Kraft Foods1 Dan Lutz University of Massachusetts Amherst

Under the supervision of Tom Juravich Conference Research Director Kate Bronfenbrenner Conference Coordinator

February 1, 2006

Prepared for the International Conference

Global Companies Global Unions Global Research Global Campaigns

This report was funded by the universities supporting the Global Companies-Global Unions-Global Research-Global Campaigns conference and prepared in keeping with one of the primary goals of the conference increasing our understanding of the changing nature of the structure and practices of multinational corporations in the global economy. It was prepared for educational purposes only and should not be copied, distributed, or disseminated beyond the participants of this conference. Neither Cornell nor any of the authors or other academic institutions involved in preparing this report intends to advocate or advance any particular action by any individual or organization as a result of the report.

Table of Contents 1. Executive Summary .............................................................................................1 1.1 Description of Firm and Operations ..................................................................1 1.2 Profit Centers .....................................................................................................1 1.3 Growth Plan .......................................................................................................1 1.4 Key Decision Makers.........................................................................................2 1.5 Key Relationships ..............................................................................................2 1.6 Possibilities for Union Cross-Border Comprehensive Campaigns....................3 2. Introduction..........................................................................................................3 2.1 Basic Information...............................................................................................3 2.2 Company History ...............................................................................................4 3. Operations ............................................................................................................4 3.1 Business Segments.............................................................................................4 3.1.1 Products...........................................................................................................4 3.1.2 Organization of Production.............................................................................6 3.1.3 Facilities..........................................................................................................7 3.1.3.1 Unionization of Facilities.............................................................................8 3.2 Workforce ..........................................................................................................9 3.3 Suppliers ............................................................................................................9 3.4 Distribution ......................................................................................................10 3.5 Clients and Customers .....................................................................................10 3.6 Marketing.........................................................................................................11 4. The Industry and Competitors ...........................................................................11 4.1 Industry Overview ...........................................................................................11 4.2 Major Players and Competitors .......................................................................12 5. Financial Analysis..............................................................................................13 5.1 Balance Sheet and Income Statement ..............................................................13 5.2 Key Financial Ratios........................................................................................14 5.3 Competitors......................................................................................................15 5.4 Segment Analysis.............................................................................................15 5.5 Stock Analysis .................................................................................................16 6. Command and Control.......................................................................................16 6.1 Parent Company: The Altria Group.................................................................16 6.1.1 Operations .....................................................................................................17 6.1.2 Command and Control..................................................................................17 6.1.3 Business Strategy and Growth Plan..............................................................18 6.1.4 Outside Stakeholders ....................................................................................19 6.2 Management.....................................................................................................20 6.3 Board of Directors............................................................................................22 6.4 Stockholders.....................................................................................................25 6.5 Lenders.............................................................................................................26 6.6 Subsidiaries ......................................................................................................26 6.7 Business and Competitive Strategies ...............................................................27 7. Outside Stakeholders .........................................................................................29 7.1 Safety and Health.............................................................................................29

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7.2 Environmental..................................................................................................29 7.3 Regulation ........................................................................................................30 7.4 Community ......................................................................................................30 7.5 Politics..............................................................................................................31 8. Conclusion .........................................................................................................31 8.1 Profit Centers ...................................................................................................31 8.2 Growth Plan .....................................................................................................32 8.3 Key Decision Makers.......................................................................................33 8.4 Key Relationships ............................................................................................33 8.5 Possibilities for Union Cross-Border Comprehensive Campaigns..................34 Appendix A Facility Locations...........................................................................35 Appendix B Financial Analysis ..........................................................................41 Works Cited ...........................................................................................................53

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1. Executive Summary Kraft Foods is changing. Sometime in 2006, Altria will sell its daughter company. CEO Roger Deromedi is selling sections of the business, consolidating divisions, and slashing jobs. Altria and Deromedi aim to create a leaner, more independent food company. 1.1 Description of Firm and Operations A multinational company, Kraft manufactures foods in five major categories: Snacks, Beverages, Cheese and Dairy, Convenient Meals, and Grocery. Geographically Kraft has two divisions: Kraft Foods North America and Kraft Foods International. Most of Krafts sales come from the North American market. With 2004 revenues more than $32 billion and a global workforce of 98,000 employees, Kraft is the second-largest food company in the world. Altria owns 85% of Kraft stocks, and Altria CEO Louis Camilleri chairs Krafts Board of Directors. To shield Kraft from tobacco litigation, in 2006 Altria plans to spinoff Kraft. 1.2 Profit Centers The North American market is Krafts profit center. In 2004, the North American market brought in 63% of Krafts revenue. Moreover, that same year operations in North America accounted for more than four fifths of the companys operating income. 2 Strong sales and low costs in its Convenient Meals, Grocery, and Beverage sectors drive Krafts North American profits. Kraft faces stiff competition from store brands. Krafts products that are difficult to copy and different from basic commodities earn the highest revenues. Frozen pizza, for example, drives the high margins in Convenient Meals. Though just a basic commodity, Cheese, an essential part of Krafts profit center, brings in the largest portion of Krafts North American revenue. 3 Bringing in one fifth of Krafts revenue, Europe is a weak profit center, accounting for only 14.2% of the companys operating income, mostly from Snacks and Beverages. 4 1.3 Growth Plan Krafts Sustainable Growth Plan aims to consolidate the company around a few core brands. Five key elements define the Plan: Focus on core brands and product lines, particularly Cheese, Beverages, and frozen pizza. Sell off brands and operations outside of the core. Close plants and restructure production.
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Kraft. Form 10-K. March 11, 2005. p. 2. Kraft. Form 10-K. March 11, 2005. p.2. 4 Kraft. Form 10-K. March 11, 2005. p. 3.

Develop new food technologies within their core product lines, such as DiGiorno frozen pizza and the Tassimo coffee system. Increase marketing and brand-building.

In the past Kraft sought growth through the acquisition of other businesses and brands. Its strategy today is very different from the old merger strategy. Consolidation, not acquisition, is at the center of the companys Sustainable Growth Plan. Over the next few years, Kraft will shrink to grow. 5 The company will sell off more businesses and close more plants. Kraft will shift the savings into research and marketing. International Expansion: No Longer a Priority After its IPO, Kraft sought to expand aggressively into international markets. Today, overseas expansion does not immediately interest the company. Before looking for any major overseas acquisitions, Kraft will finish its consolidation in the United States. 1.4 Key Decision Makers Three primary actors define Krafts business strategy: Altria, CEO Roger Deromedi, and Krafts corporate bureaucracy. Altria holds overall control of the company, but in 2006 it will spinoff Kraft. This spinoff will reshuffle relationships among the current key decision makers. The spinoff will increase Deromedis control, the architect of the Sustainable Growth Plan. Nevertheless, with its strict lines of command, Krafts own corporate bureaucracy will resist Deromedis restructuring. Even if it retains a major portion of Kraft stock, Altria will abdicate control over the new company. Camilleri will probably leave the Chairmanship to either an outside, independent new Board member or to Deromedi himself. In addition, the spinoff will add a new decision maker: new potential shareholders. Deromedi will seek to please new shareholders, and they will hold significant power over him. Today, Krafts Board of Directors is relatively weak. Its members come largely from the Chicago business community or from inside Altria. Altrias spinoff will shake up the board. New shareholders will demand a more independent board with more influential members. 1.5 Key Relationships As Altrias daughter, Kraft is isolated. As a new, independent company, it will have to negotiate new relationships. First, Kraft must clarify its relationship with Altria. As much as possible, Kraft will seek to distance itself from the cigarette company. Kraft will also seek to please new shareholders. New shareholders will expect steady, sustainable growth, clear leadership from Deromedi, and independence from Altria and its liabilities.
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Neff, Jeff. Can Kraft Shrink to Grow? Food Processing. May 2004. p. 37.

1.6 Possibilities for Union Cross-Border Comprehensive Campaigns Kraft is a rich target for cross-border, comprehensive campaigns. Some of its most profitable sectors remain unorganized especially in the profitable Convenient Meals and Beverage divisions. Kraft makes all of its frozen pizzas in just three plants in Wisconsin. Kraft is vulnerable. Kraft depends on the good name of its brands. Rising commodity prices and competition from store brands are already hurting Kraft. By identifying crossover brands, targeting regional markets and highly profitable brands, and following Krafts supply chains, unions can create powerful campaigns to organize Kraft workers and win good contracts. Kraft is especially vulnerable in two areas: Beverages and Frozen Pizza. The Beverage segment is highly profitable in both Europe and North America. Moreover, Kraft wants to release the new Tassimo hot beverage system without any major complications. While only dominant in the U.S., Frozen Pizza is also an important target for organizing. Two of Krafts frozen pizza brands, DiGiorno and Tombstone, dominate the grocery pizza market, yet all three of Krafts frozen pizza plants in the U.S. all in Wisconsin remain unorganized. 2. Introduction 2.1 Basic Information Kraft Foods is an international food manufacturer. Krafts corporate headquarters is located in the Chicago suburbs at Three Lakes Drive, Northfield, Illinois, 60093. 6 Krafts main telephone number is 847 646-2000, and its fax number is 847 646-6005. Kraft maintains two websites: www.kraft.com contains corporate information, while www.kraftfoods.com provides product descriptions and recipes for Krafts brands. 7 Kraft is publicly traded on the New York Stock Exchange. Kraft trades under the ticker symbol KFT. 8 Kraft has been traded since the companys initial public offering in 2001. Despite this public offering, Altria, formerly Philip Morris, still holds 85% of Kraft stock and controls 98% of shareholder votes. 9 In 2006, Altria plans to spinoff Kraft, creating a fully-independent company. 10 Kraft employs 98,000 employees in 68 countries. These employees manufacture food in five main categories: Dairy and Cheese, Snacks, Beverages, Grocery, and Convenient
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Kraft. Form 10-K. March 11, 2005. Mergent Online. Kraft: Synopsis. 8 Mergent Online. Kraft: Synopsis. 9 Kraft. DEF 14A. March 4, 2005. p. 1. 10 Jargon, Julie. Altria May Spinoff Kraft in Early 2006. Crains Chicago Business. July 13, 2005.

Meals. 11 In 2004, sales of these products in 155 countries earned Kraft revenues of more than $32 billion (see Appendix B: Income Statement). Sales of food in North America accounted for 68.6% of Krafts total revenue. 12 2.2 Company History Over the last one hundred years, Kraft has grown from a small Chicago cheese firm to a multinational manufacturer of dozens of food brands. Today, Kraft Foods is much more than just cheese. Kraft is an empire of popular brands in dairy, biscuits, cereal, confectionery, coffee, and beverages. This growth quickened in the last two decades as several large food companies merged to form todays Kraft Foods. In 1909, J.L. Kraft founded his cheese business in Chicago. Kraft pioneered the mass production of sterilized, packaged cheese. First, the company mastered the pasteurization of processed cheese. Later, the company developed cheese slices, Velveeta, and Cheez Whiz. 13 But today cheese is only one part of Kraft. Several major mergers in the 1980s broadened Krafts brand base. First, in 1981, General Foods acquired Oscar Mayer. Then in Europe, Jacobs Kaffee merged with Suchard-Tobler in 1982. In 1985, two cigarette firms joined the merger wave: Philip Morris bought General Foods, and RJ Reynolds merged with Nabisco. Finally, in 1988, Philip Morris bought Kraft. 14 These mergers continued in the next decade, producing Kraft Foods. First, in 1990 Kraft General Foods bought Jacobs Suchard. 15 Then, at the end of the decade, Philip Morris acquired Nabisco from RJ Reynolds, integrating the company into the current Kraft Foods. 16 3. Operations 3.1 Business Segments 3.1.1 Products Kraft manufactures and distributes branded food products around the world. Kraft divides its dozens of brands into five categories: Snacks, Beverages, Cheese and Dairy, Grocery, and Convenient Meals. Kraft plans to concentrate on these five categories and to sell brands outside of this core. In 2005, Kraft completed a sale of its confectionery business to Wrigley. 17
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Kraft. 10-K. March 11, 2005. pp. 2-3. Kraft. 10-K. March 11, 2005. p. 3. 13 Kraft. Kraft History. James Lewis Kraft. www.kraft.com/100/founders/JLKraft.html. 14 Kraft. Kraft History. 1980s. www.kraft.com/100/timeline/time_1980s.html. 15 Kraft. Kraft History. 1990s. www.kraft.com/100/timeline/time_1990s.html. 16 Kraft. Kraft History. 2000s. www.kraft.com/100/timeline/time_2000s.html. 17 Wrigley Completes Life Savers, Altoids Acquisition. Associated Press. June 29, 2005.

Each of Krafts product categories contains major North American and international brands: Snacks. Biscuits, crackers, cookies, and confectionery brands such as the Oreo and Milka brands Beverages. Coffee, juice, and powdered beverage brands such as the Maxwell House, Jacobs, and the new Tassimo hot beverage system Cheese and Dairy. Cheese brands such as Kraft Singles, Velveeta, and Philadelphia Cream Cheese Grocery. Cereal, salad dressings, and desserts brands such as Kraft salad dressings, Post cereals, and Miracle Whip Convenient Meals. Frozen pizzas, packaged dinners, and meat brands such as DiGiorno, Tombstone, and Oscar Mayer 18 Krafts North American revenue breaks down as follows. Segment Revenue 2004 (in million $) Percent, KFNA Revenue 11.6 % 33.6 % 19.3 % 11.0 % 24.5 % Percent, Worldwide Revenue 7.9 % 23.1 % 13.2 % 7.5 % 16.8 %

Beverages 2555 Cheese and Dairy 7420 Convenient Meals 4250 Grocery 2425 Snacks and Cereals 5410 Kraft North America Revenues, 2004 19

In revenue, Cheese is the largest of Krafts North American products. While Cheese leads in revenue, its operating income has not grown significantly over the past three years. Store brands have competed easily with Krafts cheese brands, essentially a basic commodity. On the other hand, Convenient Meals and Grocery have expanded in operating income over the past three years. 20 In these two segments, Krafts ability to innovate and create complex products gives it an advantage over store brands. With this advantage, the company has seen sustained operating income growth in these high-tech sectors. In particular, Krafts DiGiorno Pizza, with rising crust technology, leads the industry in sales, while Tombstone, another Kraft pizza brand incorporating the same technology, is second. 21 Overseas, different segments predominate. In Europe, coffee and confectionery share a larger section of Krafts revenues. Beverages account for 44.8% of Krafts European revenue, while snacks bring in 32.1%. 22
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Kraft. Form 10-K. March 11, 2005. pp. 3-6. Mergent Online. Kraft: Company Financial Segments. 2005. 20 Neff, Jack. Ooey Gooey Mess. Food Processing. September 2003. 21 Pehanich, Mike. Pizza Breakthrough. Food Processing. April 2002. 22 Kraft. Form 10-K. March 11, 2005. p. 3.

