Kraft, the US global foodstuffs manufacturer, had a very good year last year and after a series of recent acquisitions is rightly termed a multinational. But not it is facing previously unforeseen challenges that it must address.
More than enough to chew over
Even in difficult times, food is the last thing to drop off the average consumer's shopping list. Selling everyday foods, such as juice mix and processed cheese, continued to be big business last year for Kraft Foods, based in the US, whose net revenues were US$13.8 billion (Dh50.68bn), up 30 per cent from the previous year. The multinational company's profits increased by 21.6 per cent to $4.8bn.
But while the global economy continues on the road to recovery, there are a few stumbling blocks this year. The cost of many key food commodities such as sugar and wheat are rising to near-record levels, squeezing food manufacturers' and retailers' profits. Protests in parts of the Mena region are disrupting sales in countries such as Egypt and Libya.
Here, Vishal Tikku, Kraft's managing director of the GCC and Middle East shared services, tells The National how the foodstuff giant plans to address these challenges.
Q: How was last year for Kraft Foods?
A: Last year was good for us. I know the general sentiment in the market is that there has been a downturn since a couple of years. We haven't experienced that. Consumers tend to keep eating, in fact, the global trends were that people tended to eat more at home. So we haven't seen a massive downturn. It was a good year for us. We got high double-digit growth.
Q: Which markets were the strongest or fastest growing?
A: Qatar did grow stronger than the UAE … but in the larger scheme of things, Saudi dominates, and UAE and Kuwait are second and third. Qatar, Bahrain and Oman, if they do grow at a higher percentage, they don't make a massive difference to the overall pie because it's less than 10 per cent of the total [in the Mena region]. Globally, last year for Kraft was watershed because we turned into this giant, a global snacks powerhouse. Kraft historically has been a very North America-centric company, and with the acquisitions, one was LU biscuits a few years ago, and last year Cadbury, places 50 per cent of our portfolio in snacks and places 60 per cent of our revenue outside of the US. So it truly makes us a global company. We didn't have a big business in India, we didn't have a big business in South Africa, we didn't have a big business in Turkey, but Cadbury has major business there and a distribution pipeline.
Q: What is Kraft Foods's outlook for this year and for the food industry in the Middle East as a whole?
A: For the food industry, and for us, it will continue to be normal growth. We will grow as we have. Our real challenge in 2011 will be in profitability, because global food commodity prices are at a level which are really staggering at this point. And, while nobody really knows, our outlook suggests that it is not coming down any time soon.
Q: How much of an impact will this have?
A: It will hit our profitability quite adversely. We are a cheese and Tang [juice mix] and biscuits company. Wheat prices are high, cocoa prices are high, sugar is at an all-time high, dairy is really very high. So it kind of puts our profitability under pressure and places far more pressure on us to improve. Because you cannot pass this on to the consumer. So you have to manage that through reduced profitability … and also through better efficiencies.
Q: How do you plan to handle these extra costs?
A: You have to take a call whether this is long term or short term. So, some in the industry have taken the call that this is long term … the soft drink industry have taken a significant price increase. They have gone from Dh1 to Dh1.50 on a can of Pepsi or Coke. You can take some prices increases where possible, and the rest you have to manage through a diluted margin. Profitability of food companies will be under pressure.
Q: What can consumers expect in terms of pricing this year?
A: There will not be major increases, but in some instances we may have to raise prices. Some of the industry has chosen to take pack sizes down, we haven't done that … But the pressure might get so much somewhere in the middle of the year that we may have to make a call. But the price increases are never more than 5 or 7 per cent. There is a pressure on us, and we will manage it as long as we can, and we do what we can to mitigate it.
Q: Is the regional consumer ready for price increases, after becoming increasingly budget-conscious during the economic downturn?
A: There is more acceptance at this point. I think because of the scale of the problem, and the number of manufacturers which foresee a price increase, I believe there is greater acceptance. Economies like the UAE and Saudi are more geared or more able to withstand a global increase in commodities. The real issue is in a place like Bangladesh, or Algeria, where people are out on the streets saying "we can't afford this". There is more tolerance here, more affordability, quite simply. But it's just a fact, food prices will have to go up. If oil is up, plastic is up. Whenever you transport things, your costs are higher. What can you do other than pass it?
Q: Is there anything that you can do in terms of tweaking the formula of your products to cut costs? How else do you plan to reduce costs?
A: That would be our last resort. What you don't want to do is to dilute the quality of your product. Your consumers are used to a certain kind of quality, and you don't want to jeopardise the quality of the product we offer. You see how you can derive efficiencies. At the factory, can you do things differently. Can we do some packaging savings? Can we remove that divider in the middle? You start challenging everything. That is what the business must do.
Q: What impact has the recent unrest had on Kraft Foods's operation in the region?
A: We had to shut down our plant [in Egypt], but they seem to have recovered quite well. I don't believe that there is a serious permanent impact of any kind. They got back as quickly as they could and production is in full swing. It's, at this time, back to normal. In Bahrain, we shut our plant down for about two days, just sort of a cautionary measure. There wasn't any real danger in Bahrain, but just for the safety of our employees, we shut down for two days. Yemen is also a place of upheaval, and we have been unable to sell this month because there is a wide-scale public disorder in the country. Our plant is still running in Yemen, but we can't get [products] to the shop. There is public disorder in the streets, so our distributors can't sell. That is a stumbling block. We have a distributor there in Libya, and we're not selling to them at this point in time … and they're not selling to the trade. Normally, you would carry about four weeks' worth to our distributor. So for about two or three weeks it's not a real issue. They have stock and they can supply the market. But when it gets longer than that then there is a problem.
Q: What impact do you think the protests will have on the food industry this year?
A: We can't really say which way this goes, how serious this is. I'm hoping nothing much will happen. All our plans from this point onward are not built in case we [meet] a stumbling block. It's food, and people tend to continue eating food. But we have basic staple products, and people tend to continue buying them.
Q: What about the growing health consciousness globally and in the region? What kind of impact does that have on Kraft Foods, when 50 per cent of your portfolio is snacks?
A: It's a balance thing. When that happens to a large extent, then we will have to react to it in terms of offering solutions to the consumers which they want. Frankly, so far, we haven't seen consumers making a choice of healthier products over tastier ones. It's a real difficult thing. What we have to do as manufacturers is to offer delicious products, which are healthier. As soon as you get into a non-sugar product in this market, the share is really small, because they just don't like the taste. So we have to offer products which are delicious and healthier.
Q: Have you launched healthier products?
A: We have a cheese product and it's high protein. But healthier products are also about portion control, so we have [smaller chocolate] sticks here. We have projects that aren't out at this time, but yes, we are working on products that are healthier and we'll see if they get picked up. We also do our bit to be part of the community, and we sponsor the diabetes campaign. Consumers will always buy delicious products. We need to make tasty products which are good for you. There has been a health and wellness trend which has been around for more than 10 years. It hasn't hit us in any big way. It is certainly one of the things we need to watch. And at a certain time, people will respond to that [trend] and so will manufacturers.