In our food industry notes for this week, we take a look at the Kraft Foods Group (NYSE:KRFT). The company announced the retirement of its CEO, as well as the rollout of McCafe coffee products in partnership with McDonalds (NYSE:MCD). The company also said that it will raise the prices of its single serve coffees.
We have a price estimate for the Kraft Foods Group of $63 a share, roughly equal to the market price.
- Kraft Foods Q1 2015 Earnings Preview
- Analysis Of the Kraft-Heinz Merger
- Kraft Foods Group Earnings: Lack Of Guidance Causes Uncertainty
- Kraft Foods Earnings Preview: Commodities And Operations In Focus
- The Impact Of Coffee Prices On Kraft Foods Group’s Business
- A Difficult Operating Environment Leads To A Lacklustre Q3 For Kraft Foods
Chairman Becomes CEO To Fuel Growth
The outgoing CEO, Tony Vernon, had served earlier as the president of Kraft Foods North America. He became the CEO of the Kraft Foods Group after the spin-off of Mondelez International in 2012. In its announcement, the company said that Vernon had helped put it on a solid footing following the spin-off. The outgoing CEO cited the need to spend time with his family as the cause for the transition, while Kraft identified the need to speed up growth. The person brought in to effect this accelerated growth is the current Chairman of the company, John Cahill. Before Joining Kraft in 2012, Cahill was the CEO of The Pepsi Bottling Group. The announcement was well received by the markets and the company’s stock rose by 3%. 
New Coffee Line To Cater To Premium Segment
Kraft is adding a new brand to its coffee products line-up. Launched in association with McDonalds, it will be called McCafe. It is expected to bolster Kraft’s prospects in the premium coffee space, and is considered a more promising product than Kraft’s current premium offering, Gevalia. The deal is also expected to end Kraft’s search for a partner in its coffee business. Its 12 year partnership with Starbucks (NYSE:SBUX) ended in 2010 with a lawsuit.  The competing offerings of Starbucks and Dunkin Donuts (NYSE:DNKN) will provide challenges to Kraft in this new endeavor. 
Single Serve Coffee Pack Price Raised
Kraft announced that it would raise the price of its single serve coffee pack prices by about 9%. Apart from the McCafe brand discussed earlier, this will also be applicable to Maxwell House, Gevalia and Yuban K-Cup. The larger packs of Maxwell House and Yuban roast and ground coffee brands had their prices raised by 10% in June 2014. There was also a 7% hike in the prices of the premium Gevalia brand in July. These price hikes were related to the rising price of coffee, as is the new proposed hike. We have written on the rising price of coffee and its effect on Kraft earlier (See The Impact Of Coffee Prices On Kraft).
The margins on single serve packs are larger than on the other packs, so absorbing the rising raw material prices without passing them on to customers would have been more tolerable for this category. Price hikes are also discouraged by the fear of losing market share. For instance, after the J.M. Smucker Company (NYSE: SJM) raised the price of its single serve K-Cup packs by 8%, sales of the product dropped. The company had to reduce its sales estimates for 2014 on account of this decrease in revenue.
View Interactive Institutional Research (Powered by Trefis):Notes: