NEW YORK Squeezed by higher commodity costs and ad spends, Kraft and Kellogg are both planning to raise prices on many of their products.
The announcements by both came after disappointing Q4 earnings on Wednesday. Kraft's earnings fell 6.3 percent while Kellogg's slipped 3 percent compared to the year-ago period.
Kraft, which markets Nabisco, Philadelphia and Maxwell House brands, attributed declines to higher dairy and marketing costs. Kraft invested heavily in marketing support for new products such as Single Select cheese slices, Oreo Cakesters, DiGiorno Ultimate Pizza, Maxwell House Coffee, as well as Oscar Meyer Deli products to inflate sales.
CEO Irene Rosenfeld said in a conference call with analysts and investors that marketing expenses rose to 6.9 percent of revenue, up from 6.8 percent in 2006. "As we enter 2008, we're targeting to be more in the mid-seven range," she said. Between January and November 2007, Kraft spent $1.023 billion in measured media (TV, radio, print and outdoor), versus $1.003 billion for the comparable period in 2006, per Nielsen Monitor-Plus.
CFO Tim McLevish told analyst that where Kraft has invested, it's seeing results. "Our efforts to revitalize processed cheese slices with better marketing and the introduction of Single Select helped reverse our share declines in that segment," he said, noting that Kraft delivered double-digit revenue and share gains in snacking cheese in the quarter.
However, operating income in the North America cheese and foodservice division declined 53 percent as contributions from new products like Singles Select and LiveActive snacking and cottage cheese were offset by record high input costs including a more than 40 percent increase in dairy costs.
Rosenfeld said that Kraft would increase cheese prices further, which may hurt demand. She said that Kraft typically prices to the expected average, not the peak dairy costs in any given year. As a result, when cheese costs stayed high late in the year, "Our pricing actions did not keep pace with costs. Therefore, we are taking additional pricing actions now."
Analyst David Driscoll of Citigroup wrote in a report that the firm believes Kraft has been through the worst of its recent declines and that its restructuring is beginning to take hold. However, "we remain concerned about a number of risk factors, including recent market share losses in key U.S. categories such as biscuits (cookies and crackers), coffee, cereal and sliced lunchmeat," he said, adding that price hikes have not been sufficient given the significant margin contraction occurring at Kraft.
Meanwhile, Kellogg, which markets Special K, Pop-Tarts and Keebler cookies, notched double-digit increases in ad spending, significantly along with higher commodity costs. Kellogg spent $567 million in measured media (TV, radio, print and outdoor) between January and November 2007, up from $552 million in the comparable 2006 period, per Nielsen Monitor-Plus.
Kellogg's global advertising outlay hit $1.06 billion for the year, the first time the company broke the $1 billion mark. John Bryant, CFO, said during a conference call with analysts and investors that though Kellogg is spending more, it's doing it more efficiently. "We have increased our presence with more targeted communications at a lower cost, allowing us to invest more into our best ideas." He said that Kellogg would continue to review that spending for further efficiencies, but added, "advertising is an essential part of that business model and we have even more investment plans for 2008." David Mackay, CEO noted that Kellogg's advertising is 12 percent of sales, "which is very strong for our business, but we will continue to increase certainly at a rate consistent with sales growth."
In an effort to offset rising materials costs, Kellogg has increased prices. In the U.S. cereal business, price increases were in the low single digits. The price hikes take effect this month.