Kraft Foods

Kraft Foods, Inc.

Kraft Foods corporate logo
Type	Public (NYSE: KFT) Dow Jones Industrial Average component
Industry	Food Processing
Predecessor	Former names: - see text
Founded	Englewood, South Chicago, Chicago, Illinois (1903)
Headquarters	Northfield, Illinois, U.S.
Key people	Irene Rosenfeld Chairman & Chief Executive Officer
Products	See Brands section.
Revenue	US$40.4 Billion (FY 2009)[1]
Operating income	US$5.52 Billion (FY 2009)[1]
Net income	US$3.02 Billion (FY 2009)[1]
Total assets	US$66.7 Billion (FY 2009)[2]
Total equity	US$25.9 Billion (FY 2009)[2]
Employees	98,000 (2008) [3]
Website	www.kraftfoodscompany.com

Kraft Foods, Inc. (NYSE: KFT) is the largest confectionery, food, and beverage corporation headquartered in the United States^[4] and the second-largest in the world (after Nestlé SA). It markets many brands in more than 155 countries.

The company is headquartered in Northfield, Illinois, a Chicago suburb. Its European headquarters are just outside Zürich, Switzerland.

A public company, it is listed on the New York Stock Exchange and became a component of the Dow Jones Industrial Average on September 22, 2008, replacing the American International Group.^[5]

Origin of the firm

The firm today known as Kraft Foods was formed on December 10, 1923 by Thomas H. McInnerney.^[6] The firm was initially set up to execute on a rollup strategy in the then fragmented United States ice cream industry. Through acquisitions it expanded into a full range of dairy products. By 1930, eight years after it was founded, it was the largest dairy company in the United States and the world, exceeding Borden.

McInnerney operated the Hydrox Corporation, an ice cream company located in Chicago, Illinois. In 1923 he went to Wall Street to convince investment bankers there to finance his scheme for consolidating the United States ice cream industry. He initially found "hard sledding" with one banker saying the dairy industry "lacked dignity." He persevered and convinced a consortium including Goldman Sachs and Lehman Brothers to finance a roll-up strategy.^[7]

As a result of his efforts, National Dairy Products Corporation was formed in 1923 in a merger of McInnerney's Hydrox with Rieck McJunkin Dairy Co of Pittsburgh, Pennsylvania. The resulting firm was then listed on the New York Stock Exchange with the offer of 125,000 shares having been oversubscribed.^[6]

The firm grew quickly through a large number of acquisitions. As is typical in a roll-up strategy, acquisitions were primarily for stock in National rather than cash. Examples of firms acquired include: (list is not complete - National acquired more than 55 firms between 1923 and 1931)

Beginnings for Kraft

The Kraft product logo

Canadian-born and of German origin, James L. Kraft started a wholesale door-to-door cheese business in Chicago in 1903; its first year of operations was "dismal", losing US$3,000 and a horse. However, the business took hold and Kraft was joined by his four brothers to form J.L. Kraft and Bros. Company in 1909. As early as 1911, circulars and advertisements were in use by the company.

In 1912, the company established its New York City, New York, headquarters to prepare for its international expansion. By 1914, thirty-one varieties of cheeses were being sold around the U.S. because of heavy product development, expansion by marketing, and opening a wholly owned cheese factory in Illinois.^[8]

In 1915, the company had invented pasteurized processed cheese that did not need refrigeration, thus giving a longer shelf life than conventional cheese.^[8] The process was patented in 1916 and about six million pounds of the product were sold to the U.S. Army for military rations during World War I.

In 1916, the company began national advertising and had made its first acquisition — a Canadian cheese company^[8]

In 1924, the company changed its name to Kraft Cheese Company and listed on the Chicago Stock Exchange.^[8] In 1926, it was listed on the NYSE. The firm then began to consolidate the United States dairy industry through acquisition, in competition with National and Borden. Firms acquired included:

Later, in 1927, it established its London, United Kingdom, and Hamburg, Germany, sales offices — its first forays outside North America. Sales for 1927 were $60.4m.

In 1928, it acquired Phenix Cheese Company, the maker of a cream cheese branded as Philadelphia cream cheese, and the company changed its name to Kraft-Phenix Cheese Company.

