STRONGBRANDS    Professor Tim Calkins, Kellogg School of Management

This week I’m busy teaching in the Kellogg on Branding executive education program. Earlier today one of the participants asked me for my thoughts on the new Kraft Foods. This was a timely question; Kraft is in the news because the company just completed its split. The fast growing snacks business is now a distinct company called Mondelez. Kraft Foods is the North American grocery business, made up of brands like Miracle Whip, Grey Poupon and Cool Whip.

In theory the new Kraft should do well because the company can now focus on the grocery business. The combined company logically devoted resources and time to the high growth snacks business, neglecting the grocery side. With additional focus, the grocery business should do well, at least in theory.

The reality isn’t quite so simple. The new Kraft has two significant issues. First, Kraft hasn’t invested in its grocery brands for many years. Bloomberg recently reported that, according to a New York consulting firm, Kraft spent only 3% of sales on advertising over the past couple years. This is dramatically lower than General Mills (5.7%) and Kellogg (8.6%). With little investment the brands have eroded and now need innovation and great marketing. This spending will probably have a negative short-term ROI; building brands doesn’t deliver quick profits.

Second, Kraft plays in mature categories. There just isn’t a lot of growth in gelatin and macaroni and mayonnaise. One might wish for lots of growth, and proclaim that with innovation the category growth will appear. But that just isn’t likely to happen.

Kraft might have a bright future. The company could rebuild its brands, win over customers and deliver solid financial returns.

The key, however, is setting appropriate financial expectations. Kraft won’t be growing much, perhaps not at all. In the short run, profits should actually decline some as the company invests in marketing and innovation. But the dividend should be solid and results generally consistent and predictable.

The risk is that the new executive team tries to generate significant growth. The easy way to get growth in profits is to cut overhead, trim marketing, reduce product costs and spend on quick volume driving tactics like discounting. This formula will lead to long-term brand erosion and a difficult future.

Giving the new executive lots of stock options would be a very bad move; the stock market rewards quick profit growth. It is hard to resist the temptation to focus on short-term profits when there are options at stake. Hopefully the board sets the right incentives and Kraft’s new executive team builds the business, setting the stage for a bright future.

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