Kraft is selling off non-core businesses to consolidate its priority segments. In 2004, the company sold much of its sugar confectionery business, including Life Savers and Altoids, to Wrigley for $1.46 billion. 23 Industry analysts predict Kraft may intend to sell the Oscar Mayer brand of meats and Post cereals. 24 Less so, Kraft is also making small purchases to fill out growth segments. In 2004 the company bought Veryfine Juice to supplement its other beverage holdings. 25 Fewer Brands, But Better Kraft products are brands, food commodities sold under a brand-name, often at a higher price than similar commodities. Traditionally, Kraft has led the industry in the annual release of new branded products. In the past, Kraft measured its success in the number of new brands released. 26 In recent years, Kraft has shifted its branding strategy from brand expansion to brand consolidation. As part of the companys Sustainable Growth Plan, Kraft announced it would focus on Cheese, Biscuits, Frozen Pizza, and Beverages in 2005. 27 This new strategy fits the advice of Eric Lazar at Lehman Brothers, who argues that Kraft needs to focus on increasing the success-rate of new products. 28 The release of the new Tassimo hot beverage system in Western Europe is a model for Krafts new brand strategy: the new system is part of a priority segment, beverages; Tassimos complexity reduces private label competition; and Tassimos flexibility opens room for the future release of other new products within the Tassimo brand. 29 3.1.2 Organization of Production Kraft splits its production into two sections, Kraft Foods North America (KFNA) and Kraft Foods International (KFI). The company organizes these two sections quite differently. Each major food product has its own division within KFNA, while the company divides KFI by geography. These two sections are imbalanced. Compared to most of its competitors, Kraft brings in a much smaller portion of revenue from its international section than from its North American operation. 30 Until the Initial Public Offering of Kraft in 2001, Philip Morris kept the North American and international businesses isolated as separate, independent units. Betsy Holden ran the North American operations, while Roger Deromedi oversaw the international unit.
Wrigley Completes Life Savers, Altoids Acquisition. Associated Press. June 29, 2005. Jargon, Julie. Kraft Meat Biz Looks Like a Sale Candidate. Crains Chicago Business. March 7, 2005. p. 4; Krafts Strategy Continues to Unfold. Food Processing. April 2005. 25 Acquisitions and Brand-Swapping Return. Food Processing. May 2004. 26 Dornblaser, Lynn. Top 20 Companies Synergistic Acquisitions Pay Off. Prepared Foods. March 2003. p. 95. 27 Krafts Strategy Continues to Unfold. Food Processing. April 2005. 28 Neff, Jeff. Can Kraft Shrink to Grow? Food Processing. May 2004. p. 37. 29 Kraft. Kraft Foods Debuts Tassimo Hot Beverage System in the US. Business Wire. March 16, 2005. 30 Forster, Julie. Can Kraft Be a Big Cheese Abroad? Business Week. June 4, 2001. p. 54.
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Despite the formal merger of these two units into Kraft Foods, organizational differences and business cultures continue to divide these two sections of the business. 31 Kraft Foods North America oversees Krafts operations in Canada and the U.S. Kraft divides this unit into five product segments: U.S. Beverages U.S. Cheese, Canada and North America Food Service U.S. Convenient Meals U.S. Grocery U.S. Snacks and Cereals Kraft created this new segment organization after the sale of its confectionery business. Following the Sustainable Growth Plan, this new structure closely matches the priority segments. Until recently, Kraft managed its Canadian brands within the U.S. Cheese, Canada and North America Food Service division. 32 Under the Sustainable Growth Plan, Kraft has separated these brands into the five major product categories. 33 Kraft Foods International divides its operations geographically rather than by segment. KFI is split into two divisions: Europe, Middle East, and Africa Latin America and Asia Pacific 34 KFI is much smaller than KFNA. As you can see in the segment analysis chart in Appendix B, in 2004 Kraft Foods International produced less than a fifth of the companys total operating income. Most other major food manufacturers bring in a sharply higher proportion of revenue and operating income from international sales. When Philip Morris announced the IPO, industry analysts criticized this imbalance, calling on Kraft to focus more on international expansion. Other companies like Unilever sell basic commodities in emerging markets. Kraft, on the other hand, mainly sells highly-processed products to high-income consumers. 35 Since the IPO, Kraft has attempted to expand into emerging international markets such as Brazil, Venezuela, Mexico, and Russia. Nevertheless, this expansion has not significantly increased Krafts international revenue and operating income. 36 3.1.3 Facilities

Edgecliffe-Johnson, Andrew. Two Brains May Be Better Than One Big Cheese. Financial Times. September 3, 2001. p. 9. 32 Kraft. Form 10-K. March 11, 2005. pp. 2-6. 33 Kraft. Kraft Food Announces Additional Simplification Initiatives. October 14, 2005. 34 Kraft. Form 10-K. March 11, 2005. pp. 5-6. 35 Forster, Julie. Can Kraft Be a Big Cheese Abroad? Business Week. June 4, 2001. p. 54. 36 Kraft Reports Growth in Pizza, Breakfast Meats. Feedstuffs. May 2, 2005. p. 6.

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Kraft operates more than 190 manufacturing facilities worldwide. With its primary market centered on the U.S., Kraft has located most of its facilities in North America: as you can see from the following chart, of all of Krafts facilities, 85 are in the U.S. and Canada. 37 Area Number of Facilities Kraft Foods North America United States 65 Canada 20 Kraft Foods International Western Europe 38 Eastern Europe, Middle East, Africa 20 Asia Pacific 17 South America 20 Central America and Caribbean 4 Mexico 4 Kraft Manufacturing Facilities, by region 38 In North America, most Kraft facilities largely produce for the domestic food market. 39 Under KFI, on the other hand, Kraft manufacturing facilities often produce for a regional market, especially inside the European Union. Internationally, Kraft is expanding into emerging markets in Brazil, Venezuela, Mexico, Russia, and the Ukraine. New facilities in these countries primarily produce for the domestic market, with some production for neighboring countries. 40 As part of the companys Sustainable Growth Plan, the company will close several plants and eliminate more than 6000 jobs. KFNA will cut 1300, and KFI will cut 4700. The company will close newly-acquired plants and move production into older Kraft plants. In the U.S., Kraft will close former Nabisco biscuit plants in Niles, Illinois, and Buena Vista, California. 41 In Europe, Kraft will shutter factories in York, United Kingdom and Budapest, Hungary. In Herentals, Belgium, the company has eliminated three production lines without closing the plant. 42 The sale of part of the companys confectionery business in 2005 eliminated plants in Iowa, Tennessee, Romania, and the United Kingdom. 43 3.1.3.1 Unionization of Facilities
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Kraft. Form 10-K. March 11, 2005. p. 12. Kraft. Form 10-K. p. 12; IUF. Kraft Domestic Production by Segment. 39 BCTGM. Kraft Facility Locations 2005. 40 Kraft Foods Opens $5 Million Coffee Packaging Facility in Ukraine. Datamonitor Newswire. July 12, 2005.; IUF. Kraft Facility Locations 2005. 41 Neff, Jeff. Can Kraft Shrink to Grow? Food Processing. May 2004. p. 37. 42 IUF. Sustainable Growth Plan at Kraft Brings. 6000 Job Cuts Worldwide. www.iuf.org. February 10, 2004. 43 Kraft. Form 10-K. p. 12.

In the U.S., unions represent thirty percent of Krafts employees. Internationally, unions and works councils cover half of Krafts workforce. 44 Since 1996, the Kraft Foods Europeans Works Council has represented all of Krafts employees in the European Union. 45 Several unions represent Kraft employees in the U.S.: the BCTGM, the IBT, UFCW, the RWDSU, and OPEIU. The BCTGM represents all of the companys biscuit plants, as well as one cereal plant. The Teamsters, UFCW, and RWDSU represent workers in cereals, cheese, coffee, desserts, enhancers, and meat. OPEIU represents the Jell-O plant in Woburn, Massachusetts. In the U.S., three important categories are unorganized: all of the companys juice and powdered beverage plants, its three frozen pizza plants, and all of its major distribution centers have no union representation. 46 Kraft needs these sectors to grow. Kraft CEO Roger Deromedi specifically included Beverages and the Frozen Pizzas as priority segments in the Sustainable Growth Plan. 47 Outside of North America, unions in Latin America, Eastern Europe, Australia, and Korea represent large sections of Kraft employees.48 3.2 Workforce Kraft employs 98,000 workers worldwide. More than 45,000 employees work in the U.S., while the remaining 53,000 work internationally. 49 As part of its Sustainable Growth Plan, Kraft will close several factories to cut 6000 jobs. Existing plants and co-packers will increase production to make up for this lost capacity. 50 Especially in segments targeted for reduction, such as biscuit manufacture, these closures will increase the workload for the remaining Kraft workers. Defined-benefit pension plans cover nearly all of Krafts U.S. employees; non-U.S. employees are covered by separate plans. The U.S. and Canadian retirement plans include health care coverage. In 2004, the company estimated that for three pension plans covering salaried U.S. employees, it had not set aside sufficient funds. 51 3.3 Suppliers
Kraft. Form 10-K. pp. 8-9. European Foundation for the Improvement of Living and Working Conditions. EWC Case Studies. Kraft Foods. Dublin: 2005. p.1 www.eurofound.eu.int/publications/files/EF057117EN.pdf. 46 BCTGM. Kraft Facility Locations 2005. IUF. Kraft Facility Locations 2005. 47 Krafts Strategy Continues to Unfold. Food Processing. April 2005. p. 9. 48 IUF. Kraft Restructuring in Latin America. www.iuf.org. November 29, 2001; National Union of Workers. Comprehensive Agreement. Kraft Foods Port Melbourne Plant and National Union of Workers. 2004. 49 Kraft. Form 10-K. March 11, 2005. pp. 8-9. 50 Neff, Jeff. Can Kraft Shrink to Grow? Food Processing. May 2004. p. 37. 51 Kraft. Form 10-K. March 11, 2005. pp. 74, 76.
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Kraft depends heavily on suppliers of agricultural commodities, plastic and pulp container materials, and fuel. 52 Increases in basic food commodity costs and the spike in food costs hurt Krafts operating income. Kraft blamed higher commodity costs especially for coffee, nuts, energy, packaging for its decreased second-quarter earnings. 53 Over the last several years, Kraft has paid high basic commodity costs for food products and for fuel. To cover increased costs, Kraft has raised food prices, limiting its revenue growth. 54 While most of Krafts supplies come from large agricultural firms, Kraft sometimes must buy cheese from smaller producers. When it cannot purchase enough cheese from other suppliers, Kraft bids for cheese through auctions on the Chicago commodity market. Recently, the National Family Farm Coalition has alleged that Kraft, large dairy cooperatives, and large cheese producers are manipulating the cheese auction to lower commodity prices paid to family farmers. 55 The new Tassimo hot beverage system requires a specialized machine in addition to Krafts T-Discs. Saeco International will manufacture the new machines while Braun will distribute them. 56 3.4 Distribution A vast network of distribution centers and depots moves Krafts products to stores. In North America, Kraft operates 175 distribution centers and another 154 depots. KFI runs 25 distribution centers in nine different countries. As part of Krafts direct-to-store transportation plan, many of these depots move products directly from the manufacturing location to store customers. 57 3.5 Clients and Customers Kraft sells the bulk of its products to supermarkets and other food retailers. Geographically, sales are very uneven. In the U.S., Kraft is the leading supplier of foods to supermarkets nearly every supermarket aisle has at least one Kraft product. With a saturated market in the U.S., Kraft aims to increase customer share of stomach. Overseas, on the other hand, products from other multinational food companies overshadow Kraft; considering it a less-popular alternative to other multinational or local

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Standard and Poors. Industry Surveys. Food and Non-Alcoholic Beverages. June 9, 2005. pp. 1-2. Kraft Cites Commodity Costs. Feedstuffs. August 15, 2005. p. 7. 54 Carpenter, Dave. Kraft Net Drops 28 Percent on Higher Costs. Associated Press. January 26, 2005. 55 Grant, Jeremy. Big Dairy Is Milking Cheese Prices, Say U.S. Small Farmers. Financial Times. April 22, 2005. p. 20. 56 Kraft. Kraft Foods Debuts Tassimo Hot Beverage System in the U.S. Business Wire. March 16, 2005. 57 Kraft. Form 10-K. March 11, 2005. p. 12.

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brands, international retailers often neglect Kraft products. 58 Wal-Mart is Krafts largest customer, accounting for 14% of the companys revenue. 59 3.6 Marketing Kraft must advertise to grow. To justify higher prices, Kraft must distinguish its brands from other commodities. After the IPO, Kraft has cut on advertising in order to increase its operating income. 60 Reducing consumer demand for Kraft brands, this cut has hurt sales among key Kraft brands. Maxwell House for example, fell behind Procter and Gambles Folgers brand in 2004, as Krafts ad spending on the brand dropped from $57.5 million to just $31.3 million. 61 As part of its new corporate strategy, Kraft is committed to spend more on advertising. 62 In 2004, the company increased advertising spending by $460 million. 63 To boost Maxwell House, the company will spend more than $60 million. 64 Kraft uses the agency Ogilvy and Mather to handle many of its advertising projects. 65 Krafts new marketing strategy includes a mix of traditional advertising and new, more innovative methods. Don Miceli, Krafts senior Vice-President of Global Marketing, plans to broaden Krafts TV-heavy media buys into more integrated efforts. Kraft used to spend 85% of its advertising budget on television; today, it spends 35% on other media. 66 To launch the new Tassimo coffee system, before using traditional mass marketing methods, Kraft will first rely on buzz marketing techniques. 67 For the South Beach Diet line, the company sponsored showmercials with product creator Dr. Arthur Agatston. 68 4. The Industry and Competitors 4.1 Industry Overview

Forster, Julie. Can Kraft Be a Big Cheese Abroad? Business Week. June 4, 2001. p. 54. Kraft. Form 10-K. March 11, 2005. p. 8. 60 Neff, Jack. Ooey Gooey Mess. Food Processing. September 2003. p. 46. 61 Thompson, Stephanie. Kraft Wakes Up to the Need to Push Maxwell House. Advertising Age. May 2, 2005. p. 9. 62 Kraft. Form 10-K. March 11, 2005. p. 23. 63 Kraft. Form 10-K. March 11, 2005. p. 23. 64 Thompson, Stephanie. Kraft Wakes Up to the Need to Push Maxwell House. Advertising Age. May 2, 2005. p. 9. 65 Thompson, Stephanie. Kraft Wakes Up to the Need to Push Maxwell House. Advertising Age. May 2, 2005. p. 9. 66 Thompson, Stephanie. Don Miceli. Kraft Foods. Advertising Age. September 12, 2005. p. 10. 67 Thompson, Stephanie. Krafts Tassimo Coffee System Aims to Sell Its Beans, not the Machines. Advertising Age. April 4, 2005. p. 6. 68 Thompson, Stephanie. Don Miceli. Kraft Foods. Advertising Age. September 12, 2005. p. 10.
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The food industry is fragmented. In the same food categories, a few extremely large food companies such as Kraft compete with smaller, regional food manufacturers. In addition to their own brands, often these regional manufacturers produce private-label brands for supermarket chains. 69 This intense competition shapes several key trends in the food industry: The growth of private-label brands is hurting revenue growth among traditional popular brands. Increasingly, store customers are choosing cheaper store brands over more expensive traditional brands. 70 To restore brand loyalty, companies such as Kraft are shifting more resources into marketing. 71 Major food companies are restructuring. No longer are big companies making major acquisitions. Instead, companies are building up their core operations. They are selling off businesses outside of their core, closing inefficient plants, and eliminating unprofitable brands. 72 Companies are exploring new food trends. With slow, single-digit growth in traditional food items, companies are experimenting with the sale of specialty foods, especially diet foods, organic items, and ethnic foods. The demand for specialty food brands especially organics often grows in the double-digits. 73 Wal-Mart increasingly influences food distribution. In 2004, Wal-Mart sold more than $117 billion in groceries, 15% of total U.S. grocery sales. With this major share of the market, Wal-Mart can increasingly dictate pricing and production standards to food manufacturers. 74 4.2 Major Players and Competitors After Nestl, Kraft is the second largest food manufacturer in the world. With the food industry so fragmented, Kraft competes both with smaller, regional firms as well as large multinational food corporations. Competition among these companies is often uneven. Usually, competition is most intense between Kraft and small private-label manufacturers. 75 Reducing their direct competition, many multinationals focus more on sales outside of the U.S. than does Kraft. 76 Major industry players include:

Joy, Richard. Standard and Poors Industry Survey. Food and Nonalcoholic Beverages. June 9, 2005. pp. 6-7. 70 Joy, Richard. Standard and Poors Industry Survey. Food and Nonalcoholic Beverages. June 9, 2005. p. 1. 71 Neff, Jeff. Can Kraft Shrink to Grow? Food Processing. May 2004. p. 37. 72 Joy, Richard. Standard and Poors Industry Survey. Food and Nonalcoholic Beverages. June 9, 2005. p. 3. 73 Thompson, Stephanie. Kraft, Campbells Bank on Crop of Organic Efforts. Advertising Age. April 25, 2005. p. 24; Joy, Richard. Standard and Poors Industry Survey. Food and Nonalcoholic Beverages. June 9, 2005. pp. 7-11. 74 Joy, Richard. Standard and Poors Industry Survey. Food and Nonalcoholic Beverages. June 9, 2005. p. 11. 75 Joy, Richard. Standard and Poors Industry Survey. Food and Nonalcoholic Beverages. June 9, 2005. p. 1. 76 Forster, Julie. Can Kraft Be a Big Cheese Abroad? Business Week. June 4, 2001. p. 54.

