Ahead of Spin-Off, Kraft Looks to Bolster Grocery Business

by Trefis Team
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Kraft Foods
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As the company prepares to split into the North American Grocery division and the Global Snacks division, Kraft Foods (NYSE:KFT) is looking to reinvigorate its grocery division with productivity initiatives and increased marketing.

The latest Planters marketing campaign targets adults who consume two-thirds of the peanut butter market in the U.S. [1] These are signs that Kraft is more aggressively pushing groceries as the division had somewhat stagnated with skeptics pointing out that the North American grocery market has matured. Kraft competes with players like PepsiCo (NYSE:PEP), General Mills (NYSE:GIS) and Kellogg (NYSE:K). We currently estimate a $34.68 price for Kraft Foods.

See our full analysis for Kraft here

Kraft’s investment in Planters has decline in recent years that resulted in the brand’s market share dropping to 24% in 2011, from 32% in 2006, in the snack nuts market in the U.S. Planters is the iconic brand best known for its processed nuts.

However, after extending its Planters brand to peanut butter in 2011, the company may look to take future innovative steps like Smucker’s. In February, Smucker’s introduced two new hazelnut flavors to expand its offerings in the specialty nut butter market. According to the company, Planters’ market share in the peanut butter market has increased from 1.8% last year to mid-single digits. [1] Besides, the Planters brand witnessed a 7% increase in revenues in 2011. The peanut butter market is currently pegged to be around $1.8 billion in the U.S.

Productivity Initiatives

In 2011, the company was able to increase the conversion productivity in 28 of its 57 plants at a double-digit rate through Lean Six Sigma. Moreover, overhead, as a percentage of revenues declined 60 basis points to 11.4%, which meant an overall overhead savings of $100 million for the entire year.

The grocery segment is one of the most important divisions within Kraft as the EBITDA margins are almost double those of the other divisions. [2]

We expect a slight increase in the margins in the near term as the full effect of the productivity initiatives begins to feed through to its EBITDA margins.

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Notes:
  1. Kraft’s Planters Heads for the Peanut Butter Aisle, Business Week, March 08, 2012 [] []
  2. Kraft Foods’ CEO Discusses 2011 Results – Earnings Call Transcript, seekingalpha.com, February 21, 2012 []
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