With Cadbury, Kraft pushes into China

By Dow Jones Newswires
Posted Aug. 13, 2010 at 5:55 a.m.

Kraft Foods Inc. is seeking to raise the profile of Cadbury products in China as the U.S. food giant ramps up investments in developing markets, particularly the Asia-Pacific region, which has become Kraft’s key growth driver following its multi-billion dollar acquisition of the British confectioner earlier this year.

The Northfield-based company, with brands such as Kraft, Maxwell House, Tang and Oreo, has been expanding its presence in developing markets during the last three years amid slowing growth at home. It spent $7.2 billion to buy Groupe Danone SA’s global biscuit business in 2007 to give it a stronger toehold in countries such as China and Indonesia.

Kraft Chief Executive Irene Rosenfeld said the company’s $19 billion purchase of Cadbury PLC was “just the next step in that evolution.” Kraft targeted the confectionary producer in large part because of its presence in fast-growing developing markets in Latin America, Asia-Pacific and the Middle East.

Rosenfeld told Dow Jones Newswires in an interview that Kraft is placing “disproportionate focus” on Asia-Pacific, mainly because of the strength of the Indian and Chinese consumer markets, in which the company expects to see “explosive growth” in the future.

The world’s second-largest food company after Nestle SA doesn’t break down its figures for Asia-Pacific, but it has said its operating profit for the region has registered double-digit growth since 2008, and it expects a similar trend to continue.

Though Cadbury has had a strong position in India, its presence in mainland China–Kraft’s fastest growing market–has been very small. Rosenfeld said she hopes to build on the success of Kraft’s Oreo cookies in China with Cadbury’s line of products, which include Dairy Milk, Trident, Dentyne chewing gum and Halls cough drops.

Kraft’s China revenue has quadrupled during the last four years, helped by the acquisition of the Danone biscuit business, which provided a strong distribution platform for Kraft to market flagship products such as Oreo.

Efforts to cater to local tastes by reducing the sweetness of Oreo cookies sold in China have helped make the brand the best-selling packaged cookie in the country, according to Kraft.

“I think you will see a similar step-up in a number of the core Cadbury businesses,” said Rosenfeld. “Cadbury was essentially sub-scale in that market and today, as part of the Kraft family, the infrastructure is considerably greater and our opportunity then to penetrate the country…is that much greater.”

Rosenfeld added she expects the Cadbury franchise in China to be a “very important and significant growth engine for us in the next couple of years,” but declined to give projections.

Kraft has already taken Cadbury’s Halls cough drops to outlets in China that carry Kraft products, and the company expects similar opportunities to raise awareness of other Cadbury brands.

The company is also realizing operational savings in China with the combination of the two businesses. For example, the company is making surplus sugar from its Tang factory available for use at Cadbury’s Halls factory, which is just 500 meters away, said Rosenfeld.

In addition, she said the company is in the process of consolidating the China headquarters of Cadbury and Kraft in Kraft’s Shanghai offices. Cadbury had been operating out of Beijing.

The inclusion of Cadbury’s operations helped boost Kraft’s second-quarter net revenue from developing markets by 73.4 percent from a year earlier to $3.30 billion, surpassing contributions from Europe, and accounting for 27 percent of its total $12.25 billion of revenue for the quarter.

Rosenfeld said Kraft will invest more heavily in developing markets, especially in Asia-Pacific, to drive growth from a strong base. Aggregate spending in the region will be “considerably north of” the 8 percent of revenue Kraft has planned for the company as a whole, she said, though specific investment figures haven’t been finalized.

But she said new acquisitions won’t be part of Kraft’s investment plans. “I feel very good about our portfolio, and it will be many years before we work through some of the opportunities, so I would say it would be premature to comment on those kinds of opportunities.”

Since becoming CEO in 2006, Rosenfeld has led an effort to make Kraft a bigger, more profitable company through acquisitions and investments in major brands.

Under her watch, the company’s developing-market strategy has involved placing particular focus on 10 products in 10 key markets, helping boost profits from the segment by 24% over the last three years.

With the Cadbury deal, Kraft has added Trident, Halls, and Dairy Milk to its list of 10 focus products and put India on the map as a target market.

Rosenfeld said she looks forward to building Kraft’s businesses in China and India to the point where they each generate US$1 billion in revenues a year, putting them on a level with the company’s operations in Russia and Brazil, though she declined to provide a timeframe. “I’m quite optimistic about the future of our business in this region.”

-By Jeffrey Ng, Dow Jones Newswires

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