SOUTH BEACH DIET PRODUCTS FATTEN KRAFT EARNINGS REPORT

New Line's $170 Million in Sales Surprises Industry

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NEW YORK (AdAge.com) -- Amid dismal news about 8,000 layoffs and plans to discontinue 10% of its products this year, Kraft Foods showed one surprising area of strength in its earnings announcement this week: its much-maligned South Beach Diet products.
Proving naysayers wrong, Kraft's South Beach Diet product line has been a supermarket home run.
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The portfolio of products, ranging from cereal bars to wrap kits, was widely expected to be a bust for Kraft because it was launched at the tail end of the low-carb trend. But in the 10 months since South Beach hit the market, the line has racked up an astounding $170 million in sales, a rare coup in the food category that counts $100 million as the benchmark for new-product success.

It was one of the few bright spots for Kraft, whose fourth-quarter earnings offered analysts little hope of a near-term recovery to boost the bottom line.

Bucking the trend
Howard Brandeisky, VP-marketing for South Beach Diet, had long championed the line even in the face of titters in the industry, predicting that despite the sinking low-carb trend, “We’ve seen growing consumer interest in the South Beach Diet, and providing convenient options for consumers to be on that diet will be a big idea.”

He has since been proven right. But, without a savvy understanding of the skepticism in the market, Mr. Brandeisky -- now awash in praise from the likes of Kraft CEO Roger Deromedi -- could have been out of a job.

Instead of waiting for the line to hit store shelves to turn on marketing, Mr. Brandeisky and his team began to tackle those who, he said, “wrongly linked South Beach with low-carb diets,” before the products even began to ship to supermarkets. Print ads reinforced -- and differentiated -- the principles of South Beach author Dr. Arthur Agatston’s philosophy from Atkins and other fad diets, saying, “Forget low-carbs or low-fats, think right carbs and right fats,” and teased consumers that such a line of products would be “coming soon from Kraft.”

A series of three-minute “showmercials” on Lifetime in April likewise aimed to educate (and entertain) by following four women on the South Beach Diet sharing a beach house for the week and offering information on the diet itself and the Kraft convenience products. Recipes featuring the more than 200 Kraft products in the line were flagged as “South Beach Diet recommended.”

Plowing ahead
Armed with research that shows as many as 50% of consumers who try South Beach products have made a repeat purchase, Mr. Brandeisky is bulldozing ahead, expanding into new categories like salad dressings and frozen breakfast wraps this month and significantly increasing marketing spending in 2006. TNS Media Intelligence/CMR reports Kraft spent $8 million on the brand from January through September last year. South Beach was also Kraft’s leading spender in online advertising last year as it aimed to use the Internet to push its message and “build a great sense of community,” Mr. Brandeisky said.

Despite slower sales in cereal, Kraft has not pulled away there, keeping up the South Beach brand’s presence in the highly visible category, as well as in nine other categories such as frozen meals. Kraft, moreover, has rankled some retailers by not paying the normally steep slotting fees for some South Beach items, a move it clearly seems to have pulled off with finesse and will surely copy for future launches if it’s able.

Despite Kraft’s report of a revenue rise of 10% to $9.7 billion, Credit Suisse analyst Dave Nelson in a note briefly summarized top-line growth at a mere 3% (a figure actually at the bottom end of guidance both for the quarter and the year) and volumes that were flat for 2005 and down 2% in the fourth quarter on a comparable basis. To boot, Mr. Nelson said, Kraft’s expected $200 million in increased marketing spending last year turned out to be only a mere $130 million extra, a fact that he said puts their true earnings “into some question.”

Mr. Deromedi also put future earnings into question by expanding his “Sustainable Growth Plan” with additional efforts that call for the elimination of 8% of Kraft’s workforce (or 8,000 positions by 2008) and the elimination of an additional 10% of its products this year.

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