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Nestl, the worlds largest food manufacturer, brought in revenues of more than $76 billion in 2004, more than twice Krafts 2004 revenues. Nestls Nescafe brand is the worlds leading coffee brand. 77 Nestls revenue structure is very different from Krafts: a third of the companys revenue comes from Europe, a third from the Americas, and the remaining third from the rest of the world. 78 This difference limits direct competition between the companies. But if Kraft shifts its focus away from North American markets, competition will surely increase. ConAgra, with revenue roughly half of Krafts, produces a variety of branded food items. Like Kraft, ConAgra focuses largely on the North American market. 79 ConAgras Armour and Butterball meats directly compete with Krafts Oscar Mayer brands. 80 Groupe Danone produces foods in three of Krafts key areas: dairy, biscuits, and beverages. 81 Danone is centered on the European market, where it brings in 68% of its revenues. 82

5. Financial Analysis 5.1 Balance Sheet and Income Statement Kraft is a financially healthy but slow-growing company. Kraft has shaped its new strategy of consolidation and divestiture the Sustainable Growth Plan around this financial reality. Burdened with smaller debts and freed of older assets, a leaner company will cut down on operating expenses and boost Krafts operating income. To cut assets, Kraft and CEO Deromedi hope that long-term gains in efficiency will pay for short-term losses in operating income. Section 6.7 of this report describes Deromedis plan. This section is based upon the financial charts and figures in Appendix B. Balance sheet As the company has cut its debt, Krafts balance sheet has steadily improved for shareholders over the past three years. As the balance sheet in Appendix B shows, from 2002 to 2004, Krafts total current assets increased from more than $7.4 billion to $9.7 billion. Inside total assets, current and fixed assets have shifted differently. Over the last year, inventory and accounts receivable have each steadily held at around $3.5 billion, while Krafts other current assets have jumped from $232 million in 2002 to more than $1.7 billion.
77 78

Hoovers. Nestl. Fact Sheet. proquest.umi.com. Hoovers. Nestl. Products and Operations. proquest.umi.com. 79 Hoovers. ConAgra. Products and Operations. proquest.umi.com. 80 Hoovers. ConAgra. Fact Sheet. proquest.umi.com. 81 Hoovers. Groupe Danone. Fact Sheet. proquest.umi.com. 82 Hoovers. Groupe Danone. Products and Operations. proquest.umi.com.

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Fixed assets have not increased steadily. Total fixed assets rose from $49.6 billion to $51.2 billion from 2002 to 2003; then dropped to $50.2 billion in 2004. Valued at more than $35.8 billion, intangibles covered the bulk of fixed assets in 2004. In the same year, buildings accounted for $3.5 billion of these assets; plant and equipment covered another $11.9 billion. From 2002 to 2004, driven largely by the increase in current assets, Krafts total assets increased from $57.1 billion to $59.9 billion. With assets increasing, Kraft has lowered its liability over the same period from $31.3 billion to $30.0 billion. Despite an increase in current liabilities from $7.2 billion to $9.0 billion from 2002 to 2004, in the same period non-current liabilities fell from $24.0 billion to just $20.9 billion. As the balance sheet indicates, with the help of the modest increase in Krafts fixed assets, this drop in liabilities lifted Krafts shareholder equity from $25.8 billion to $29.9 billion. Income Statement Despite steady growth in revenue, Krafts operating income and profit have wobbled over the past three years. The income statement in Appendix B shows that from 2003 to 2002 Krafts revenue increased modestly to $30.5 billion from $29.2 billion. In 2004, revenue shot up to $32.2 billion. Nevertheless, Krafts operating expenses grew more quickly, wiping out revenue gains. From 2002 to 2003, operating income grew insignificantly from $5.96 billion to $6.04 billion, and then this income dropped dramatically to $4.79 billion last year. Over these three years, this drop pushed down Krafts net profit from $3.39 billion to $2.67 billion. Krafts restructuring program accounts for much of this increased cost. Kraft must pay out severance benefits as well as cover the costs of shuttering several factories. Kraft hopes to absorb this loss now in order to gain significant costs savings in the next few years. 83 5.2 Key Financial Ratios Kraft is stable but slow-growing. Deromedis Sustainable Growth Plan aims to improve growth in operating income while preserving the companys stability. Listed in Appendix B, Krafts key financial ratios point out both the stability of this company and the immediate costs of this new plan. The current ratio highlights Krafts stability. From 2002 to 2004, it grew modestly from 1.04 to 1.07. Kraft now has more cash and other current assets to cover the immediate costs of plant closures and to increase advertising spending.
83

Neff, Jeff. Can Kraft Shrink to Grow? Food Processing. May 2004. p. 37.

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The increased cost of the Sustainable Growth Plan has temporarily hurt Krafts return on assets. With profits driven down by restructuring costs, from 2002 to 2004 this ratio declined from 5.94% to 4.45%. Kraft expects the eventual savings from restructuring to reverse this drop. 84 On the other hand, as Kraft lowers its debt-load, Krafts debt to equity ratio highlights the companys stability. Kraft is paying off debts and borrowing conservatively but not too conservatively. Over the past three years, with many debts settled, debt to equity has dropped from 94.65% to 72.51%. As part of this more conservative borrowing, over the last three years Krafts interest coverage has risen from 6.98 to 7.08 times. Even while Kraft is accepting immediate losses as part of Sustainable Growth, the company has already significantly improved its financial stability. 5.3 Competitors As the comparison of competitors in Appendix B shows, Krafts performance closely matches other companies in the food industry. Among a group of competitors in 2004, only General Mills beat Krafts profit margin of 12.27 percent, while ConAgra and Archer-Daniels-Midland lagged far behind. 85 General Mills and ConAgra beat Krafts return on assets by a percentage point, while at 4.43%, Cadbury closely matched Krafts 4.45%. Krafts current ratio of 1.07 was close to Cadbury (0.92) and General Mills (1.17), but Archer-Daniels-Midland and ConAgra each had significantly higher current ratios, at 1.53 and 1.71, respectively. While Krafts debt to equity ratio has shrunk recently, many of its competitors have seen this ratio grow much higher as their debt load increases. ConAgra (141.98%), General Mills (164.15%), and ConAgra (203.42%) each have gearing ratios much higher than Krafts. 5.4 Segment Analysis Krafts segments perform very differently. As the two segment pie charts in Appendix B show, segment revenue amounts do not correlate to operating income. Each segment has its own operating costs; these costs determine the segments operating income. As Kraft restructures, the company will build the sections of the company with the lowest costs. Looking at the segments shows Krafts focus on the North American market. Capturing 63% of the total, Kraft earns most of its revenue in the U.S. and Canada. Europe and the Middle East account for 22% of the total, while sales in the Asia Pacific and Latin America segment make up the rest. North America, though, brings in an even greater portion of operating income. North American segments bring in more than 81% of

84 85

Neff, Jeff. Can Kraft Shrink to Grow? Food Processing. May 2004. p. 37. The peer group studied includes Kraft Foods, Groupe Danone, Cadbury Schweppes, General Mills, ConAgra, and Archer-Daniels-Midland.

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operating income, while Europe brings in only 14%. The operating income of the Latin American, Asian, and Pacific segment shrinks to just 5%. Within Krafts North American segments, revenue and operating income again diverge. Cheese is the biggest revenue source, bringing in 23% of all company revenue. But cheese only accounts for 21% of operating income. Other company segments in North America perform better. The Beverage segment brings in 8% of revenue but 10% of operating income. Even more cost-effective, Convenient Meals earns 13% of revenue but accounts for 16% of operating income. Most profitable, Grocery brings in 8% of revenue but 19% of operating income. Less profitable, Snacks and Cereals, on the other hand, bring in 17% of revenue but only 15% of operating income. With Kraft attempting to cut unprofitable brands, this poor performance supports rumors that Kraft will sell off Post cereals. 86 5.5 Stock Analysis Exaggerated initial promises and climbing commodity prices have hurt Krafts share prices. With its IPO, Kraft promised investors double-digit growth. Instead, over the past four years Kraft has grown steadily but slowly. Analyst William Leach says Kraft is too big to grow that fast. 87 Since the IPO, investors have slowly driven down the cost of Kraft stocks. As Appendix B shows, in 2002, stockholders paid nearly $39 for Kraft stocks. But years of slow growth dashed stockholders initial expectations. Moreover, with food commodity prices rising, Kraft stocks dropped to a low of $29.36 in September 2005. 88 Despite this performance, Appendix B shows that most analysts recommend that stockholders hold onto their Kraft shares. Analyst Steven Mallas encourages investors to snap up Kraft shares while prices are low. 89 Preparing for Krafts spinoff from Altria, analysts like Tim Ghriskey of Solaris Asset Management predict that Kraft stock will shoot up in price. 90 6. Command and Control 6.1 Parent Company: The Altria Group Krafts parent company is the Altria Group. Altrias corporate headquarters is located in Manhattan at 120 Park Avenue, New York, New York, 10017. Altrias phone number is 917 663-5000. Altria maintains a website at www.altria.com.
Krafts Strategy Continues to Unfold. Food Processing. April 2005. p. 9. Neff, Jack. Ooey Gooey Mess. Food Processing. September 2003. 88 Mallas, Steven. Kraft Hits New Low. The Motely Fool. September 23, 2005. www.fool.com/News/mft/2005/mft05092307.htm. 89 Mallas, Steven. Kraft Hits New Low. The Motely Fool. September 23, 2005. www.fool.com/News/mft/2005/mft05092307.htm. 90 Phan, Monty. Altria Sees Its Breakup Soon. Newsday. April 29, 2005. p. A59.
87 86

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Altria is publicly traded on the New York Stock Exchange. Altria trades under the ticket symbol MO. 91 6.1.1 Operations Altria includes both Kraft Foods and Philip Morris cigarettes. Philip Morris manufactures and distributes the tobacco brands Marlboro, Virginia Slims, and Basic. Altria dwarfs Kraft. In 2004, Altria netted $89.6 billion, and the conglomerates net earnings totaled $9.4 billion. 92 6.1.2 Command and Control CEO Louis Camilleri became CEO of Philip Morris in 2002. 93 Altrias Board of Directors chose Camilleri an unusual combination of diplomat, number-cruncher, and strategist as a competent leader to control the company despite increasing regulations and litigation. 94 Camilleri succeeded the blustery and beloved Geoffrey Bible as CEO of the company. 95 Despite his different style, Camilleri firmly controls Altria. More diplomat than gunslinger, he lacks the rough charisma of Bible, but he has developed an intense loyalty among Altria executives. 96 Camilleri has worked for Altria since 1978. He led the expansion of Philip Morris brands into Eastern Europe after the fall of the Berlin Wall and oversaw the 1998 Federal tobacco settlement. 97 Until the spinoff, Camilleri chairs the Kraft Board of Directors. Stockholders Institutional shareholders own a large share of Altria. Together, the top 25 institutional shareholders control 46.98% of Altria shares. The top ten shareholders control 31.99% of shares. However, no single institutional shareholder dominates. Ownership may be concentrated among a small group, but among this group, holdings do not vary dramatically in size.
Mergent Online. Altria Group: Synopsis. Mergent Online. Altria Group: Company Financials, Income Statement. 93 Altria. Our Management. Louis Camilleri. www.altria.com/about_altria/biography/01_03_01_Camilleri.asp. 94 Buckely, Neil. Food for Thought in Marlboros New Face. Financial Times. January 31, 2003. p. 12. 95 Byrnes, Nanette, Julie Forster, and Christopher Condon. A New Kind of Marlboro Man. Business Week. April 29, 2002. p. 94. 96 Byrnes, Nanette, Julie Forster, and Christopher Condon. A New Kind of Marlboro Man. Business Week. April 29, 2002. p. 94. 97 Byrnes, Nanette, Julie Forster, and Christopher Condon. A New Kind of Marlboro Man. Business Week. April 29, 2002. p. 94; Buckely, Neil. Food for Thought in Marlboros New Face. Financial Times. January 31, 2003. p. 12.
92 91

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The largest shareholder, Capital Research and Management Company, owns 7.79% of shares. The next sixteen largest institutions, though, each own between one and four percent of shares. 98 This ownership pattern suggests that while individual institutions hold little power over Altria, together the top institutional shareholders hold the deciding power over the company. Shareholder Shares Percent of ownership Capital Research and Mgmt Co. 161,153,900 7.79% State Street Corp. 82,018,768 3.97% Barclays Bank 75,547,255 3.65% Bank of America 61,023,804 2.95% FMR Corp. 59,824,329 2.89% Axa 52,866,896 2.56% Davis Selected Advisers 49,771,422 2.41% Vanguard Group 43,867,162 2.12% Fayez Sarofim 39,838,665 1.93% Wellington Mgmt Co. 35,487,168 1.72% Morgan Stanley 30,910,257 1.49% Mellon Financial 28,661,306 1.39% Putnam Investment 28,226,751 1.36% JP Morgan 26,472,356 1.28% Citigroup 24,202,527 1.17% Northern Trust 22,265,063 1.08% Deutsche Bank 22,113,320 1.07% TIAA-CREF 18,963,738 0.92% Barrow Hanley 18,655,903 0.90% Pacific Financial Research 18,097,306 0.87% Dreman Value Mgmt 17,283,287 0.84% NWQ Investement Mgmt 14,200,713 0.69% Brandes Investment 13,765,610 0.67% Bank of Ireland 13,423,978 0.65% Goldman Sachs 12,679,448 0.61% Altria Institutional Shareholders, Top 25 99 6.1.3 Business Strategy and Growth Plan Threatened by massive lawsuits, Altria is seeking to reduce the danger of litigation. To preserve the food manufacturers profitability, Altria is preparing to spinoff Kraft. The 1998 multi-state Master Settlement Agreement is the centerpiece of Altrias efforts to reduce the danger of litigation. The MSA settled lawsuits with 46 separate states. In exchange, Altria and the other tobacco companies promised to pay state governments

98 99

Mergent Online. Altria Group: Institutional Ownership Summary. Mergent Online. Altria Group: Institutional Ownership Summary.