In 1929, the New York Times reported that Kraft Phenix, The Hershey Company and Colgate were looking at merging.^[9] In the same year it was reported that National, Borden and Standard Brands (a firm that is now part of Kraft Foods) were all looking at acquiring the firm.

By 1930, it had captured forty percent of the cheese market in the U.S. and was the third largest dairy company in the United States after National Dairy and Borden. In 1930, the company also began operating in Australia following a merger with Fred Walker & Co.^[8]

Post National acquisition of Kraft-Phenix

At the time of the acquisition, National Dairy had sales of $315m compared with $85m for Kraft Phenix. National Dairy management ran the combined business. Following the Kraft-Phenix acquisition, the firm continued to be called National Dairy until 1969 when it changed its name to Kraftco.^[10].

Historically, all of the firm's sales came from dairy products. However, the firm's product lines began to diversify away from dairy products to caramel candies, macaroni and cheese dinners and margarines. From the 1950s onward, the firm began to move away from low value added commodity dairy products, such as fluid milk.^[11] This trend would continue for the firm, through neglect and divestiture, until the primary remaining dairy product produced by the firm would be cheese. As a result, the modern history of the firm emphasizes the cheese history.

In 1933, the company began marketing by radio sponsorship. In 1935, the Sealtest brand of ice cream was launched as a unified national brand to replace the firms numerous regional brands.^[8]

During World War II, the company sent four million pounds of cheese to Britain weekly.^[8]

Product development and advertising helped the company to grow during the postwar years, launching sliced process cheese and Cheez Whiz, a brand of process cheese sauce, in the 1950s.

During these years, Thomas McInnerney, National Dairy's founder, and James L. Kraft, Kraft's founder, died, and at the end of the decade, the divisions became less autonomous and even diversified to the glass-packaging business with the acquisition of Metro Glass in 1956.^[8]

In 1947 the company tested the marketing power of the emerging medium of television by producing an hour-long drama/anthology series, the Kraft Television Theatre. The product advertised on the program, McLaren’s Imperial Cheese, was selected because "... [it had] not only had no advertising appropriation whatsoever, but had not even been distributed for several years." As described by internal documents of J. Walter Thompson — the advertising firm which conceived of the marketing test — the result was "although there was no other advertising support for it whatsoever, still grocery stores could not keep up with the demand."^[12]

Former Philadelphia cream cheese plant in Strathmerton, Australia

In the 1960s, product development became intense, launching fruit jellies, fruit preserves, marshmallows, barbecue sauces and Kraft Singles, a brand of individually wrapped cheese slices.^[8] During this decade, the company also expanded in many markets worldwide.

In 1961 the firm acquired Dominion Dairies of Canada, marking the first effort by the firm to expand into fluid milk and ice cream outside the United States.^[13] In the same year it also acquired The Southern Oil Company in Manchester, England.

National Dairy becomes Kraft

In 1969, the firm changed its name from National Dairy to Kraftco Corporation. The reason for the name change was given at the time: "Expansion and innovation have taken us far afield from the regional milk and ice cream business we started with in 1923. Dollar sales of these original products have remained relatively static over the past ten years and, in 1969 accounted for approximately 25% of our sales."^[14] At the same time the firm transferred to Glenview, Illinois, in 1972.^[8] In 1976, its name changed to Kraft, Inc. to emphasize the trademark the company had been known for and as a result of the fact that dairy, other than cheese, was now only a minor part of the company's sales. Reorganization also occurred after the name change.^[8]

Dart merger

In 1980, Kraft merged with Dart Industries - makers of the Duracell brand of batteries, Tupperware brand of plastic containers, West Bend brand of home appliances, Wilsonart brand of plastics and Thatcher glass - to form Dart & Kraft.^[8]

During the 1980s, Dart & Kraft offered mixed results to its shareholders, as new acquisitions in the food business - such as Churny premium cheeses, Lender's Bagels, Frusen Gladje ice cream and Celestial Seasonings tea - slightly offset the lagging nonfood business - Tupperware's decrease in sales and KitchenAid's (acquired soon after the merger) slide in market share - leading Dart & Kraft to spin off its nonfood business (except Duracell batteries) into a new entity (Premark International, Inc.) while changing its name back to Kraft, Inc. Premark was bought by Illinois Tool Works in 1999. In 1988, Kraft sold Duracell to private equity firm Kohlberg Kravis Roberts, who then put it into an initial public offering in 1989. Gillette^[8] bought Duracell in 1996, and itself was acquired by Procter and Gamble in 2005.

