Private Label Takes Bite Out of Kraft Profits

Kraft today reported a 72 percent drop in fourth quarter profit, a sign that the food giant—which in October saw net income soar to $1.4 billion—is hurting as consumers and retailers cut back in a down economy.

Value-driven advertising helped boost sales for some Kraft brands, including Singles and Velveeta. Overall, however, consumers and retailers cut back on Kraft brands, affecting fourth quarter earnings. Kraft’s net earnings came in at $163 million, down from $585 million for the same period last year.

Pricing boosted profits in segments such as U.S. meals (organic net revenue was up 10.7 percent), but sales were weak in categories such as cheese and the Planters nut brand. “We priced quickly and aggressively in late Q3 and Q4 in response to the rapid rise in input costs,” Kraft CEO Irene Rosenfeld said during the earnings call this morning. “Combined with the spike in unemployment and rapid deterioration of consumer sentiment, it’s not surprising that branded consumption was down and private label picked up share.”

Krista Faron, senior analyst at Mintel, said the decline is not due to a flaw in Kraft’s strategy, but a change in consumer perception over the course of four months, when Kraft last reported its earnings. “Kraft is feeling the pain. Consumers are scrutinizing every purchase they make,” Faron said. “Every purchase is considered, every dollar is considered, and that has made for very cautious shopping.”

Food company Sara Lee today also posted a $17 million second quarter net loss, as private label sales surged worldwide. Particularly in the U.S., discretionary items like frozen bakery treats took a hit.

In a research note, UBS analyst David Palmer attributed Kraft and Sara Lee’s disappointing quarters to the companies’ vulnerability to private label. “These are two of the more penetrated by private label companies in the food space, and thus, each company’s pricing is more affected by falling commodity costs and more aggressive private label competition,” he said.

Still, Kraft CFO Timothy McLevish maintains the company delivered “the best combination of top and bottom line growth since 2001.” Kraft’s 5 percent revenue growth was the best in four years, and a 7 percent increase in organic income was the highest in six years, McLevish said.

Going forward, Kraft will rely on product innovations and value marketing to drive growth behind its brands. “Our 2009 advertising and merchandising plans will continue to emphasize the value proposition of our brands,” said Rosenfeld.

So far, the strategy seems to be working. New Oscar Mayer Deli Creations Flatbread Sandwiches brought in double-digit growth, as did the new line of DiGiorno and California Pizza Kitchen single-serving pizzas. According to the company, value messaging behind Kraft staples, such as Jello and Macaroni & Cheese, also resulted in a 2 percent organic revenue increase. Sales of Oreo Cakesters are nearing the $100 million mark and Oreo grew by more than 20 percent.

Kraft spent $805 million on U.S. measured media through November 2008, excluding online, per Nielsen Monitor-Plus.