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more than $200 billion and to change tobacco marketing significantly. 100 To reduce future liability and eliminate competition from low-cost brands, Altria supports increased regulation by the Food and Drug Administration. Camilleri summed up the companys view of regulation: Does society want a manufacturer that is seeking to respond to its expectations and produce and market that product responsibly, or does it want it to become the Wild West? 101 Nevertheless, Altria still faces more than a thousand individual lawsuits, including a federal lawsuit by the Department of Justice. In June 2005, the Department of Justice reduced its claim on Altria from $130 billion to just $10 billion, significantly reducing the danger of liability to the company. 102 With litigation coming under control, analysts expect Altria to spinoff Kraft. Altria first announced its intention to spinoff the food manufacturer in November 2004. 103 At the 2005 shareholders meeting in April, the company reiterated that this break-up is imminent. 104 David Adelman of Morgan Stanley argues that with the reduction of the Department of Justice claim, Altria will not await a verdict before spinning off Kraft. 105 Analysts at JP Morgan, on the other hand, expect Altria to wait for the settlement of three separate lawsuits before splitting the company. They expect Kraft will leave in early 2006. 106 After the spinoff, analysts do not know how much stock Altria will continue to own. No matter how much ownership Altria retains, the split will free Krafts management to consolidate the company. Kraft has already taken over some corporate administrative functions from Altria. After the split, Deromedi expects more freedom to pursue divestitures of marginal products and to focus on key brands. 107 Moreover, analyst Tim Ghriskey of Solaris Asset Management estimates that Kraft stock is undervalued; he predicts a spinoff will increase the companys equity value. 108 6.1.4 Outside Stakeholders Three groups of outside stakeholders influence Altrias corporate strategy:

100

Wilson, Joy Johnson. Summary of the Attorney Generals Master Tobacco Settlement Agreement. March 1999. academic.udayton.edu/health/syllabi/tobacco/summary.htm. 101 Buckely, Neil. Food for Thought in Marlboros New Face. Interview Louis Camiller. Financial Times. January 31, 2003. p. 12. 102 Altria Rallies After DoJ Cuts Claim by $120 Billion. MarketWatch. June 8, 2005. www.marketwatch.com;Byrnes, Nanette, Julie Forster, and Christopher Condon. A New Kind of Marlboro Man. Business Week. April 29, 2002. p. 94. 103 Daly, Brendon. Kraft Ready for Spinoff. Daily Deal. February 24, 2005. 104 Phan, Monty. Altria Sees Its Breakup Soon. Newsday. April 29, 2005. p. A59. 105 Altria Rallies After DoJ Cuts Claim by $120 Billion. MarketWatch. June 8, 2005. www.marketwatch.com. 106 Jargon, Julie. Altria May Spinoff Kraft in Early 2006. Crains Chicago Business. July 13, 2005. 107 Daly, Brendon. Kraft Ready for Spinoff. Daily Deal. February 24, 2005. 108 Phan, Monty. Altria Sees Its Breakup Soon. Newsday. April 29, 2005. p. A59.

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The parties to the Master Settlement Agreement, especially state attorneys general organized through the National Association of Attorneys General. NAAGs Tobacco Project monitors compliance with the MSA. 109 Consumer groups. From 1993 to 2003, Infact, now Corporate Accountability International, ran a boycott against Kraft to target Philip Morris. Even after the boycotts end, CAI still organizes activists to oppose the tobacco industry. 110 Working with tobacco-opposition groups from the Global South, CAI is pushing the U.S. to ratify the Global Tobacco Treaty. At the 2005 Altria shareholders meeting, CAI activists protested Philip Morriss rapid expansion into new markets. 111 Smokers and smoking victims. Altria fears litigation from smoking victims. To stifle these claims, Altria will continue to seek settlements and increased litigation.

6.2 Management Krafts management structure is highly bureaucratic. With strict product development policies and sharply-defined organizational boundaries, this bureaucracy has set Krafts corporate strategy and governed everyday operations for many years. 112 With the IPO, Krafts CEO Roger Deromedi has sought to increase his own power and limit the power of the bureaucracy. Pushing his Sustainable Growth Plan, Deromedi will use this new power to consolidate the company. Roger Deromedi In December 2003, Roger Deromedi, 51, became Kraft Foods sole CEO. Starting out at General Foods in 1977, Deromedi joined Kraft when Philip Morris merged the two companies in 1988. 113 In 1999, before the company went public, Deromedi became Chief Executive Officer of Kraft Foods International.114 After Krafts IPO, Philip Morris appointed Deromedi as co-CEO of Kraft; the parent company appointed Betsy Holden, former head of Kraft Foods North America, as Deromedis co-chief. 115

109

National Association of Attorneys General. NAAG Projects: Tobacco. www.naag.org/issues/issuetobacco.php. 110 Corporate Accountability International. Impact of InFacts Tobacco Industry Campaign and the Kraft Boycott, 1993-2003. June 2003. 111 Corporate Accountability International. As Countries across Globe Ratify Tobacco Treaty, Big Tobacco is Forced to Change its Ways. April 28, 2005. www.stopcorporateabuse.org/cms/page1253.cfm. 112 Thompson, Stephanie. Kraft Simplification Strategy Anything But. Advertising Age. February 28, 2005. p. 3. 113 Altria. Our Management. Roger K. Deromedi. www.altria.com/about_altria/biography/01_03_10_Deromedi.asp. 114 Kraft. Form DEF 14A. March 4, 2005. 115 Edgecliffe-Johnson, Andrew. Two Brains May Be Better Than One Big Cheese. Financial Times. September 3, 2001. p. 9.

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The co-CEO structure preserved Krafts bureaucracy. Before her new job, Holden was often successful: she launched DiGiorno frozen pizza and acquired of Nabisco. But as coCEO, company insiders blamed Holden for lower cheese sales and a drop in profits.116 Altria demoted her in December 2003. In 2005, she resigned from the company. 117 With Betsy Holden fired, Deromedi, now the sole CEO, is grasping for tighter control over Krafts sprawling operations. With the motto work simply, act quickly, Deromedi has encouraged Krafts departments to eliminate barriers to communication, to communicate more regularly, and to speed up the release of new brands. 118 Deromedi serves on the Boards of Gillette and the Grocery Manufacturers Association. His memberships include: Stanford Graduate School of Business Advisory Board Field Museum of Natural History Board of Trustees Chicago Commercial Club Civic Committee Deromedis Allies: Challenging Krafts Bureaucracy Many analysts consider Kraft unwieldy and bureaucratic. 119 Departments communicate sporadically, and the company test-markets new products painstakingly slowly. For many years, KFI and KFNA acted as totally separate companies, and organizational barriers still divide them. According to Dave Nelson of Credit Suisse First Boston, analysis culture at Kraft paralyzes the company. 120 To streamline the company, several Kraft managers serve Deromedi as key allies. To fill the new position of Vice President of Business Process Simplification, Deromedi has appointed David Brearton. 121 Also serving as corporate controller, Brearton must carry out Deromedis work simply, act quickly mantra. Aiming to bring new products out more quickly, Brearton will especially seek to cut test-marketing of new advertising. 122 Just as the old practices of the advertising department stand in the way of new products, so do the barriers between departments block the release of new, innovative products. To reduce these barriers, Deromedi has ordered technology chief Jean Spence to report directly to him. Formerly, Spences job, Executive Vice President of Global Technology

116 117

Jargon, Julie. Brenda Came Back. Can Betsy Do It To? Crains Chicago Business. July 4, 2005. p. 3. Krafts Holden Resigns from Marketing Post, Board. Associated Press. June 24, 2005. 118 Thompson, Stephanie. Kraft Simplification Strategy Anything But. Advertising Age. February 28, 2005. p. 3. 119 Thompson, Stephanie. Kraft Simplification Strategy Anything But. Advertising Age. February 28, 2005. p. 3. 120 Thompson, Stephanie. Kraft Simplification Strategy Anything But. Advertising Age. February 28, 2005. p. 3. 121 Thompson, Stephanie. Kraft Simplification Strategy Anything But. Advertising Age. February 28, 2005. p. 3. 122 Thompson, Stephanie. Kraft CEO Pledges a Faster Culture. Crains Chicago Business. March 7, 2005. p. 19.

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and Quality, reported to a lower level of management. 123 Without the speedy release of new products, Kraft cannot compete with private-label manufacturers. Other managers are also helping Deromedi change Krafts bureaucratic corporate culture. Don Miceli, Vice-President of Global Marketing, is changing how Kraft advertises. Miceli had limited spending on television advertising in favor of newer, more-targeted methods. 124 Named Vice-President of Nutrition in August 2005, Richard Black will lead the reformulation of Krafts foods in order to avoid possible government obesity regulation. 125 Lower down in the bureaucracy, Deromedi has eliminated management positions to streamline decision-making. In October 2005, he eliminated division heads with the consumer sectors. Now product leaders report directly to the head of their sector. 126 These cuts eliminated 600 management jobs. In addition, the company will close its Tarrytown, New York, corporate offices in 2006. 127 6.3 Board of Directors Krafts Board of Directors is not very independent. Despite the impending spinoff, Altria still holds significant influence over Kraft and its Board of Directors. Of the ten Board members, three are direct Altria appointees. Louis Camilleri, CEO of Altria, chairs the Kraft Board. Other Board members, such as Richard Lerner from the Scripps Research Institute, have strong connections to Altria. When Altria splits Kraft away, they will most likely remove some Board members and add others to increase Krafts independence. The most significant change expected is the replacement of Board Chair Louis Camilleri with Roger Deromedi. Now, Camilleri Chairs the Board even though Deromedi serves as CEO of Kraft. Camilleri joined the Kraft Board during the IPO, and when he became the CEO of Altria, he also became the chair of Krafts Board. 128 Camilleri will most likely step down when Altria spinsoff Kraft. Deromedi is his most likely successor. The spinoff may also remove the two other Altria appointees. Dinyar Devitre joined the Kraft Board in 2002. Camilleri appointed Devitre to the Kraft Board at the same time as he promoted him to Chief Financial Officer of Altria. 129 Born in India, Devitre started his career with Philip Morris in Bombay. 130 Devitre is a director of the Lincoln Center, and
123

Grant, Jeremy. Kraft Cooks Up Strategic Innovations. Microwaveable Pizzas Symbolize the Food Giants New Approach. Financial Times. May 17, 2005; Kraft. Management. Jean Spence. www.kraft.com/profile/biosspence.html. 124 Thompson, Stephanie. Don Miceli. Kraft Foods. Advertising Age. September 12, 2005. p. 10. 125 Kraft Foods Names Black to New Post as Vice President, Nutrition. Nutrition Today. July-August, 2005. p. 150. 126 Kraft. Kraft Food Announces Additional Simplification Initiatives. October 14, 2005. 127 Schmeltzer, John. Kraft Plans to Slice 600 Salaried Positions. Chicago Tribune. October 15, 2005. 128 Kraft. DEF 14A. March 4, 2005. p. 9; see Section 6.1.1 for a biography of Camilleri. 129 Kraft. DEF 14A. March 4, 2005. p. 9. 130 Altria. Our Management. Dinyar Devitre. www.altria.com/about_altria/biography/01_03_04_Devitre.asp.

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he serves on the Asia Society Board with West Virginia Democratic Senator Jay Rockefeller. 131 Devitre lives at 211 Central Park West, Apartment 10 G, in Manhattan, New York. His home telephone number is 212-579-4863. 132 Charles R. Wall is Altrias third appointee on the Kraft Board. Like Devitre, he also joined the Board in 2002. In addition to his board membership for the New York City Opera, Wall also serves on the Board of the Neurosciences Institute in La Jolla, California, a research institution closely connected to flawed tobacco science. 133 The Director of the Neuroscience Institute, Gerald Edelman, consulted for Philip Morris from 1992 to 2002. 134 New Board Member Richard A. Lerner is also connected to flawed tobacco science. Lerner is the President of the Scripps Research Institute, also in La Jolla, California. A private, non-profit biomedical research organization, Scripps researches the impact of nicotine and drug and alcohol abuse. 135 Serving as a consultant for Philip Morris from 1992 to 2002, Lerner earned $700,000. Moreover, to fund his post-doctoral work in the 1970s, Lerner accepted funding from the tobacco industrys Council for Tobacco Research. 136 Lerner joined the Kraft Board in January 2005; he serves on the Audit and Nominating and Governance Committees. Lerner is also a director of the biotechnology firm Xencor and a member of the National Academy of Sciences. 137 New Board Member Jan Bennink has years of experience in the food industry. As it builds a more independent Board, Kraft will seek out more Board members like Bennink independent and experienced. Today, he is the CEO and Chairman of Royal Nummico NV, a Dutch company that specializes in infant nutrition. In 2002, he became CEO at Royal Nummico after a long career at Procter and Gamble. Bennink is also a director of Boots Group PLC in Britain. On the Kraft Board, he is a member of the Compensation and Nominating and Governance Committees. 138 John C. Pope is also an experienced, independent Director. He chairs the Board of Waste Management, Inc. He also is a board member at CNF, Inc., Dollar Thrifty Automotive Group, Federal-Mogul Corp., and R.R. Donnelley and Sons. On the Kraft Board, Pope chairs the Audit Committee and also serves on the Compensation Committee. 139

131 132

The Asia Society. Officers. asiasociety.erlbaum.net/about/officers.html. North Point Alumni Association. North Point Reunion in New York. www.npalumni.org/reunion_ny100502.htm. 133 Kraft. DEF 14A. March 4, 2005. p. 11. 134 Lieberman, Bruce. Leading SD Scientists Had Longtime Tobacco Ties. San Diego Union-Tribune. June 25, 2004. www.signonsandiego.com/news/science/20040625-9999-1n25smoke.html. 135 Bardi, Jason Socrates. The Down Side of Nicotine and Environmental Stimuli. TSRI News and Views. July 18, 2005; Scripps Research Insitute. Research and Faculty. The Pearson Center for Alcohol and Addiction Research. www.scripps.edu/research/pearsonctr/. 136 Lieberman, Bruce. Leading SD Scientists Had Longtime Tobacco Ties. San Diego Union-Tribune. June 25, 2004. www.signonsandiego.com/news/science/20040625-9999-1n25smoke.html. 137 Kraft. DEF 14A. March 4, 2005. p. 10. 138 Kraft. DEF 14A. March 4, 2005. p. 9. 139 Kraft. DEF 14A. March 4, 2005. p. 10.

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Unlike Bennink and Pope, W. James Farrell comes from Chicago, Krafts home. The retired Chairman and CEO of Illinois Tool Works, Farrell is influential in the Chicago business community. 140 He chairs the Board of the Federal Reserve Bank of Chicago, and he serves on numerous boards: Allstate Insurance, Sears, and United Airlines. 141 Farrell is a member of the Nominating and Governance Committee of the Kraft Board. 142 Mary Schapiro has significant experience in corporate governance. Bill Clinton appointed Schapiro acting Chair of the SEC in 1993 and Chairman of the Commodity Trading Futures Commission in 1994. Today, Schapiro is the Vice-Chairman of the private corporate governance monitor NASD. 143 Deborah Wright joined the Kraft Board during the IPO in July 2001. She is the Chairman and CEO of Carver Bancorp, the nations largest publicly-traded African- and CaribbeanAmerican operated bank. Wright is a member of the Harvard University Board of Overseers and she also serves on numerous boards in the New York community, including the Memorial Sloan-Kettering Cancer Center, the Partnership for New York City, and the Ministers and Missionaries Benefit Board of the American Baptist Church. On the Kraft Board, Wright is a member of the Audit and Compensation Committees. 144 Board Member Vulnerabilities Krafts current Board is not especially vulnerable to a corporate campaign. The Board is small and narrow, with few important political figures or major economic players. However, as it prepares for the spinoff, Kraft will likely add higher-profile Board members to represent the companys new independence. Nevertheless, even the current Board offers some opportunities for a corporate campaign. Altrias three representatives represent the most obvious target. Louis Camilleri, Dinyar Devitre, and Charles Wall represent a company deeply distrusted by the American public and under the tight watch of government regulators. In addition, this report has uncovered the home phone number and address of Mr. Devitre. In addition, Charles Wall, along with fellow board member Richard Lerner, is connected to the bad science of the tobacco industry. Richard Lerner, head of the Scripps Research Institute, received $700,000 for consulting for Philip Morris in the 1990s. Gerald Edelman, director of the Neurosciences Institute on whose Board sits Charles Wall
140

Mergent Online. Illinois Tool Works. Business Summary.; ITW Chief to Resign Next Month. Crains Chicago Business. July 18, 2005. 141 Farrell also serves on the following Boards: Northwestern University, Trustee; Rush Presbyterian St. Lukes Medical Center, Trustee; The Chicago Club, President; Economic Club of Chicago, Chairman; The Business Council; Illinois Roundtable; Mid-America Committee; Museum of Science and Industry, Chair of Board of Trustees; Junior Achievement of Chicago, Chair of Board of Trustees; Lyric Opera of Chicago; United Way/Crusade of Mercy; Big Shoulders Fund; Chicago Public Library Foundation. 142 Kraft. DEF 14A. March 4, 2005. p. 10. 143 NASD, Inc. NASD Leadership. Mary L. Schapiro. www.nasd.com/web/idcplg?IdcService=SS_GET_PAGE&nodeId=1028. 144 Kraft. DEF 14A. March 4, 2005. p. 11.