Philip Morris acquisition and merger with General Foods

At the end of 1988, Philip Morris Companies purchased Kraft for $12.9 billion. In 1989, Kraft merged with Philip Morris's General Foods unit - makers of Oscar Mayer meats, Maxwell House coffee, Jell-O gelatin, Budget Gourmet frozen dinners, Entenmann's baked goods, Kool-Aid, Crystal Light and Tang powdered beverage mixes, Post Cereals, Shake 'n Bake flavored coatings and numerous other packaged foods - as Kraft General Foods. Its aggressive product development was reversed after the merger, as it became slow in addressing issues on its product lines due to its size, and also company politics.^[8]

In 1990, the company acquired Jacobs Suchard (a European coffee and confectionery giant) and Freia Marabou (a Scandinavian confectionery maker) to expand overseas as its business was heavily dependent on the U.S. In 1993, it acquired RJR Nabisco's cold cereal business (mainly Shredded Wheat and Shreddies cereals) while selling its Breyers ice-cream division to Unilever and its Birds Eye unit to Dean Foods. In 1994, it sold its frozen dinners unit to H.J. Heinz and in 1995, it sold its foodservice unit.^[8]

In 1995, it changed its name to the present name, Kraft Foods. The same year, it sold its bakery division (except Lender's Bagels, which was sold in 1996 to CPC International), its candy division and its tablespreads division. Log Cabin syrup was sold in 1997.^[8]

Financial expansion

In 2000, Philip Morris (renamed Altria in 2003) acquired Nabisco Holdings for $18.9 billion and merged the company with Kraft Foods the same year.^[8] In 2001, Philip Morris sold 280 million Kraft shares via the third-largest IPO of all time, retaining an 88.1% stake in the company.

In 2004, it sold its sugar confectionery division to Wrigley, while doing minor divestitures - including its hot cereals division in 2007, its pet snacks division in 2006, juice drinks and functional water in 2007 and some grocery brands in 2006.

Altria announced on January 31, 2007, that it would spin off all the remaining Kraft Foods shares to Altria's shareholders; each will be given approximately 0.7 share of Kraft for every Altria share they own.

Investor Nelson Peltz bought a three-percent stake at Kraft Foods and is talking with the executives on revitalizing the business,^[15] with options such as buying Wendy's fast food chain or selling off Post cereals and Maxwell House coffee.^[15] On January 31, 2007, after months of speculation, the company announced that its 88.1% stake would be spun off to Altria shareholders at the end of March 2007. Kraft is now an independent publicly held company.

In July 2007, the company bought Groupe Danone's biscuit (cookie) and cereal division for $7.2 billion, including iconic French biscuit brand Lefèvre-Utile.^[15][16] While two years earlier firestorms of protest had arisen over plans for American PepsiCo's hostile takeover of the French company, Kraft's announcement was not met with the same protests, in part because Kraft agreed not to close French factories and keep the new merged divisions headquarters near Paris for at least three years.^[15]

In November 2007, Kraft agreed to sell its cereal unit to Ralcorp Holdings, a major private-label food maker, for $2.6 billion in a form of a spin-off merger. This would add 50% to Ralcorp's sales, to $3.3 billion, and will be used for Kraft's debt payment, which is at $13.4 billion, in danger of a downgrade by Standard and Poor's.^[17]

In February 2008, Berkshire Hathaway Inc. run by billionaire investor Warren E. Buffett announced that it had acquired an 8% stake in Kraft worth over $4 billion. Buffett's business partner Charles Munger had also invested over $300 million in Kraft.

On September 22, 2008, the company replaced the troubled insurance company, American International Group in the Dow Jones Industrial Average.^[5]

Purchase of Cadbury

On September 7, 2009, Kraft made a £10.2 billion takeover offer for the long-established British confectionery group Cadbury, makers of Dairy Milk and Bournville chocolate.^[18] On November 9, 2009 Kraft's £9.8bn takeover bid was rejected by Cadbury. Cadbury stated that the takeover bid was a "derisory" offer.^[19] Kraft renewed the offer under the same terms on December 4, 2009.^[20]. The offer generated significant political and public opposition in the United Kingdom and abroad, even leading to calls for the government to invoke a policy of economic protectionism in cases of takeovers of large companies.^[21] On January 19, 2010, Cadbury finally approved a revised offer from Kraft, valuing the confectionery business at $19.5 billion (£11.5 billion). The funding for the takeover is partially provided by the Royal Bank of Scotland, the British state-owned bank.^[22]

