Analysts wary: Kraft vows to kick addiction to extensions

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Struggling to rebound from recent earnings declines of 26%, Kraft Foods is embarking on a "fewer, bigger, better" strategy for new-product innovation.

Its plan is to eschew line extensions that have not helped differentiate it from its lower-priced competitors. But even people within the company's ranks admit that plenty of extensions are still coming out of the gate and analysts are skeptical that Kraft's upcoming products are innovative enough to command the price premiums necessary to drive up its profit margins.

According to one senior Kraft executive, "there is less emphasis on short-term wins and more emphasis on creating long-term change based on consumer-driven trends and categories." He said the directional shift has caused the company to retrench on some smaller initiatives this year in favor of "fantastic" initiatives on the horizon.

But another executive close to Kraft said the reality is closer to a 50/50 split between line extensions and true new ideas. Among upcoming efforts are a microwave single-serve version of DiGiorno Rising Crust pizza; a Honey Maid extension into oatmeal cookies; and a first-time move by Kraft into glass-jar microwaveable cheese dips. Kraft Cracker Dips will be sold in the cracker aisle. Kraft will also launch its recently acquired Veryfine Fruit-2-0 brand nationally with TV and print in September and will likely make inroads in the U.S. with the Tassimo Coffee System-which will first launch in France-to combat Sara Lee's Senseo and Procter & Gamble's Home Cafe.

But despite CEO Roger Deromedi's pronouncement during the recent second-quarter earnings call that such products are "more incremental than we've delivered in the past," analysts still need more proof.

"We'll believe it when we see it," D.A. Davidson analyst Tim Ramey said. "The development of novel products with new brand positions has been missing from Kraft for years." Instead, he said, "they are using trade promotion and pricing to accomplish growth and I don't view that as an effective long-term strategy."

the bind

Therein lies the bind in which Kraft finds itself. Despite plans to increase media a stated $500 million to $600 million this year to build its key trademarks, Kraft has still had to "recognize the limits of their brands" by reducing price premiums it proudly charged consumers in the past, said Credit Suisse First Boston analyst Dave Nelson. And although the company's ongoing "sustainable growth plan" has included narrowing price gaps in such categories as cheese, deli and coffee, the problem still plagues Kraft in other categories, such as pizza.

While an East Coast retail executive said DiGiorno Microwave Rising Crust Pizza is "somewhat innovative" as the first more portable premium pizza and could provide incremental sales, he also said Kraft will have to get more aggressive with trade promotion and price reduction on the brand if it wants to bring consumers back.

crispy technology

The superior delivery-quality image Kraft rode on successfully for years with DiGiorno has been eroded by inferior ingredients and size reductions while private-label quality has increased, he said, and consumers are no longer willing to pay the roughly $2 price differential between the two. According to Information Resources Inc., DiGiorno sales fell 3% for the 52 weeks ended July 11 despite category growth of 3%.

Michael Pellegrino, senior VP- general manager of Kraft Pizza Co., said the new microwave variety, which features a proprietary technology to maintain crispness, leverages the DiGiorno equity but is indicative of Kraft's bigger-ideas strategy.

In cereal, too, where Kraft has seen declines far greater than the category and its competitors, industry watchers are surprised that no major launches have been announced.

But, of course, one very well may be in the offing per the new mandate. Credit Suisse First Boston's Mr. Nelson said that while Kraft has recently "definitely not delivered," he believes now that "they're down in the trenches, which is where they need to be."

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