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also received $700,000 as a Philip Morris consultant. Cancer researcher Michael Cummings commented on their association with faulty tobacco research: Frankly, I find it hard to believe that any scientist in the 1990s that was taking money from the (Tobacco Research Council) didnt know that they were being used and their institutions were being used. Dr. David Burns, professor at the University of California San Diego, also said, Certainly (Lerner) was working for an organization that denied something that was an incontrovertible fact. 145 Finally, a corporate campaign may aim to target two of the independent board members. Mary Schapiro has political connections inside the Democratic party, plus her current job monitors transparency and fairness in corporate governance. James Farrell has farreaching connections in the Illinois business community. Farrell is a member of numerous Chicago civic and cultural institutions, all potential targets for a corporate campaign. 6.4 Stockholders Altria owns most of Kraft. In 2001, Altria released Kraft shares in an initial public offering. Since then, Altria has sold only 14.7% of Kraft shares, retaining ownership over 85.3% of shares. Through its sole ownership of all Class B shares, each carrying 10 votes, at shareholder meetings Altria controls 98.0% of all votes. Stock Type Votes Oustanding Shares Altrias ownership Class A 1 526,621,988 276,536,915 Class B 10 1,180,000,000 1,180,000,000 Kraft Stock Ownership 146 No Board Member or Executive owns a significant number of Kraft shares. Nonetheless, several insiders own enough stock that a shift in stock price would lose them a significant amount of money. Kraft Class A Stock Altria Stock 0 0 18,000 2,919,024 720,610 482,591 1,204 206,858 10,158 0 56,220 243,486 497,579 362,431 217,576 102,787 0 0 11,703 0

Jan Bennick Louis Camilleri Roger Deromedi Dinyar Devitre W. James Farrell Marc Firestone Betsy Holden David Johnson Richard Lerner John Pope
145

Lieberman, Bruce. Leading SD Scientists Had Longtime Tobacco Ties. San Diego Union-Tribune. June 25, 2004. www.signonsandiego.com/news/science/20040625-9999-1n25smoke.html. 146 Kraft. DEF 14A. March 4, 2005. p. 1.

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Hugh Roberts 200,256 Mary Schapiro 10,403 Franz-Joseph Vogelsang 125,946 Charles Wall 31,620 Deborah Wright 10,637 Board and Executive Stock Ownership 147 Shareholder Activism

191,316 0 123,800 1,567,815 0

Despite the control of Altria, shareholder activists are targeting Krafts use of genetically modified foods. At the 2004 and 2005 shareholders meetings, a small group of shareholders, largely Catholic religious orders, called on Kraft to monitor the effect of its use of genetically-engineered foods. 148 Backed by U.S. PIRG and Friends of the Earth, these shareholders knew they could not win a resolution, but they chose to use the shareholders meetings to publicize their issue. 149 Name Missionary Oblates of Mary Immaculate Shares Owned Address 6,800 391 Michigan Ave. NE Washington, DC 20017 Society of the Holy Child of Jesus 85,000 460 Shadeland Ave. Drexel Hill, PA 19026 Basilian Fathers of Toronto 5,400 15015 Piedmont Detroit, MI 48223 Green Century Capital Management 90 29 Temple Pl, Suite 200 Boston, MA 02111 150 Sponsors of 2005 Shareholder Proposal on GMOs 6.5 Lenders As of December 31, 2004, Kraft held $1.8 billion in short-term debt, mainly commercial paper, and $9.7 billion in long-term debt. 151 JP Morgan Chase is the trustee for all of Krafts reported bond releases.152 6.6 Subsidiaries Having grown through a series of mergers, Kraft has maintained many of its acquisitions as wholly-owned subsidiaries. These subsidiaries do not act as independent companies,
147 148

Kraft. DEF 14A. March 4, 2005. p. 15. Kraft. DEF 14A. March 4, 2005. p. 33. 149 US PIRG, Friends of the Earth, and Green Century Capital Management. Investors, Consumers, Scientists, and Environmentalists Present New Information and Voice Concerns about Genetically Engineered Foods at Kraft Shareholder Meeting. Common Dreams Progressive Newswire. April 27, 2004. www.commondreams.org/news2004/0427-02.htm. 150 Kraft. DEF 14A. March 4, 2005. p. 33. 151 Kraft. Form 10-K. March 11, 2005. pp. 62-63. 152 Mergent Online. Kraft: Long Term Debt.

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however. Instead, major acquisitions such as Nabisco in the U.S. and Jacobs in Europe operate within Krafts existing corporate segment structure. 153 6.7 Business and Competitive Strategies The Failure of Old Strategies Kraft faces a tough business environment. Investors want big returns and, as it prepares for spinoff, Kraft must pay increasing attention to their demands. With its IPO, Kraft promised investors an increase of annual earnings close to 15%. 154 Since 2001, Kraft has usually grown by only 2 to 3%. Neuberger Bergman analyst William Leach attributes this slower growth to the companys size and the maturity of the industry. In his words, Kraft is too big to grow. 155 Especially around basic commodities such as cheese, private-label manufacturers compete effectively with Kraft.. 156 Moreover, Krafts older brands such as Maxwell House and Velveeta face serious competition from newer, more hip brands. 157 High prices for food commodities and oil have cut into the companys operating income. 158 With its emphasis on the production of relatively high-cost food products, rather than basic commodities, Kraft cannot expand into developing markets as easily as competitors such as Unilever and Nestl. 159 Krafts old corporate strategies have left it unprepared for these challenges. Earlier Kraft strategies emphasized acquisitions and overseas expansion. In 2001, shortly after the IPO and the Nabisco acquisition, Deromedi and Holden announced their intention to acquire new brands in health foods, snacks, and beverages, especially in international markets. 160 According to William Leach, in the same period Kraft cut marketing spending to boost its operating income. 161 A New Strategy: The Sustainable Growth Plan Krafts new corporate strategy rejects Holden and Deromedis old strategy. The old strategy focused on expansion. The new strategy, the Sustainable Growth Plan, instead seeks to consolidate the company and its product lines. The strategy is broken down into five key areas:
Kraft. Form 10-K. March 11, 2005. pp. 4-6. Neff, Jack. Ooey Gooey Mess. Food Processing. September 2003. 155 Neff, Jack. Ooey Gooey Mess. Food Processing. September 2003. 156 Jargon, Julie. Krafts Cheese Whizzes Rethink a Core Product. Crains Chicago Business. August 8, 2005. p. 1. 157 Thompson, Stephanie. Kraft Wakes Up to the Need to Push Maxwell House. Advertising Age. May 2, 2005. p. 9. 158 Carpenter, Dave. Kraft Net Drops 28 Percent on Higher Costs. Associated Press. January 26, 2005. 159 Forster, Julie. Can Kraft Be a Big Cheese Abroad? Business Week. June 4, 2001. p. 54. 160 Edgecliffe-Johnson, Andrew. Kraft Looks for More Purchases. Financial Times. September 3, 2001. p. 13. 161 Neff, Jack. Ooey Gooey Mess. Food Processing. September 2003.
154 153

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1. Focus on core brands and product lines. Instead of acquiring new brands and product categories, Kraft will focus on consolidating its most important product segments. Rather than adding new product lines, Kraft will seek to introduce new products within its core brands. Kraft will focus on cheese, cookies and crackers, beverages, and specialized grocery products, especially frozen pizza.162 Together, cheese, biscuits, and coffee accounted for 46% of the companys revenue in 2004. 163 With their rising-crust technology, Krafts two main pizza brands, DiGiorno and Tombstone, dominate the market for frozen pizzas. 164 In addition to these high-revenue categories, Kraft will also explore brands that offer high potential for rapid growth, such as its South Beach line of diet items and organic brands. 165 2. Sell brands outside of the core. Kraft will seek to sell brands and product lines outside of the core categories. Over the last year, Kraft sold its U.S. confectionery business, including the Altoids and Life Savers brands, to Wrigley for $1.46 billion. 166 After Deromedi announced the focus on core brands, analysts predicted that the company will seek to sell Oscar Mayer meats and Post cereals. Deromedi denied the rumor. 167 With successful new products and improving sales, Kraft will probably not sell off Oscar Mayer any time soon. 168 3. Close plants and restructure production. As part of the Sustainable Growth Plan, the company will eliminate 6000 jobs. Kraft estimates that it will cut 1300 jobs in North America and 4700 internationally. Kraft will cut Nabisco plants, such as the ones in Niles, Illinois, and Buena Vista, California, and move production into older Kraft plants. 169 Kraft has also cut 600 U.S. management jobs. 170 4. Create new product categories in the core areas. Kraft has always researched and introduced new food products. 171 Now, faced with intense competition from private-label manufacturers, Kraft will create complicated products that are hard to copy. With these products, the company seeks to include many related products within a single brand. Two brands in particular highlight this approach: The Tassimo beverage system. Already released in Europe, the Tassimo beverage system makes single-cup, caf-style coffees and hot beverages. The Tassimo machine uses special T-discs of coffees, teas, and condensed milks. Bar-codes on the T-discs instruct the machine to add the proper amount of
162 163

Krafts Strategy Continues to Unfold. Food Processing. April 2005. p. 9. Kraft. Form 10-K. March 11, 2005. p. 4. 164 Pehanich, Mike. Pizza Breakthroughs. Food Processing. April 2002. p. 27. 165 Atkins Out, South Beach In. Prepared Foods. June 2005. p. 8; Thompson, Stephanie. Kraft, Campbell Bank on Crop of Organic Efforts. Advertising Age. April 25, 2005. p. 24. 166 Wrigley Completes Life Savers, Altoids Acquisition. Associated Press. June 29, 2005. 167 Jargon, Julie. Kraft Meat Biz Looks Like a Sale Candidate. Crains Chicago Business. March 7, 2005; Krafts Strategy Continues to Unfold. Food Processing. April 2005. p. 9. 168 Kraft Cites Commodity Costs. Feedstuffs. August 15, 2005. p. 7. 169 Neff, Jeff. Can Kraft Shrink to Grow? Food Processing. May 2004. p. 37. 170 Stein, Jason. Kraft Cuts Oscar Mayer Jobs in Madison, WI. Wisconsin State Journal. October 15, 2005. 171 Dornblaser, Lynn. Top 20 Companies Synergistic Acquisitions Pay Off. Prepared Foods. March 2003. p. 95.

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water at the correct temperature. Kraft has protected the Tassimo system with more than 20 patents. 172 DiGiorno and Tombstone frozen pizzas. Krafts rising crust food technology pushed DiGiorno and Tombstone to the top of the frozen pizza industry. 173 With new microwaveable rising crust pizzas, Kraft will still dominate the frozen pizza sector. 174 5. Increase spending on marketing and brand-building. In the past, Kraft skimped on advertising spending to boost operating income. 175 These cuts especially hurt sales of older Kraft product lines such as Maxwell House and Velveeta. 176 Kraft will shift the money saved by restructuring to marketing and promotions. 177 The Sustainable Growth Plan will make Kraft a better-run company. Nevertheless, as Kraft consolidates around fewer brands, it becomes increasingly vulnerable to the failure of a single brand or product release. 7. Outside Stakeholders 7.1 Safety and Health Working at Kraft is dangerous. Work often involves hazardous chemicals and fastmoving machinery. Over the past five years, OSHA has investigated eleven industrial accidents at Kraft facilities. OSHA has found machinery defects and problems with energy sources. 178 In 2001, a discharge of ammonia gas at the Oscar Mayer plant in Madison, Wisconsin, killed one worker and injured another; at the same plant, exposed machinery has severed one workers fingers and cut off anothers arm. 179 Despite these problems, Kraft has improved its safety record in the last four years. According to company data, from 2001 to 2004 Krafts lost-time accident rate dropped by 30 percent. The total number of accidents dropped even further, by 37 percent. 180 7.2 Environmental Most Kraft facilities operate relatively cleanly. According to Environmental Defenses Scorecard, several Kraft facilities are among the top 10% of clean manufacturing
Kraft. Kraft Foods Debuts Tassimo Hot Beverage System in the US. Business Wire. March 16, 2005. Pehanich, Mike. Pizza Breakthroughs. Food Processing. April 2002. p. 27. 174 Grant, Jeremy. Kraft Cooks Up Strategic Innovations. Microwaveable Pizzas Symbolize the Food Giants New Approach. Financial Times. May 17, 2005. 175 Neff, Jeff. Can Kraft Shrink to Grow? Food Processing. May 2004. p. 37. 176 Thompson, Stephanie. Kraft Wakes Up to the Need to Push Maxwell House. Advertising Age. May 2, 2005. p. 9. 177 Kraft. Form 10-K. March 11, 2005. p. 23; Neff, Jeff. Can Kraft Shrink to Grow? Food Processing. May 2004. p. 37. 178 OSHA. Employment Search. Kraft. www.osha.gov. 2000-2005. 179 Newman, Judy. OSHA Continues Investigation into Accidents at Wisconsin Oscar Mayer Plant. Wisconsin State Journal. December 27, 2001. 180 Kraft. Responsibility. Safety and Health. [www.kraft.com/responsibility/people_safety.aspx]
173 172

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facilities in the U.S. Despite a clean record overall, several Kraft facilities are major polluters. Five Kraft facilities fall under Scorecards bottom 70% of the dirtiest facilities in the U.S., and two more are in the bottom 80%. 181 Ammonia is the chief environmental problem at each of these facilities. A suspected toxin, ammonia harms the skin and the neurological and reproductive systems. 182 For its ingredients, Kraft uses many genetically-modified organisms. In 2000, Friends of the Earth discovered genetically-modified StarLink not approved for human consumption in Kraft tortillas. 183 Kraft has refused to accept shareholder resolutions calling for increased reporting of the use of genetically-modified organisms. 7.3 Regulation The Food and Drug Administration regulates the food industry. The FDA inspects manufacturing facilities and tests food products to ensure products contain safe ingredients and are labeled correctly. If a company fails to abide by its regulations, the FDA can sanction the company. 184 Kraft closely follows the FDAs rule-making and public comment procedures. In 2002, Kraft petitioned the FDA to reduce the regulation and testing of new food technologies and ingredients. Kraft sees these regulations as barriers that hinder significant improvement in food safety, quality and cost. 185 In 2002, the FDA cited Kraft for a serious violation of the Food and Drug Act. The FDA alleged that Kraft cheese plants in Illinois, Minnesota, and Missouri were adding unlisted food ingredients to processed cheese. 186 Krafts management worries that the government will increase regulation of food manufacturers to stem the obesity epidemic. As business reporter Adrienne Carter warns, Kraft ... and its competitors risk becoming this decades cigarette companies: vilified for pushing junk to children, restricted by often-conflicted regulators, challenged in court. To avoid increased regulation, Kraft has started to reformulate many of its products. These new formulations reduce trans-fats and increase vitamins and nutrients. Nevertheless, these new formulations will probably not avert increased government oversight of fat content. 187 7.4 Community
181

The five in the bottom 70% are in Philadelphia, Pennsylvania; Madison, Wisconsin; Fair Lawn, New Jersey; Atlanta, Georgia; and Buena Park, California. The two in the bottom 80% are in Chicago, Illinois, and Richmond, Virginia. 182 Environmental Defense. Scorecard. Toxic Release Inventory. www.scorecard.org. 183 Crenson, Matt. How Corn Not Approved for the Human Consumption Reached the U.S. Food Supply. Associated Press. December 1, 2000. 184 FDA. The Food and Drug Administration. An Overview. www.cfsan.fda.gov/fdaoview.html. 185 Spence, Jean. E. Re: CFSAN 2002 Priorities. September 14, 2001. pp. 1-2. 186 Connelly, Virginia R. FDA Warning Letter. December 18, 2002. pp. 1-2. 187 Carter, Adrienne. Slimmer Kids, Fatter Profits? Charles Davis, a Kraft Food Maven, Is on a Health Kick. But Then, He Has No Choice. Business Week. September 5, 2005. p. 70.

