Kraft earnings fall for fifth straight quarter
commodity costs and retail price pressures took their toll.
The company said commodity costs were up about $225 million in the quarter, with dairy costs the biggest increase due to the carry-over effect from the record high cheese markets in the second quarter. Energy costs have also eaten into profits.
Over the summer, Kraft announced price increases on certain products to offset ballooning costs for certain ingredients such as milk, meat and coffee. But those price increases, which did help boost its revenue 4.7 per cent during the quarter, weren't strong enough to compensate for increases in commodity and oil costs.
The difficulty for manufacturers such as Kraft is that they have been unable to pass on these higher costs, and are effectively being squeezed by an increasingly powerful retail sector. The Wal-Mart business model in which the goal of cutting prices relentlessly is the ultimate objective has been copied extensively in both North America and Europe and, from a retail point of view, has been a stunning success.
But to achieve all this, suppliers and manufacturers have been squeezed relentlessly to cut wholesale costs.
As a consequence third-quarter net income fell 3.8 per cent to $779 million from $810 million a year ago. The result included a $61m pre-tax restructuring charge.
The results top a tough year for the company, which is second only to Nestlé in terms of global sales. Earlier on, chief executive Roger Deromedi initiated a far-reaching programme that included the loss of 6,000 jobs and the closure of up to 20 plants worldwide.
The company claims that the plans are part of an aggressive attempt to reposition the company for stronger long-term growth. But the costs of the programme have so far outweighed the savings. For the first nine months of the year, the programme cost $508 million but saved just $84 million, according to a report in the Financial Times.
Kraft is also report to be considering selling four of its brands - Oscar Mayer meats, Post cereals, Life Saver candies and Altoid breath mints in an effort to streamline its operations. A report in the New York Post said that Kraft, which is owned by holding company Altria, has already met with various investment banks to assess the value and market interest for the brands.
The most likely buyer appears to be Wrigley, which has been on the lookout for a purchase ever since it failed to clinch a deal for Hershey Foods in 2002. Hershey is also a potential buyer, analysts say, as are Mars, Cadbury Schweppes and Nestlé.
The future health of major food manufacturers such as Kraft remains uncertain. Commodity costs in 2005 are likely to be wildly unpredictable. While the cost of some ingredients such as milk may well begin to decline, energy costs are likely to continue increasing.
For the full year, Kraft projects a negative pre-tax impact from commodities of more than $750 million versus last year, higher than previous estimates due primarily to continued high costs for coffee, meat, energy and packaging. On its restructuring programme, the company projects full year pre-tax asset impairment charges and exit and implementation costs of $750-$800 million and pre-tax savings of $120-$140 million, both of which are consistent with previous guidance.
