Restaurant Gains Force Kraft to Cut Costs

Food giant Kraft Foods announced yesterday a restructuring that was precipitated by foodservice's gains over supermarkets, according to published reports. Kraft said it would eliminate 8,000 jobs, or 8% of the work force, and padlock 20 plants. The decision comes on top of 5,500 layoffs and 19 plant closures that Kraft announced two years ago.

The National Restaurant Association expects operator sales to reach a record $511 billion in 2006. The projected annual sales would mean a 5.1% increase over last year and a total economic impact of over $1.3 trillion, the NRA said. It will be the first time the industry's sales will cross the half-trillion dollar mark, the NRA pointed out. In terms of consumption, the annual sales figure translates into $1.4 billion per day or about $1,703 per every American man, woman and child for the entire year.

At the same time, the packaged-food industry is expecting growth of about 2%.

"Packaged-food companies, which aim their products at ordinary shoppers, are beginning to see slower growth as consumers are choosing the convenience of eating out at restaurants or relying on take-out — while making fewer trips down grocery aisles," The New York Times wrote in today's edition.

Kraft said yesterday that it would close plants in Broadmeadows, Victoria, in Australia and in Hoover, AL, although it did not announce the other plant closings. It also said it would trim 10% of its brand portfolio.

Kraft reported sales yesterday that were up 10% for the quarter, to $9.66 billion. Earnings for the quarter were $773 million, or 46 cents a share, up from $628 million, or 37 cents a share, a year earlier. The United States is Kraft's largest market, comprising about 65% of total sales.

In foodservice, growth was driven by strength in national accounts, partially offset by the elimination of lower margin SKUs. Sales grew from $7.4 billion to $7.8 billion in 2005, or 4.8%.

In a conference call yesterday with investors, Roger K. Deromedi, ceo, acknowledged that the company's financial results were "not where we wanted them to be when we started the year."

"While 2005 was a difficult year for Kraft and several of the challenges we faced will continue in 2006, I am pleased by our progress in many areas, particularly in our fourth quarter U.S. market shares," Deromedi said. "The actions we've taken over the past two years have improved our Brand Value propositions and are enabling us to drive out costs even more aggressively."


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