30

In recent years, several farm activists, environmentalists, and anti-tobacco activists have raised objections to Krafts supplier policies, environmental practices, and its relation to Altria. Farmers. The National Family Farm Coalition works with farmers and rural communities to preserve family farms through sustainable agriculture. 188 The NFFC has mobilized farmers to push for tighter regulation of food commodity auctions. Their campaign targets both the Dairy Farmers of America as well as Kraft. 189 Anti-GMO Activists. Activists opposed to the use of genetically-modified organisms (GMOs) have targeted Krafts distribution of foods containing GMOs. Friends of the Earth and the U.S. Public Interest Research Group have targeted Kraft. They are allied with shareholders including Green Century Capital Management and several Catholic monastic orders. At the last two shareholders meetings, these groups proposed that Kraft disclose the use of GMOs in its food and examine the health effects of its geneticallymodified food. 190 Anti-Tobacco Activists. Anti-tobacco activists, especially around the group Corporate Accountability International (formerly Infact), have pressured Altria to stop marketing tobacco to children and to halt tobacco marketing overseas. Infact ran a boycott of Kraft to protest Altrias connection from 1993 to 2003. 191 7.5 Politics Today, Kraft handles most of its political work through Altrias Political Action Committee. Krafts PAC spent just a little les than $3,000 in the 2004 election, while Altrias PAC spent $1.7 million. More than two thirds of Altrias money went to Republican candidates. 192 Roger Deromedi made a small contribution of $832 to the Altria PAC. 193 In 2004, Altria also spent more than $13 million in political lobbying. 194 8. Conclusion 8.1 Profit Centers
188 189

National Family Farm Coalition. NFFC Issues. www.nffc.net/issues/index.html. Grant, Jeremy. Big Dairy Is Milking Cheese Prices, Say US Small Farmers. Financial Times. April 22, 2005. p. 20. 190 U.S. PIRG, Friends of the Earth, and Green Century Capital Management. Investors, Consumers, Scientists, and Environmentalists Present New Information and Voice Concerns about Genetically Engineered Foods at Kraft Shareholder Meeting. Common Dreams Progressive Newswire. April 27, 2004. www.commondreams.org/news2004/0427-02.htm; Kraft. DEF 14A. March 4, 2005. p. 33. 191 Corporate Accountability International. Impact of InFacts Tobacco Industry Campaign and the Kraft Boycott, 1993-2003. June 2003. 192 Center for Responsive Politics. Political Action Committees. Kraft. www.opensecrets.org; Center for Responsive Politics. Political Action Committees. Altria. www.opensecrets.org. 193 Center for Responsive Politics. Individual Search. Roger Deromedi. www.opensecrets.org. 194 Center for Public Integrity. Lobbywatch. Altria Group. www.publicintegrity.org/lobby/.

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North America is Krafts main market. Sales in North America not only provide most of Krafts revenue, but operations provide an overwhelming amount of Krafts operating income. In 2004, the North American market brought in 63% of Krafts revenue, and operations there provided four fifths of Krafts operating income. With high revenues and lower costs, brands within Convenient Meals, Grocery, and Beverage drove this high performance. 195 Frozen pizza, for example, drives the high margins in Convenient Meals. Even though the Cheese division is relatively less profitable than the other segments, it continues to bring in the largest portion of the companys U.S. revenue. 196 Without this revenue, Kraft cannot expand and consolidate its operations. Europe brings in less revenue and even less operating income than North America, but the region is still an important market for Kraft. With expensive products, Kraft does not compete well in the Global South. Without a plan for international expansion, Kraft needs the European market especially for beverages and snacks to balance its dependence on the U.S. 197 8.2 Growth Plan Traditionally, Kraft has aggressively bought out other companies. For now, though, Kraft has put aside these mergers. Instead, the company plans to grow by building on the core brands within its profit center. Consolidation is at the center of the companys Sustainable Growth Plan. Krafts growth strategy contains five key elements: Focus on core brands and product lines. Sell off brands and operations outside of the core. Close plants and restructure production. Develop new food technologies within their core product lines. Increase attention to marketing and brand-building. Kraft will shrink to grow. 198 This consolidation started with the elimination of 6000 jobs, the closing of several plants, and the sale of Altoids and Lifesavers. These cuts are probably just the beginning. Over the next few years, Kraft will likely sell off more businesses and close more plants in order to shift more resources into research and development and marketing. With fewer plants and fewer workers, Kraft will force the remaining employees to work harder and longer. Despite these cuts, new products such as the Tassimo coffee system and DiGiorno pizza with microwaveable crust are still essential to Krafts growth strategy. With fewer brands and products, consumers must buy Krafts new products. A small change in consumer preferences can ruin the release of a new product. With fewer products, Kraft is now more vulnerable to the failure of any single item.

195 196

Kraft. Form 10-K. March 11, 2005. p. 2. Kraft. Form 10-K. March 11, 2005. p.2. 197 Kraft. Form 10-K. March 11, 2005. p. 3. 198 Neff, Jeff. Can Kraft Shrink to Grow? Food Processing. May 2004. p. 37.

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The Sustainable Growth Plan has put international expansion on hold. With its IPO, Kraft aimed to expand aggressively into international markets. Today, the Plan does not mention international expansion. Kraft will seek modest expansion in emerging markets such as Brazil, Mexico, and Russia. But until it has completed its consolidation, Kraft will delay any major international acquisitions and product releases. 8.3 Key Decision Makers Today, three primary actors define the business strategy of Kraft: Krafts corporate bureaucracy, new CEO Roger Deromedi, and Altria. With sparse internal communication, Krafts individual departments make many of the day-to-day business decisions of the company. These corporate decision-makers oversee production and design new products. Their rigorous, painstakingly slow corporate style largely shapes Krafts corporate culture. The result is not a unified plan but an ooey gooey mess. 199 Roger Deromedi will try to tame Krafts bureaucracy. He is encouraging departments to communicate more and to report directly to him. His Sustainable Growth Plan captures his leaner style. Altria still holds overall control over the company. But Altria often defers to Krafts departments. Altria itself is controlled by a few large institutional shareholders. The spinoff will re-shuffle the key players. Deromedi will play an even more independent role in the company. His greater independence will give him more opportunities to weaken Krafts internal bureaucracy and carry out his corporate strategy of consolidation. Even if Altria keeps a major portion of Kraft stock, it will seek a smaller role. Stockholders will demand independence for the new company. Altria will change the composition of the Board to make it more independent. Camilleri will probably step down as Chairman. Either Deromedi or an independent representative of stockholders will take this position. Who assumes control over the Board will largely determine Deromedis power within the company. 8.4 Key Relationships The spinoff will dramatically end Krafts isolation. Today, Kraft relies on Altria for political influence. Furthermore, Krafts current Board of Directors is heavily centered on Chicago, Illinois. As Kraft negotiates the spinoff, it will have to renegotiate many key relationships: Altria. To enhance its value to new stockholders, Kraft will distance itself from Altria, even if the parent company retains significant holdings in Kraft. New Shareholders. Kraft will work hard to please new shareholders. At the time of the IPO, Kraft promised quick and easy expansion; instead, it has grown slowly. New shareholders will expect the company to continue the consolidation begun under the Sustainable Growth Plan. Moreover, they will expect the
199

Neff, Jack. Ooey Gooey Mess. Food Processing. September 2003.

33

company to operate with clear leadership. These expectations will strengthen Deromedis position and encourage the company to expand the Board beyond its narrow Chicago base. Suppliers. Higher commodity prices have hurt Krafts revenue and operating income in the last year. Some suppliers, such as dairy farmers, are now organizing to win even higher prices. Kraft will seek out new supplier relationships to counter rising prices. Regulators and Politicians. Kraft has an existing relationship with regulators, but Altrias stewardship has shielded the company from developing other political relationships. As politicians start to target the obesity epidemic, Kraft will seek out new relationships with politicians.

8.5 Possibilities for Union Cross-Border Comprehensive Campaigns Krafts Sustainable Growth Plan will make the company more efficient. But, the company will also rely on fewer brands. It will also make the company more vulnerable to cross-border, comprehensive campaigns. As they seek to organize Kraft workers and fight for stronger contracts, unions and works councils will likely find more vulnerabilities in Krafts leaner structure. Kraft is especially vulnerable and ripe for organizing in its Beverage and Frozen Pizzas divisions. Looking for Crossovers. Kraft is consolidating only a few key product segments. Although these priority segments differ by region, there are crossovers. In particular, Krafts Beverage segment is important for its North American, European, and developing nation markets. All of the companys U.S. juice and powdered beverage plants are unorganized. Targeting Regional Markets. Not all Kraft plants produce for only local markets. Plants in Europe, Asia, and Latin America often produce for regional markets. Cross-border campaigns can often seek alliances regionally among different Kraft facilities. Targeting Key Brands. Kraft is focused on releasing a few, big brands, such as the Tassimo coffee system and the new DiGiorno microwaveable frozen pizzas. Consumer indifference can cripple the release of any new product. This vulnerability presents crossborder campaigns with an opportunity to interfere with the release and initial marketing of these new brands. Even minor interference could cost Kraft significant new market share. Following the Supply Chains. Kraft usually manufactures food products in the country of sale. But despite its preference for local manufacture, Kraft must rely on a global supply chain to bring together the raw materials for its products. Interference with suppliers can interfere with Kraft operations worldwide.

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Appendix A Facility Locations Kraft Foods North America United States 200 Category Beverage Beverage Beverage Beverage Beverage Biscuit Biscuit Biscuit Biscuit Biscuit Biscuit Biscuit Biscuit Location Fresno, CA Granite City, IL Littleton, MA Berlin, NH Winchester, VA Atlanta, GA Bronx, NY Chicago, IL Fairlawn, NJ Buffalo, NY Philadelphia, PA Portland, OR Richmond, VA Employees n/a 300 n/a n/a 300 370 Union Non-union Non-union Non-union Non-union Non-union BCTGM Product Capri-Sun, Kool-Aid Capri-Sun, Kool-Aid Veryfine Veryfine Capri-Sun, Kool-Aid Saltines, Nilla Wafers, Cheeze Nips, Ritz Stella DOro Oreo, Grahams, Chips Ahoy, Wheat Thins Oreo, Ritz Milkbone Oreo, Ritz Oreo, Wheat Thins, Chips Ahoy Oreo, Ritz, Wheat Thins, Nilla Wafers, Chips Ahoy, Cheeze Nips Banana Nut Crunch, Grape Nuts, Pebbles Grape Nut Flakes, Cocoa Pebbles, Almond Crunch, Honey Nut Shredded Wheat Grape Nuts, Banana Nut Crunch Frosted Shredded Wheat Cheese powder Philadelphia Crme Cheese Processed cheese Mozzarella, Ricotta, Dry whey powder Cream Cheese Parmesan, Romano, Vat Cheeses, Cream Cheese Cottage Cheese

161 BCTGM 1160 BCTGM 600 150 550 250 BCTGM BCTGM BCTGM BCTGM

520 BCTGM

Cereal Cereal

Battle Creek, MI Jonesboro, AR

1500 RWDSU 70 Non-union

Cereal Cereal Cheese Cheese Cheese Cheese Cheese Cheese Cheese

200

Modesto, CA Naperville, IL Albany, MN Beaver Dam, WI Bentonville, AR Campbell, NY Lowville, NY Melrose, MN North Lawrence,
BCTGM. Kraft Facility Locations 2005.

230 IBT 300 BCTGM 75 Non-union 250 Non-union 100 Non-union 400 IBT 335 Non-union 300 Non-union 130 IBT

35

Cheese Cheese Cheese Cheese

NY New Ulm, MN Rupert, ID Springfield, MO Tulare, CA

600 Non-union n/a Non-union 1300 Non-union n/a Non-union

Cheese Cheese Cheese Cheese Coffee Coffee Coffee Convenient Meals Desserts Desserts Desserts Desserts Desserts Distribution Distribution Distribution Distribution Distribution Distribution Distribution Distribution Distribution Distribution Enhancers

Visalia, CA Walton, NY Waupaca, WI Wausau, WI Houston, TX Jacksonville, FL San Leandro, CA Fullerton, CA Avon, NY Dover, DE Mason City, IA Rochelle, IL Woburn, MA Columbus, OH Ft Worth, TX Bethlehem, PA Bethlehem, PA Norcross, GA Ontario, CA Ontario CA Stockton, CA Stockton, CA Aurora, IL Champaign, IL

150 IBT 200 IBT and UFCW n/a Non-union 285 Non-union 650 UFCW 425 UFCW 400 IBT 500 IBT 350 IBT 900 UFCW and IBT 200 n/a 250 220 125 100 135 n/a n/a n/a n/a n/a n/a n/a Non-union Non-union OPEIU Non-union Non-union Non-union Non-union Non-union Non-union Non-union Non-union Non-union Non-union IBT

Kraft Singles, Velveeta Low fat and fat free cheeses Processed cheese, cream cheese, pizza sauce Grated cheese, Whey powder, Parmesan, Whey cream Knudsen, Breakstone Knudsen, Light n Lively Athenos Feta and Spreads, Hoffmans Kraft Parmesan and Romano Maxwell House Maxwell House Maxwell House, Starbucks, Nabob Lunchables Lunchables and Cool Whip Jell-O, Kool-Aid, StoveTop, Shake n Bake Jell-O Handi-Snacks, Pudding Jell-O

Enhancers Enhancers Meat

Lehigh Valley, PA Garland, TX Columbia, MO

n/a Non-union 500 Non-union 400 Non-union

Kraft Singles, Miracle Whip, Taco Bell, Salad Dressings Sauces, Salad dressings Miracle Whip, Sauces, Margarine Oscar Mayer

36

Meat Meat Meat Meat Meat Pasta Pickles Pizza Pizza Pizza

Coshocton, OH Davenport, IA Kirksville, MO Madison, WI Newberry, SC Birmingham, AL Woodstock, IL Little Chute, WI Medford, WI Sussex, WI

500 UFCW 1500 380 3000 1100 100 300 500 UFCW Non-union UFCW and IBT Non-union Non-union IBT Non-union

n/a Non-union 400 Non-union

Oscar Mayer, Hickory Country Oscar Mayer, Louis Rich Oscar Mayer Lunchables, Oscar Mayer Louis Rich DiGiorno pasta Claussen DiGiorno, Tombstone, Jacks DiGiorno, Tombstone, Jacks DiGiorno, Tombstone, Jacks

Kraft Foods International European Union Category Cheese Location Fallinbostel, Germany Employees Product 802 Ketchup, Miracle Whip, Philadelphia Cream Cheese, Miracoli 611 Lunchables, Handisnacks, Processed cheese 176 Caserio, Sante, Trachettes 138 Grated and Parmesan cheeses 840 Kroenung 708 Desserts 99 Familial, Carte Noir, Degustation 80 Decaffeinated 111 Gevalia 53 Coffee 91 Caramba Market Germany, Italy

Cheese

Namur, Belgium

UK, Italy

Cheese Cheese Coffee Coffee Coffee Coffee Coffee Coffee Coffee

Mahon, Spain Zamora, Spain Bremen, Germany Banbury, UK Liege, Belgium Strasbourg and Le Havre, France Gavle, Swedem Sevilla, Spain Andezeno, Italy

Spain Spain Germany, France, Greece, Lithuania UK France, Switzerland Belgium, France Sweden, US Spain Germany, Switzerland, Italy, France UK, Italy France

Coffee Coffee

Vienna, Austria Laverune, France

29 Kenco 118 Regal, Carte Noir, JV Nectar 37

Coffee

Valasske Mezirici, Czech Republic Halle/Herentals, Belgium Strasbourg, France Loerrach, Germany Bern, Switzerland Bludenz, Austria

