0.8

H.

Grand Strategy Matrix

Rapid Market Growth Quadrant II Quadrant I

Weak Competitive Position

Strong Competitive Position

Quadrant III

Slow Market Growth

Quadrant IV

1. 2. 3. 4. 5. 6. 7.

Market development Market penetration Product development Forward integration Backward integration Horizontal integration Related diversification

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I.

The Internal-External (IE) Matrix

The IFE Total Weighted Score Strong 3.0 to 4.0 I Average 2.0 to 2.99 II Weak 1.0 to 1.99 III

High 3.0 to 3.99

Kraft Foods Inc.

IV

IV

VI

The EFE Total Weighted Score

Medium 2.0 to 2.99 VII VIII IX

Low 1.0 to 1.99

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J.

QSPM
Acquire a small competitor that sells to restaurants and / or intermediary channels AS TAS 4 0.24

Key Factors Opportunities 1. More people are dining out, and food producers are devoting more attention to products designed for restaurants, vending machines, and other foodservice providers 2. Be able to sell to restaurants at a higher margin 3. Consumers are shifting toward food containing less trans fat or fewer calories, or those containing only organic ingredients 4. Bottled water has become well established in the market and enhanced waters containing vitamins or supplements are gaining popularity 5. Consumer prices for baked goods increased 10.7 percent in January 2009 compared to January 2008 6. Input costs for bakers, included commodities such as wheat, eggs, and natural gas, have declined recently 7. The U.S. market for packaged and processed foods has seen large profits in retail sales, and this number is expected to see steady growth 8. Worldwide, demand is also on the rise for packaged type of food as more people adopt a lifestyle that includes less time for the preparation of food 9. The greatest asset of any retail and consumer product company is its reputation and perceived value among consumer Threats 1. Obesity is increasing drastically in both children and adults and accordingly consumers are deviating from having snacks, cheeses and such 2. Rising costs of petroleum cause an

Weight 0.06

Develop a new product line, focusing on organic ingredients AS TAS 2 0.12

0.07 0.07

1 4

0.07 0.28

4 1

0.28 0.07

0.07

---

---

---

---

0.06 0.04 0.09

----3

----0.27

----1

----0.09

0.09

0.36

0.18

0.06

0.24

0.06

0.08

0.32

0.08

0.09

0.27

0.18

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increase in cost for companies in the food industry and in the agriculture end 3. Food safety programs have been adopted recently as issues of chemical and bacterial contamination and new foodborne pathogens remain a public health concern 4. Because the industry is so competitive, it is difficult for these companies to raise their prices accordingly, and profit margins have suffered as a result due to weak economy and increase in unemployment, many consumers have switched from brand name to generics 5. Due to increase in fuel, the cost of distribution can increase as well 6. Global warming becoming a major political issue and food producers are simultaneously cast as perpetrator and potential healer TOTAL Strengths 1. After two incidents of contamination, the company voluntarily recalled more than 2 million pounds of nuts and has temporarily shut down its manufacturing plants 2. Increase in sale in the developing international markets by 2 percent 3. The company operates in 5 different business segments: snacks, beverages, cheese, grocery and convenient meals 4. Despite economic downtime, the company's revenues increased to US$42.2 billion 2008, while earnings increased to US$2.9 billion 5. Increase in current asset from 2007 to 2008 by almost US$600 million 6. Decrease in current liabilities by around US$6 billion from 2007 to 2008 7. Kraft sells over 100 different brand names Weaknesses 1. Workers at one of Krafts manufacturers in Illinois turned up a batch of fruits and nuts that were contaminated with salmonella in December 2007 with a similar incident in September 2008 2. Drop in sales in the company's snack division from 2007 to 2008 by 2.30 percent 3. Drop in sales in the European Union market by 4.1 percent from 2007 to 2008

0.07

---

---

---

---

0.04

0.04

0.08

0.06 0.05

1 ---

0.06 ---

3 ---

0.18 ---

1.00 0.06 ---

2.03 -----

1.44 ---

0.08 0.06 0.08

3 4 ---

0.24 0.24 ---

1 3 ---

0.08 0.18 ---

0.08 0.08 0.05 0.06

----4 ---

----0.2 ---

----2 ---

----0.1 ---

0.07 0.06

3 4

0.21 0.24

1 2

0.07 0.12

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4. Despite 9.8 percent increase in price, Kraft Foods lost 0.3 percent market share during 2008 5. The company has over US$27.5 billion in Goodwill 6. Increase in long-term debt by about 50 percent in 2008 from 2007 7. No new innovative product introduction in recent years 8. New CEO in 2006 SUBTOTAL SUM TOTAL ATTRACTIVENESS SCORE

0.06 0.06 0.07 0.09 0.04 1.00

----4 4 ---

----0.28 0.36 --1.77 3.8

----2 2 ---

----0.14 0.18 --0.87 2.31

K.

Recommendations
Develop a series of products mainly made with organic products and are healthy in nature by having low carb, low saturated fat and sugar. Introduce the new product under its own business unit in case the company decides to expand its line or sell it off.

L.

EPS/EBIT Analysis
US$ Amount Needed: $100 million Stock Price: US$27.18 Tax Rate: 28.2% Interest Rate: 6.17% (Average Effective Rate) # Shares Outstanding: 1.5 billion

EBIT Interest EBT Taxes EAT # Shares EPS

Common Stock Recession $3,800,000,00 0 0 3,800,000,000 1,071,600,000 2,728,400,000 1,503,679,176 1.81

Financing Normal $4,000,000,00 0 0 4,000,000,000 1,128,000,000 2,872,000,000 1,503,679,176 1.91

Debt Financing Boom $4,500,000,00 0 0 4,500,000,000 1,269,000,000 3,231,000,000 1,503,679,176 2.15 Recession $3,800,000,00 0 6,170,000 3,793,830,000 1,069,860,060 2,723,969,940 1,500,000,000 1.82 Normal $4,000,000,00 0 6,170,000 3,993,830,000 1,126,260,060 2,867,569,940 1,500,000,000 1.91 Boom $4,500,000,000 6,170,000 4,493,830,000 1,267,260,060 3,226,569,940 1,500,000,000 2.15

EBIT Interest EBT Taxes EAT

70 Percent Stock - 30 Percent Debt Recession Normal Boom $3,800,000,00 $4,000,000,00 $4,500,000,00 0 0 0 4,936,000 4,936,000 4,936,000 3,795,064,000 3,995,064,000 4,495,064,000 1,070,208,048 1,126,608,048 1,267,608,048 2,724,855,952 2,868,455,952 3,227,455,952

70 Percent Debt - 30 Percent Stock Recession Normal Boom $3,800,000,00 $4,000,000,00 0 0 $4,500,000,000 1,234,000 1,234,000 1,234,000 3,798,766,000 3,998,766,000 4,498,766,000 1,071,252,012 1,127,652,012 1,268,652,012 2,727,513,988 2,871,113,988 3,230,113,988

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# Shares EPS

1,502,575,423 1.81

1,502,575,423 1.91

1,502,575,423 2.15

1,501,103,753 1.82

1,501,103,753 1.91

1,501,103,753 2.15

M.

Epilogue

Recently, Kraft announced that they will be cutting the salt in its products sold in North America by an average of 10 percent over the next two years. This decision was based on consumers demanding healthier products and better ingredients in the food they consume. Kraft is planning to complete the reduction of salt over the next two years. Kraft also has made an offer to acquire Cadbury which many analysts have rated as a positive move on behalf of Kraft Foods, Inc. and accordingly, the stock price was raised by US$3 from $33 to $36.

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