Kraft Rethinks Agency Pay, Brand Duties

Three years after its last major assessment of agencies, Kraft Foods is at it again, and this time it’s focusing on compensation, with an eye toward cutting costs. In the process, the Northfield, Ill., client may also be looking at changes in its roster-shop creative assignments.

The $775 million advertiser, which markets brands such as Velveeta, Jell-O and Ritz crackers, has hired New York consultancy Beekman Associates to reassess how Kraft pays its agencies, sources said. Roster shops include Interpublic Group’s Foote, Cone & Belding (New York and Chicago); WPP Group’s J. Walter Thompson (New York and Chicago), Ogilvy & Mather (New York) and Young & Rubicam (New York); and Publicis Groupe’s Leo Burnett (Chicago).

Grey was cut in a 1998 brand realignment, and a 2000 realignment stripped Burnett and Y&R of significant duties. The latter action also resulted in modifications of Kraft’s compensation arrangement.

“We’re always looking at how we can work more efficiently with our agency partners,” a Kraft rep said. Beyond that, she added, “We don’t discuss compensation issues.”

As for the possibilities of making creative shifts or aligning along brand lines, she said, “There are no plans to make creative agency changes.”

Kraft now uses a combined commission and fee system, said sources. And with cutbacks in client spending in the past two years, agencies handling bigger brands have felt the pinch.

Kraft, which is 84 percent owned by Altria (the former Philip Morris Cos.), hired Beekman after considering a handful of nationally known consultants, said sources. The audit is under way but is taking longer than expected, in part due to the difficulty of scheduling meetings amid summer vacations, sources said. Beekman could not be reached.

FCB and JWT handle the bulk of Kraft’s business. FCB, which divides its assignments between its Chicago and New York offices, creates ads for nearly 40 brands—including DiGiorno pizza, Jell-O, Oreo cookies and Planters nuts—that collectively spent about $340 million on ads last year, according to TNS Media Intelligence/CMR. JWT’s more than 30 brands, including Kraft cheese products and Wheat Thins crackers, spent more than $180 million in 2002.

The estimated $225 million worth of Kraft business at Ogilvy includes Post cereals, Maxwell House coffee and Kool-Aid. Burnett handles the $12 million Altoids business, and Y&R works on about $4 million in Toblerone and Terry’s chocolate assignments.

The reassessment comes at a difficult time for Kraft, with the company facing challenges in several areas.

One source of pressure is financial. The company’s second-quarter earnings fell short of Wall Street’s expectations in part because its cheese, coffee and cold-cuts products were undercut by cheaper private-label brands. To counteract that, Kraft, whose 2002 adspend was down more than 20 percent from 2001, vowed to spend $200 million more on marketing in the second half of 2003 and increase spending overall next year. But Kraft also had to lower its 2003 earnings forecast for the second time.

On top of all that, Kraft has seen its share price slide 27 percent in the past year. It closed at $28.82 last Friday, compared to $39.50 on Aug. 15, 2002. Shares were trading at about $28 on Monday, just above Kraft’s 52-week low of $26.35 and well below its high of $41.30.

Another factor prompting the client to reassess its partnerships, added another source, is the public pressure Kraft and other food marketers are feeling from anti-obesity activists. Food companies like Kraft and McDonald’s are concerned that fatty foods will become the “next tobacco” and spark lawsuits that will leave them on their heels. McDonald’s is touting new offerings such as salads in recent ads. And Kraft this year pulled ads for Double Stuf Oreo cookies. Indeed, Kraft is said to be among the major food companies that are rethinking how they market kid-oriented products [Adweek, July 21].

That pressure is a factor in the consideration of brand reassignments among the roster shops, said one source. Lunchables and other brands, including Oscar Mayer and Kraft Macaroni and Cheese, “need to be repositioned or their ingredients reworked to be more healthy,” the source noted, adding that Kraft co-CEO Betsy Holden “is very hands-on and holding tighter reins on marketing” as a result.

Beekman, whose principals include former Ogilvy & Mather North American president Julian Clopet, most recently worked on Pfizer’s compensation audit, which lasted more than a year and in February triggered the pharmaceutical giant’s split with IPG’s Deutsch.

Deutsch refused to sign a contract that sources said would have required the agency to provide, if asked, information about individual salaries, overhead costs and profit margins on other clients’ business. As a result, three brands with combined spending of $150-200 million went into review and landed at new agencies last month.