230 Coffee pods

Confectionery

735 Tablets and Seasonals 452 Milka 696 Milka, Suchard Express 290 Toblerone 397 Milka

Confectionery Confectionery Confectionery Confectionery

Czech Republic, Poland, Ukraine, Slovakia Belgium, France, Spain, Sweden, Germany Germany, France Germany, Austria, Switzerland UK, Germany Austria, Germany, France, Norway, Sweden, Denmark Norway, Sweden Germany, Norway, Sweden Greece Lithuania, Russia Czech Republic, Slovakia, Hungary, Poland, Germany Poland, Czech Republic Poland Italy Spain, Italy, UK, Belgium (mayo only) Sweden Norway

Confectionery Confectionery Confectionery Confectionery Confectionery

Oslo, Norway Upplands Vasby, Sweden Athens, Greece Kaunas, Lithuania Bratislava, Slovakia Cieszyn, Poland Poznan, Poland Aprilia, Italy Orbigo, Spain

334 Melkerull 522 Pralines, Daim, Kaba 159 Tablets and Pralines 344 SSN, Jazz, Bingo, Fregata 960 Milka

Confectionery Confectionery Convenient Meals Grocery

282 Coffee, Wafers 194 Milka 147 Spunti, Tripe, Pressatella 227 Mayonnaise, Philadelphia Cream Cheese, Tang 119 Chips 125 Chips

Salted Snacks Salted Snacks

Angered, Sweden Disena, Norway

Eastern Europe, Middle East, and Africa (EEMA) Category Coffee Coffee Coffee Confectionery Confectionery Location Kostinbrod, Bulgaria St. Petersburg, Russia Casablanca, Morocco Brasov, Romania Johannesburg, South Africa Employees Product 60 Jacobs 129 Coffee 77 Coffee 471 Tablets and Pralines 483 Beverages and Biscuits 38 Market Bulgaria Russia Morocco Romania South Africa

Confectionery Confectionery Confectionery Confectionery Confectionery Salted Snacks Salted Snacks

Svoge, Bulgaria Trostyanets, Ukraine Cairo, Egypt Pokrov, Russia Dammam, Saudi Arabia Pendik, Turkey Vyshhorod, Ukraine

403 Pralines and Tablets 716 Korona Rasco 789 Stollwerk Oreo, Ritz 297 Potato and corn chips 333 Lux

Bulgaria, Poland, Russia Ukraine, Russia Egypt Russia Saudia Arabia Turkey Ukraine, Russia, Bulgaria

Asia and Pacific Category Beverages Beverages Biscuit Biscuit Biscuit Biscuit Biscuit Cheese and Grocery Location Tianmei, China Khon Kaen, Thailand Cikarang, Indonesia Suzhou, China Beijing, China Tainan, Taiwan Broadmeadows, Australia Port Melbourne, Australia Employees Product 309 Tang 192 Tang 1040 Ritz, Oreo, Chips Ahoy 1286 Ritz, Marubu, Oreo, Chips Ahoy 705 Ritz, Oreo, Trakinas 67 Lucky Egg Roll 208 Crackers, Vegemite In-a-Biskit 277 Vegemite, Peanut butter, Salad dressings, Snacksabout 371 Philadelphia Cream Cheese, Kraft Singles 79 Philadelphia Cream Cheese, Bulk Cheese 12 Vegemite 400 Processed Cheese 175 Processed Cheese 191 Maxwell House Market China, Hong Kong Philippines, Thailand, Vietnam Indonesia, Malaysia, Singapore, Brunei China, Hong Kong, Philippines China, Australia, Hong Kong China, USA Australia Australia

Cheese and Grocery Cheese and Grocery Cheese and Grocery Cheese and Grocery Cheese and Grocery Coffee

Strathmerton, Australia Suttontown, Australia Otahuhu, New Zealand Sucat, Philippines Bandung, Indonesia Guangtong, China

Australia Australia, Japan New Zealand Phillippines Indonesia, Thailand China, Australia, Hong Kong

Latin America

39

Category Grocery Grocery Grocery

Location Curitiba, Brazil Curitiba, Brazil Jundiai, Brazil

Employees 2396 498 501

Grocery Grocery Grocery Grocery Grocery Grocery Grocery Grocery Grocery Grocery Grocery Grocery Grocery Snacks Snacks Snacks Snacks Snacks Snacks Snacks Snacks

Villa Mercedes, Argentina Aracati, Brazil Araguari, Brazil Cali, Colombia Valencia, Venezuela Pedreira, Brazil Ambato, Ecuador Curitiba, Brazil Medellin, Colombia Encatepec, Mexico Fenix, Mexico Monterrey, Mexico Victoria, Mexico Pacheco, Argentina Piracicaba, Brazil Lima, Peru Barquisimeto, Venezuela Kingston, Jamaica Managua, Nicaragua San Jose, Costa Rica San Jose Gallito, Costa Rica

265 31 186 419 293 87 90 20 285 n/a 201 n/a n/a n/a 2299 1342 535 1074 154 276 214 279

Product Confectionery Tang, Fresh Tang, Q-Fresco, Royal Puddings, Royal Baking Powder Tang, Gelatin, Dry Mixes Cashew and Passion Fruit juices Fruit juice Tang, Kool-Aid, Royal Pudding Cheese Gelatin Gelatin Philadelphia Cream Cheese Housewares Grocery Grocery Grocery Grocery Club Social, Oreo Oreo, Chips Ahoy, Club Social Club Social, Oreo Club Social, Oreo Club Social, Oreo Club Social, Oreo Tang, Royal Gelatin Milka

Market Brazil Brazil Brazil

Argentina All to Araguari plant Brazil Colombia, Venezuela, Peru, Ecuador Colombia and Brazil All to Jundiai plant All to Cali and San Jose Gallito plants Brazil Colombia Mexico Mexico Mexico Mexico Argentina, Uruguay Brazil Peru Venezuela Jamaica Nicaragua Costa Rica Costa Rica

201

Total employment in the four Mexican facilities is 2651.

40

Appendix B. Financial Analysis Kraft Foods Balance Sheet (mil $)

ASSETS Total Current Assets Net Stated Inventory Raw Materials Work in Progress Finished Goods Inventory Prepayments Net Accounts Receivable Accounts Receivable Doubtful Accounts Others Other Current Assets Prepaid Expenses & Advances Deferred Charges Total Cash & Short Term Investment Cash or Equivalent Short Term Investment Fixed Assets Net Properly, Plant & Equipment Land Total Land Depreciation Net Stated land Buildings Total Buildings Depreciation Net Buildings Plant & Machinery Plant & Machinery Depreciation Net Stated Plant & Machinery Transportation Equipment Transportation Equipment Depreciation Net Transportation Equipment Leased Assets Leased Assets Depreciation Net Leased Assets Other Property Plant & Equipment Other Property Plant & Equip. Deprec. Net Other Property Plant & Equipment Accumulated Deprec., n.e.s. Intangibles Goodwill Other Intangibles Other fixed assets Exploration Long Term Receivables Investments Long Term Associated Companies Investment Properties Other Long Term Assets Total Assets 9,722 3,447 1367 n.a. 2,080 n.a. 3,541 3,659 -118 2,734 1,703 749 n.a. 282 282 n.a. 50,206 9,985 400 n.a. n.a. 3,545 n.a. n.a. 11,892 n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. 646 n.a. n.a. -6,498 35,811 25,177 10,634 4,410 n.a. n.a. n.a. n.a. n.a. 4,410 59,928 8,124 3,343 1375 n.a. 1,968 n.a. 3,369 3483 -114 1,412 217 681 n.a. 514 514 n.a. 51,161 10,155 407 n.a. n.a. 3,422 n.a. n.a. 11,293 n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. 683 n.a. n.a. -5,650 36,879 25,402 11,477 4,127 n.a. n.a. n.a. n.a. n.a. 4,127 59,285 7,456 3,382 1372 n.a. 2,010 n.a. 3,116 3235 -119 958 232 511 n.a. 215 215 n.a. 49,644 9,559 387 n.a. n.a. 3,153 n.a. n.a. 10,108 n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. 802 n.a. n.a. -4,891 36,420 36,420 n.a. 3,665 n.a. n.a. n.a. n.a. n.a. 3,665 57,100 7,006 3,026 1,281 n.a. 1745 n.a. 3,131 3282 -151 849 221 466 n.a. 162 162 n.a. 48,792 9,109 387 n.a. n.a. 2,915 n.a. n.a. 9,264 n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. 706 n.a. n.a. -4,163 35,957 35,957 n.a. 3,726 n.a. n.a. n.a. n.a. n.a. 3,726 55,798 7,152 3,041 1,175 n.a. 1866 n.a. 3,231 3383 -152 880 185 504 n.a. 191 191 n.a. 44,919 9,405 419 n.a. n.a. 2,949 n.a. n.a. 8,858 n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. 816 n.a. n.a. -3,637 31,584 31,584 n.a. 3,930 n.a. n.a. n.a. n.a. n.a. 3930 52,071

41

LIABILITIES Total Current Liabilities Loans Current Long Term Debt Trade Creditors (payables) Other Other Short Term Debt Other Creditors Income Tax Payable Social Expenditure Payable Dividends Payable Other Current Liabilities Non Current Liabilities Total LT Interest Bearing Debt Bank Loans Debentures & Convertible Debt Lease Liabilities Other Long Term Interest Bearing Debt Other non-current liabilities Pension Fund Provisions Deferred Taxes Provisions Deferred Revenue Other LT Non-Interest Bearing Debt Minority Interest Total Liabilities and Debt Total Shareholders Equity Share Capital Common Stock/Shares Participation Shares Preferred Shares Redeemable Prefered Shares Other Share Premiums Treasury Shares Revaluation Reserves Retained Earnings Other Shareholders Reserves Total Liabilities and Equity Net Assets Net Debt Enterprise Value Number of Employees 9,078 750 750 2,207 6,121 1,818 227 170 n.a. n.a. 3,906 20,939 9,723 9,723 n.a. n.a. n.a. 11,216 1887 5850 n.a. n.a. 3479 n.a. 30,017 29,911 n.a. n.a. n.a. n.a. n.a. 29,911 23,762 -950 n.a. 8,304 -1,205 59,928 29,911 -282 61,501 98,000 7,861 775 775 2,005 5,081 553 543 451 n.a. n.a. 3,534 22,894 11,591 11,591 n.a. n.a. n.a. 11,303 1894 5856 n.a. n.a. 3553 n.a. 30,755 28,530 n.a. n.a. n.a. n.a. n.a. 28,530 23,704 -402 n.a. 7,020 -1,792 59,285 28,530 -514 55,388 106,000 7,169 352 352 1,939 4,878 220 895 363 n.a. n.a. 3,400 24,099 12,976 12,976 n.a. n.a. n.a. 11,123 1889 5428 n.a. n.a. 3806 n.a. 31,268 25,832 n.a. n.a. n.a. n.a. n.a. 25,832 23655 -170 n.a. 4814 -2,467 57,100 25,832 -215 67,329 109,000 8,875 540 540 1,897 6,438 681 1,652 228 n.a. n.a. 3,877 23,445 13,134 13,134 n.a. n.a. n.a. 10,311 1850 5031 n.a. n.a. 3430 n.a. 32,320 23,478 0 0 n.a. n.a. n.a. 23,478 23655 n.a. n.a. 2391 -2,568 55,798 23,478 -162 58,880 114,000 7,590 713 713 1,971 4,906 146 865 258 n.a. n.a. 3,637 30,433 24,102 24,102 n.a. n.a. n.a. 6,331 1867 1446 n.a. n.a. 3018 n.a. 38,023 14,048 0 0 n.a. n.a. n.a. 14,048 15230 n.a. n.a. 992 -2,174 52,071 14,048 -191 n.a. 117,000

42

Kraft Foods Income Statement (mil $)

12/31/2004 Total revenues Gross sales Adjustments/excise tax Net sales Other revenues Cost of Goods Sold Research & Development expenses Other Operating Items EBITDA Total Depreciation, Amort. & Depl. Depreciation Amortization & Depletion Operating Income After Deprec. & Amort. Unusual/Exceptional Items Earnings Before Interest & Tax Interest income Interest expenses Net interest Other non Oper./Financial Inc./Exp. Earnings before tax Income taxes Earnings after tax Minority interest Other Extraordinary items after tax Preferred dividends Net Profit Ordinary dividends Dividend share capital other 32,168 32,168 n.a. 32,168 n.a. -20,281 n.a. -7,084 4,803 -11 n.a. -11 4,792 n.a. 4,792 11 -677 -666 -180 3,946 -1,274 2,672 -3 n.a. -4 n.a. 2,665 -1,320 n.a. 12/31/2003 30,498 30,498 n.a. 30,498 n.a. -18,531 n.a. -5,916 6,051 -9 n.a. -9 6,042 n.a. 6,042 13 -678 -665 -182 5,195 -1,812 3,383 -4 n.a. 97 n.a. 3,476 -1,141 n.a. 12/31/2002 29,248 29,248 n.a. 29,248 n.a. -17,463 n.a. -5,817 5,968 -7 n.a. -7 5,961 n.a. 5,961 7 -854 -847 n.a. 5,114 -1,813 3,301 -4 n.a. 97 n.a. 3,394 -971 n.a. 12/31/2001 29,234 29,234 n.a. 29,234 n.a. -17,566 n.a. -5,822 5,846 -962 n.a. -962 4,884 n.a. 4,884 15 -1,452 -1,437 n.a. 3,447 -1,565 1,882 0 n.a. n.a. n.a. 1,882 -483 n.a. 12/31/2000 22,922 22,922 n.a. 22,922 n.a. -13,959 n.a. -4,416 4,547 -535 n.a. -535 4,012 n.a. 4,012 18 -615 -597 n.a. 3,415 -1,414 2,001 0 n.a. n.a. n.a. 2,001 0 n.a.

43

Kraft Foods Cash Flow Statement (mil $)

12/31/2004 Operating Cash Flows Net Income Depreciation Depletion Depreciation/Depletion Amortization of Intangibles Amortization of Acquisition Costs Amortization Deferred Taxes Accounting Change Discontinued Operations Extraordinary Item Unusual Items Purchased R&D Equity in Net Earnings/Loss Other Non-Cash Items Non-Cash Items Cash Receipts Cash Payments Accounts Receivable Inventories Prepaid Expenses Other Assets Accounts Payable Accrued Expenses Payable/Accrued Taxes Payable Other Liabilities Other Assets & Liabilities, Net Other Operating Cash Flow Changes in Working Capital Total Cash from Operating Activities Investing Cash Flows Purchase of Fixed Assets Purchase/Acquisition of Intangibles Software Development Costs Capital Expenditures Acquisition of Business Sale of Business Sale of Fixed Assets Sale/Maturity of Investment Investment, Net Purchase of Investments Sale of Intangible Intangible, Net Other Investing Cash Flow Other Investing Cash Flow Items, Total Total Cash from Investing Activities -1,006 n.a. n.a. -1,006 -137 18 n.a. n.a. n.a. n.a. n.a. n.a. 69 -50 -1,056 -1,085 n.a. n.a. -1,085 -98 96 n.a. n.a. n.a. n.a. n.a. n.a. 38 36 -1,049 -1,184 n.a. n.a. -1,184 -122 219 n.a. n.a. n.a. n.a. n.a. n.a. 35 132 -1,052 -1,101 n.a. n.a. -1,101 -194 21 n.a. n.a. n.a. n.a. n.a. n.a. 52 -121 -1,222 -906 n.a. n.a. -906 -15524 300 n.a. n.a. n.a. n.a. n.a. n.a. -8 -15,232 -16,138 2,665 879 n.a. 879 n.a. n.a. n.a. 41 n.a. 107 n.a. 495 n.a. n.a. n.a. 602 n.a. n.a. 23 -65 n.a. -436 152 n.a. n.a. -251 74 90 234 -179 4,008 3,476 813 n.a. 813 n.a. n.a. n.a. 244 n.a. n.a. n.a. -51 n.a. n.a. n.a. -51 n.a. n.a. -45 197 n.a. -419 -116 n.a. n.a. -125 169 -167 143 -363 4,119 3,394 716 n.a. 716 n.a. n.a. n.a. 278 n.a. n.a. n.a. 173 n.a. n.a. n.a. 173 n.a. n.a. 116 -220 n.a. -34 -116 n.a. n.a. 277 -244 -552 -68 -841 3,720 1,882 1,642 n.a. 1,642 n.a. n.a. n.a. 414 n.a. n.a. n.a. 74 n.a. n.a. n.a. 74 n.a. n.a. 23 -107 n.a. -245 -73 n.a. n.a. 74 138 -407 -87 -684 3,328 2,001 1,034 n.a. 1,034 n.a. n.a. n.a. 245 n.a. n.a. n.a. -172 n.a. n.a. n.a. -172 n.a. n.a. 204 175 n.a. n.a. 13 n.a. n.a. 35 n.a. -195 -86 146 3,254 12/31/2003 12/31/2002 12/31/2001 12/31/2000