Selling To Nestle

On January 6, 2010, Kraft agreed to sell its North American frozen pizza business to Nestle for $3.7 billion. The sale, which is subject to regulatory clearance, includes DiGiorno, Tombstone and Jack's brands in the United States, the Delissio brand in Canada and the California Pizza Kitchen trademark license. It also includes two Wisconsin manufacturing facilities in Medford and Little Chute. The business generated 2009 net revenues of $1.6 billion, with 3,400 employees.^[23]

Sponsorships

Kraft is an official partner and sponsor of Major League Soccer and sponsors the Kraft Nabisco Championship, one of the four "majors" on the LPGA tour.

Promotions

Kraft HockeyVille is a Canadian reality television series developed by CBC Sports and sponsored by Kraft Foods in which communities across Canada compete to demonstrate their commitment to the sport of ice hockey.

The contest revolves around a central theme of community spirit in Canada and is directed by Mike Dodson.

Brands

For full list of current and former brands, see List of Kraft brands

A container of Planters Dry Roasted Peanuts

The company's core businesses are in beverage, cheese and dairy foods, snack foods, confectionery, and convenience foods. The full list of Kraft brands can be found at Largest Brands on Kraft's own website.

Kraft lists its own major brands, which each generate revenues exceeding $1 billion, as:^[24]

• Kraft Dinner
• Oscar Mayer
• Philadelphia
• Maxwell House
• Nabisco
• Jacobs
• Côte d'Or
• Milka
• LU
• Vegemite
• Cadbury
• Trebor

50 additional brands have revenues greater than $100 million. In total, 40 brands are at least 100 years old.^[24]

Cadbury

In 2010 Kraft bought Cadbury, resulting in several boycotts of all Kraft related products. A YouGov SixthSense survey has revealed that at the time of the buy-out 94% of the British population was aware that Cadbury was being sold to Kraft.^[25]

Kraft Foods in the news

1950s Kraft delivery van in Australia, advertising "Velveeta", "Vegemite" and "Kraft Cheddar"

In 1992, the gelatin industry, in particular Kraft's Atlantic Gelatin plant in Woburn, Massachusetts, which supplies the vast majority of Jell-O, came under scrutiny for a history of noxious smells, toxic waste releases into Boston Harbor, and a policy of corporate secrecy. Heading off a rash of local complaints, industry lobbyists invited Massachusetts state representatives Paul Casey and Carol Donovan into the plant. However, the representatives were barred from going past the conference room. Repeated requests for a plant tour by journalists were refused. In 1993, the plant was hit with a $250,000 fine for violating the Clean Air Act of 1970. In a February 4, 1996 article, the Associated Press reported that a Massachusetts Department of Environmental Protection official was one of only a few outsiders who had seen the inside of the Woburn plant.

Kraft began a major restructuring process in January 2004, following a year of declining sales, (blamed largely on the rising health consciousness of Americans), and the sacking of co-CEO Betsy Holden. The company announced closures of 19 production facilities worldwide and the reduction of 5,500 jobs, as well as the sale of 10% of its branded products.

On September 7, 2009, Kraft made an offer to buy 100% of the share capital of Cadbury for over £10bn. The Panel on Takeovers and Mergers, the UK body that administers the City Code on Takeovers and Mergers, has given Kraft 40 days to secure the deal or walk away for at least six months.^[26] As a result the communications war between the two organizations has escalated. Kraft CEO Irene Rosenfeld launched the bid with an online video to sell its story to the investment community^[27].

On March 17, 2010, Kraft Foods said it was "truly sorry" over its closure of a Cadbury factory in Somerdale. Senior Kraft executive Marc Firestone made the public apology to MPs at a parliamentary select committee hearing.^[28]

• List of Kraft brands
• General Foods Corporation
• Ovson Egg
• Wise Use Movement

References

External links

• Official website
• Kraft Food/Recipe Website (North American Site)
• UK official website
• Kraft Foods Inc. Fact Sheet from Hoover's
• Kraft Foods Radio Show
• List of North American Kraft Companies
• Thinsations Website