New product development at Kraft Foods Group: ’The days of spray and pray innovation are gone’

Speaking to analysts and investors on Friday ahead of the firm’s October 1 split into North American grocery and international snacks, CEO-designate of Kraft Foods Group Tony Vernon said volumes for most US packaged grocery companies in the center of the store are going backwards.

And given that “a weak economy with highly volatile commodity prices is now the new normal” ​in the US, innovation is critical to Kraft Foods Group’s future, he said.

“What’s most worrisome is that no-one, absolutely no-one, has grown volume over the time period - that has to change and Kraft must lead that change.” ​

Game-changing new products will be part of the solution along with higher investment in brand building, he said.

However, “big bet new products must meet new standards covering purchase intent, margin, and sustained profitably over many years”, ​he added.

We’ve gone from worst to first in all innovation measures​

Kraft has developed some innovative new products in recent years, including MiO liquid water enhancers, Philadelphia cooking crème and MilkBite milk & granola bars, which have created completely new grocery categories, he claimed.

“We’ve gone from worst to first in all innovation measures.”​

But much more is to come, especially in nuts and coffee, said Vernon.

“Two of the fastest three growing categories in America are nuts and coffee, and we have essentially billion dollar brands in them and a long innovation pipeline especially in coffee.”​

As for liquid concentrates, he said: “We invented this category. In only its second year MiO continues to surge. Revenue is on pace to more than double to over $200m making it one of our most successful new products ever.​

“We’re also extending the platform with new Crystal Light liquid concentrates just as all of our competitors prepare to launch their imitations.”  ​

More emphasis will also be placed on health and nutrition, he said. “By 2015 more than half of our sales will be from better-for-you options.”​

There is no such thing as a mature brand, just tired marketers​

Meanwhile, the way bosses allocate resources to brands will also change, said Vernon, noting that creative advertising campaigns for ‘mature’ brands such as Velveeta and Philadelphia had delivered significant results: “There is no such thing as a mature brand, just tired marketers”.​

He added:“Historically, the breadth of our portfolio has been described by you as a weakness. Peanut butter spread resource allocation and inconsistent innovation. You frequently cited this as evidence that we would not make tough choices. ​

“In the new Kraft, you will see us take this head on by clearly defining the state of our brands and allocating resources based on margin, materiality and the momentum of each of those brands.”​

More money will also be pumped into advertising products that appeal to Hispanic consumers, he said. “Our portfolio is perfect for Latino mums - but we have underspent on ads to this group. We will spend two and a half times what we spent this year in Hispanic A&C support next year.”​

Pricing: Good, better, best​

As for pricing and positioning, more work is needed to tailor prices, pack sizes and products to specific retailers, notably dollar stores, and ensure that entry price points are appropriate, he said.

“We have ‘good, better and best’ offerings on only eight of our top 20 categories.”​

Layers of inefficiency and lack of accountability​

A large part of Vernon’s presentation focused on his ambition to establish Kraft as “the best recruiter and trainer and developer of talent in the food and beverage industry”.​

He added: “You’ve referred to Kraft as having a post office mentality, rife with bureaucracy and entitlement. In fact for years, despite middling results in North America, 50% of our people had ratings of high potential. ​

“Today I’m going to detail a 20-70-10 performance management system where pay and promotion are tied directly to shareholder returns.​

“There will be no more automatic incremental post office compensation. Starting with my own… 80% of my pay is variable, which is significantly higher than my peers.​

“My bonus will range from zero to 250% of target if we hit it out of the park.”​

We have a huge opportunity to improve profitability at New Kraft. ​

On an operational front, Vernon said bosses had already worked hard to redraw “bloated​” organizational structures and strip back “layers of inefficiency and lack of accountability” which meant operating profit margins lagged behind those of​ peers such as PepsiCo, Smucker, Heinz and General Mills.

He added: “I want​ to have the leanest overheads in our industry without sacrificing quality and to be the lowest cost producer in each category."​

Analyst: Brand building strategy makes sense​

MorningStar analyst Erin Lash told FoodNavigator-USA that she was encouraged by Vernon’s presentation and focus on innovation and investing in brands rather than pumping cash into promotions/discounts that damaged brand equity.

She added: “This is important given the competition they face from rival brands and the growth in private label.”​

Meanwhile, splitting into snacks and groceries would not reduce Kraft’s leverage with key customers, she noted as the businesses are still huge in their own right, and what matters with retailers is category scale (the fact Kraft is splitting into grocery and confectionery makes no real difference because they are talking to two different buyers anyway),

On October 1,Kraft will split into two publicly traded companies: Kraft Foods Group, an $18.7bn North American packaged foods giant with a portfolio of brands including Kraft, Maxwell House,Oscar Mayer, Planters and JELL-O;and Mondelēz International, a $36bn global snacks company with brands including Cadbury, Jacobs, LU, Milka, Nabisco, Oreo, Tang and Trident.