Kraft Foods Group (NASDAQ:KRFT) is scheduled to announce its second quarter earnings on August 1. We expect new products to drive organic revenue growth for the company. We will also be focusing on the net impact of cost savings from the ongoing productivity improvement program and higher commodity costs on the company’s profitability.
Kraft Foods Group manufactures and markets packaged food products, including beverages, cheeses, convenient meals and various grocery products. The company primarily deals in the North American markets with the majority of its sales coming from the U.S. and Canada. It generates annual revenues topping $18 billion and has guided for adjusted earnings per share target of $2.75 for 2013.
New Products To Drive Revenue Growth
Kraft created a new beverage category with MiO liquid water enhancer in 2011, which has been one of the most successful brands launched by the company in years. Its sales surged by 67% y-o-y last year. The successful launch not only drove the expansion of MiO into energy/sport drinks category, it also attracted competition from beverage giant Coca-Cola (NYSE:KO) which has been looking at growth opportunities amid declining CSD consumption in the U.S. Coca-Cola introduced Dasani flavored water drops last year to participate in the fast growing category. In order to maintain its leadership in the new category, Kraft started selling zero-calorie liquid enhancers of its popular Crystal Light brand in several flavors, and also plans to extend the product to Kool-Aid, a popular beverage brand among children, later this year.
Other successful new products launched by Kraft include Velveeta cheesy skillets and Philadelphia cream cheese. Revenues from Velveeta cheesy skillets were up more than 30% year-on-year during the first quarter. The fact that the product recorded double-digit growth throughout 2012 alongside Kraft’s widely popular mac and cheese brand suggests that the company has really been able to strike a chord with consumers in the dry dinner mixes category.
We expect Kraft to deliver organic revenue growth during the second quarter with increased focus on innovation driven new products backed by heavy marketing investments. Kraft generated around 13% of total net revenue in 2012 from new products. The metric has improved significantly from around 6.5% in 2009. Just to emphasize, that implies incremental net revenues of approximately $1.2 billion during 2012.
Will Productivity Measures Offset Higher Costs?
Kraft’s operating margins improved by 120 basis points to 17.8% during the first quarter despite higher restructuring charges of $119 million and increased marketing expense, primarily due to the company’s ongoing productivity improvement program. However, higher commodity costs are expected to put margins under pressure during the second quarter as average producer price indices of dairy and meat products have been higher by almost 7% and 3% respectively. It will therefore be interesting to see if the company is able to sustain higher margins during the quarter.
Kraft is tapping the Lean Six Sigma principles to drive productivity in supply chain and manufacturing processes. It targets to deliver net productivity as a percentage of cost of goods sold (COGS) of at least 2.5% in 2013. The company is also acting to reduce its overhead costs as a percentage of net revenues significantly. 
We currently have $62 price estimate for Kraft Foods Group, which will soon be updated based on the second quarter earnings announcement.Notes:
- 2013 Consumer Analyst Group of Europe Presentation, ir.kraftfoodsgroup.com [↩]