Earnings Drop Won't Keep Kraft From Spending

CEO Irene Rosenfeld Plans to Continue to Invest in Brands

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CHICAGO (AdAge.com) -- Kraft Foods is sticking to its guns when it comes to increased marketing spending, despite missing analyst expectations in its earnings report today.

Marketing investments in core brands in 2007 such as blue-box Macaroni & Cheese have rebuilt Kraft's pricing power, and the company is now the market leader in 80% of its portfolio.
Marketing investments in core brands in 2007 such as blue-box Macaroni & Cheese have rebuilt Kraft's pricing power, and the company is now the market leader in 80% of its portfolio.
The country's largest food marketer reported strong sales growth for its fourth quarter and full year, though 2008's earnings fell a whopping 72%, which Kraft blamed on taxes, restructuring costs and commodity hedges. Still, CEO Irene Rosenfeld underscored the importance of the company's boosted marketing outlays as it enters the final phase of its three-year turnaround plan. She emphasized that Kraft will continue to invest in its brands during 2009.

The difference, though, is that Kraft will spend more of its budget hammering away at a value message. "Our 2009 advertising and merchandising plans will continue to emphasize the value proposition of our brands," Ms. Rosenfeld said. "We have significant cost savings at our back to reinvest in brand building."

That's a response, undoubtedly, to private-label rivals gaining share in the grocery aisle. "Combined with the spike in unemployment and rapid deterioration of consumer sentiment, it's not surprising that branded consumption was down and private label picked up share," she said,

Building marketing budget
Ms. Rosenfeld's turnaround plan includes building Kraft's budget to about 8% of sales. Last year, the company projected spending at about 7% of its $42 billion in sales, or about $3 billion. She said 2007's marketing investments in core brands such as blue-box Macaroni & Cheese have rebuilt the company's pricing power, and Kraft is now the market leader in 80% of its portfolio.

Irene Rosenfeld
Irene Rosenfeld
One argument she cited for continuing to boost spending was salad dressing, a category where investors were urging a sale as recently as August 2007. Following a reformulation, repackaging and a new ad campaign, the brand has begun to recover.

"We continue to see the impact of the investments that we've made, in taking out the preservatives to changing the bottle and increasing the marketing support behind that category," she said. "So without a doubt, salad dressing is performing better than it has historically as a result of the investments that we've made."

Another category specifically cited for investment was powdered beverages, where Kraft's primary brands are Kool-Aid and Crystal Light.

Guidance for 2009
Kraft lowered guidance for 2009, however. UBS analyst David Palmer said to expect similar news from other package-foods companies, citing Sara Lee, which did likewise today. "While certainly not encouraging, we note that these [companies] are two of the more penetrated by private-label companies in the foods space, and thus each company's pricing is more affected by falling commodity costs and more aggressive private label competition," he wrote in a research note.

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