44

Financing Cash Flows Other Financing Cash Flow Financing Cash Flow Items Cash Dividends Paid Common Cash Dividends Paid Preferred Total Cash Dividends Paid Sale/Issuance of Common Repurchase/Retirement of Common Common Stock, Net Sale/Issuance of Preferred Repurchase/Retirement of Preferred Preferred Stock, Net Sale/Issuance of Common/Preferred Repurch./Retirement of Common/Preferred Options Exercised Warrants Converted Treasury Stock Issuance (Retirement) of Stock, Net Short Term Debt Issued Short Term Debt Reduction Short Term Debt, Net Long Term Debt Issued Long Term Debt Reduction Long Term Debt, Net Total Debt Issued Total Debt Reduction Issuance (Retirement) of Debt, Net Total Cash from Financing Activities Balance Foreign Exchange Effects Net Change in Cash Net Cash - Beginning Balance Net Cash - Ending Balance Supplementals Depreciation, Supplemental Cash Interest Paid, Supplemental Cash Taxes Paid, Supplemental 879 633 1,610 813 642 1,726 716 825 1,368 1,642 1433 1,058 1,034 605 1,051 34 -232 514 282 15 299 215 514 1 53 162 215 -4 -29 191 162 -2 96 95 191 -605 -605 -1,280 n.a. -1,280 n.a. -688 -688 n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. -688 n.a. n.a. -635 832 -842 -10 n.a. n.a. -645 -3,218 -473 -473 -1,089 n.a. -1,089 n.a. -372 -372 n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. -372 n.a. n.a. 819 1577 -3248 -1671 n.a. n.a. -852 -2,786 660 660 -936 n.a. -936 0 -170 -170 n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. -170 n.a. n.a. -1036 3325 -4459 -1134 n.a. n.a. -2170 -2,616 142 142 -225 n.a. -225 8425 n.a. 8,425 n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. 8,425 n.a. n.a. 2,505 4077 -17055 -12978 n.a. n.a. -10,473 -2,131 -44 -44 -1,009 n.a. -1,009 n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. -816 15087 -236 14851 n.a. n.a. 14,035 12,982

45

Kraft Foods Ratios

Liquidity
Current ratio Quick ratio Liquidity ratio Working capital ratio 1.07 0.42 0.69 0.01 1.03 0.49 0.61 0.00 1.04 0.46 0.57 0.01 0.79 0.37 0.45 -0.03 0.94 0.45 0.54 0.00

Profitability
Return on equity Return on assets Gross margin Operating margin Net margin 8.91% 4.45% 36.95% 14.90% 8.28% 12.18% 5.86% 39.24% 19.81% 11.40% 13.14% 5.94% 40.29% 20.38% 11.60% 8.02% 3.37% 39.91% 16.71% 6.44% 14.24% 3.84% 39.10% 17.50% 8.73%

Activity
Asset turnover ratio Days Sales Outstanding (DSO) Inventory turnover Revenue per employee (mil $) 0.54 39.20 5.97 0.33 0.51 38.81 5.51 0.29 0.51 38.98 5.45 0.27 0.52 39.72 5.79 0.26 0.44 51.45 4.59 0.20

Capital Structure
Debt/Equity (gearing) Interest coverage ratio 72.51% 7.08 82.96% 8.91 94.65% 6.98 102.16% 3.36 221.71% 6.52

46

Kraft Foods Peer Analysis

Total revenues mil USD KRAFT FOODS INC GROUPE DANONE CADBURY SCHWEPPES GENERAL MILLS INC CONAGRA FOODS, INC. ARCHER-DANIELSMIDLAND Net Income mil USD KRAFT FOODS INC GROUPE DANONE CADBURY SCHWEPPES GENERAL MILLS INC CONAGRA FOODS, INC. ARCHER-DANIELSMIDLAND Gross Margin (%) KRAFT FOODS INC GROUPE DANONE CADBURY SCHWEPPES GENERAL MILLS INC CONAGRA FOODS, INC. ARCHER-DANIELSMIDLAND EBIT Margin (%) KRAFT FOODS INC GROUPE DANONE CADBURY SCHWEPPES GENERAL MILLS INC CONAGRA FOODS, INC. ARCHER-DANIELSMIDLAND Profit Margin (%) KRAFT FOODS INC GROUPE DANONE CADBURY SCHWEPPES GENERAL MILLS INC CONAGRA FOODS, INC. ARCHER-DANIELSMIDLAND 2004 12.27 11.15 9.53 13.63 8.21 1.99 2 3 4 1 5 6 2003 17.03 11.23 8.76 12.53 7.27 2.05 1 3 4 2 5 6 2002 17.48 14.3 15.67 8.39 5.5 3.18 1 3 2 4 5 6 2001 11.79 4.63 16.39 18.31 4.37 2.68 3 4 2 1 5 6 2000 14.9 9.65 16.52 18.31 2.42 1.9 3 4 2 1 5 6 2004 14.9 12.52 12.88 18.22 9.85 2.06 2 4 3 1 5 6 2003 19.81 12.66 11.57 17.73 8.62 2.54 1 3 4 2 5 6 2002 20.38 15.97 17.67 13.62 7.11 3.79 1 3 2 4 5 6 2001 16.71 6.62 18.53 22.09 5.98 3.6 3 4 2 1 5 6 2000 17.5 11.86 17.6 21.24 3.62 2.63 3 4 2 1 5 6 2004 36.95 73.65 59.44 44.13 25.43 7.84 4 1 2 3 5 6 2003 39.24 72.47 59.46 45.33 22.1 7.72 4 1 2 3 5 6 2002 40.29 71.23 47.89 45.07 18.34 9.95 4 1 2 3 5 6 2001 39.91 68.97 47.5 51.94 17.2 10.29 4 1 3 2 5 6 2000 39.1 70.11 56.13 51.48 15.06 9.8 4 1 2 3 5 6 2004 2,665 432 832 1,055 811 495 1 6 3 2 4 5 2003 3,476 1,060 653 917 764 451 1 2 5 3 4 6 2002 3,394 1,345 883 458 772 511 1 2 3 6 4 5 2001 1,882 116 786 665 639 383 1 6 2 3 4 5 2000 2,001 671 740 614 382 301 1 3 2 4 5 6 2004 32,168 18,661 13,014 11,070 14,082 36,151 2 3 5 6 4 1 2003 30,498 16,584 11,496 10,506 16,939 30,708 2 4 5 6 3 1 2002 29,248 14,215 8,539 7,949 22,336 22,612 1 4 5 6 3 2 2001 29,234 12,785 7,194 5,450 25,061 19,483 1 4 5 6 2 3 2000 22,922 13,303 6,826 5,173 25,485 18,612 2 4 5 6 1 3

47

ROE (%) KRAFT FOODS INC GROUPE DANONE CADBURY SCHWEPPES GENERAL MILLS INC CONAGRA FOODS, INC. ARCHER-DANIELSMIDLAND ROA (%) KRAFT FOODS INC GROUPE DANONE CADBURY SCHWEPPES GENERAL MILLS INC CONAGRA FOODS, INC. ARCHER-DANIELSMIDLAND Current ratio KRAFT FOODS INC GROUPE DANONE CADBURY SCHWEPPES GENERAL MILLS INC CONAGRA FOODS, INC. ARCHER-DANIELSMIDLAND Liquidity ratio KRAFT FOODS INC GROUPE DANONE CADBURY SCHWEPPES GENERAL MILLS INC CONAGRA FOODS, INC. ARCHER-DANIELSMIDLAND 2004 0.69 1.11 0.64 0.78 0.88 0.85 5 1 6 4 2 3 2003 0.61 0.94 0.57 0.61 0.96 0.95 5 3 6 4 1 2 2002 0.57 1.1 0.59 0.41 0.55 0.89 4 1 3 6 5 2 2001 0.45 0.83 0.61 0.4 0.33 0.91 4 2 3 5 6 1 2000 0.54 0.82 0.49 0.27 0.33 0.77 3 1 4 6 5 2 2004 1.07 1.28 0.92 1.17 1.71 1.53 5 3 6 4 1 2 2003 1.03 1.08 0.79 0.92 1.59 1.64 4 3 6 5 2 1 2002 1.04 1.22 0.79 0.6 1.49 1.61 4 3 5 6 2 1 2001 0.79 1.01 0.81 0.64 1.06 1.59 5 3 4 6 2 1 2000 0.94 0.99 0.64 0.47 1.07 1.42 4 3 5 6 2 1 2004 4.45 2.4 4.43 5.72 5.7 2.55 3 6 4 1 2 5 2003 5.86 5.87 3.59 5.03 5.05 2.63 2 1 5 4 3 6 2002 5.94 8.28 6.97 2.77 4.96 3.32 3 1 2 6 4 5 2001 3.37 0.77 7.3 13.06 3.87 2.67 4 6 2 1 3 5 2000 3.84 4.18 7.5 13.42 3.13 2.08 4 3 2 1 5 6 2004 8.91 6.93 15.08 20.1 16.92 6.43 4 5 3 1 2 6 2003 12.18 17.39 13.17 21.96 15.85 6.38 5 2 4 1 3 6 2002 13.14 25.22 18.15 12.81 17.21 7.57 4 1 2 5 3 6 2001 8.02 2.22 18.82 n.a. 14.17 6.05 3 5 1 2 4 2000 14.24 10.03 18.84 -212.6 11.2 4.92 2 4 1 6 3 5

48

Interest Coverage KRAFT FOODS INC GROUPE DANONE CADBURY SCHWEPPES GENERAL MILLS INC CONAGRA FOODS, INC. ARCHER-DANIELSMIDLAND Gearing (%) KRAFT FOODS INC GROUPE DANONE CADBURY SCHWEPPES GENERAL MILLS INC CONAGRA FOODS, INC. ARCHER-DANIELSMIDLAND EV / EBITDA KRAFT FOODS INC GROUPE DANONE CADBURY SCHWEPPES GENERAL MILLS INC CONAGRA FOODS, INC. ARCHER-DANIELSMIDLAND Number of Employees 2004 KRAFT FOODS INC GROUPE DANONE CADBURY SCHWEPPES GENERAL MILLS INC CONAGRA FOODS, INC. ARCHER-DANIELSMIDLAND 98,000 89,499 58,442 27,580 39,000 26,317 1 2 3 5 4 6 2003 106,000 88,607 59,534 27,338 63,000 26,197 1 2 4 5 3 6 2002 109,000 92,209 42,314 28,519 89,000 24,746 1 2 4 5 3 6 2001 114,000 100,560 38,488 11,001 89,000 22,834 1 2 4 6 3 5 2000 117,000 86,657 36,460 11,077 85,000 22,753 1 2 4 6 3 5 2004 12.8 6.71 11.55 6.65 8.23 6.79 1 5 2 6 3 4 2003 9.15 8.84 11.63 7.35 6.73 5.08 2 3 1 4 5 6 2002 11.28 8.26 8.51 11.35 6.15 5.31 2 4 3 1 5 6 2001 10.07 10.15 9.57 8.41 5.4 5.81 2 1 3 4 6 5 2000 n.a. 11.67 11.74 9.8 7.74 4.48 2004 72.51 109.48 164.15 203.43 141.98 66 5 4 2 1 3 6 2003 82.96 113.91 168.27 256.6 144.44 70.69 5 4 2 1 3 6 2002 94.65 109.79 81.59 208.75 155.77 64.76 4 3 5 1 2 6 2001 102.16 119.07 74.86 n.a. 114.46 71.44 3 1 4 2 5 2000 221.71 79.39 43.41 -951.14 97.79 65.66 1 3 5 6 2 4 2004 7.08 27.45 3.2 3.81 n.a. n.a. 2 1 4 3 2003 8.91 8.28 3.18 3.21 n.a. n.a. 1 2 4 3 2002 6.98 6.91 5.89 2.45 n.a. n.a. 1 2 3 4 2001 3.36 5.32 4.75 n.a. n.a. n.a. 3 1 2 2000 6.52 5.89 15.88 n.a. n.a. n.a. 2 3 1

2 1 3 4 5

49

Kraft Foods Segment Analysis

Sales by Business 2004
(Source: Osiris, Bureau van Dijk Electronic Publishing)

Latin America & Asia Pacific 8%

U.S. Beverages 8%

Europe, Middle East & Africa 23%

U.S. Cheese, Canada & North America Foodservice 23%

U.S. Snacks & Cereals 17%

U.S. Convenient Meals 13% U.S. Grocery 8%

Operating Income by Business 2004

(Source: Osiris, Bureau van Dijk Electronic Publishing)

Latin America & Asia Pacific 5% Europe, Middle East & Africa 14%

U.S. Beverages 10%

U.S. Cheese, Canada & North America Foodservice 21%

U.S. Snacks & Cereals 15%

U.S. Grocery 19%

U.S. Convenient Meals 16%

50

Operating Magin by Business 2004

Latin America & Asia Pacific

10%

Europe, Middle East & Africa

9%

U.S. Snacks & Cereals

14%

U.S. Grocery

37%

U.S. Convenient Meals

18%

U.S. Cheese, Canada & North America Foodservice

13%

U.S. Beverages

19%

0%

5%

10%

15%

20%

25%

30%

35%

40%

Sales by Geography 2004

(Source: Osiris, Bureau van Dijk Electronic Publishing)

Other 15%

Europe 22% United States 63%

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Kraft Foods Stock Analysis

Source: http://www.investor.reuters.com/Charts.aspx?ticker=KFT&target=%2fstocks%2fquickinfo%2fhistoricalchart, July 23, 2005

Valuation
Stock price Tangible book value (mil $) Price to tangible book value Enterprise value Enterprise value to EBITDA Earnings per share Price earnings ratio Dividend yield (diluted) Price to sales PEG Ratio

12/31/2004 35.61 -5,900 -10.47 61,501 12.80 1.54 23.18 2.14% 1.92 4.23

12/31/2003 32.22 -8,349 -6.70 55,388 9.15 2.00 16.08 2.04% 1.83 3.76

12/31/2002 38.93 -10,588 -6.38 67,329 11.28 1.96 19.90 1.44% 2.31 415.56

12/31/2001 34.03 -12,479 -4.73 58,880 10.07 1.08 31.37 0.82% 2.02 1.14

Analyst Recommendations
1-5 Linear Scale (1)BUY (2)OUTPERFORM (3)HOLD (4)UNDERPERFORM (5)SELL No Opinion Mean Rating July 22, 2005 1 2 13 3 0 0 2.95 1 Month Ago 1 3 12 3 0 0 2.89 2 Months Ago 1 2 13 3 0 0 2.95 1 Year Ago 0 3 12 3 0 0 3

Consensus Recommendation: Hold

Source: http://www.investor.reuters.com/CompanyEstimates.aspx?ticker=XOM&target=%2fstocks%2fprofessionalanalysis%2frecommend ations, July 22, 2005

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Works Cited Acquisitions and Brand-Swapping Return. Food Processing. May 2004. Altria. Our Management. Dinyar Devitre. [www.altria.com/about_altria/biography/01_03_04_Devitre.asp]. _____. Our Management. Louis Camilleri. [www.altria.com/about_altria/biography/01_03_01_Camilleri.asp]. _____. Our Management. Roger K. Deromedi. [www.altria.com/about_altria/biography/01_03_10_Deromedi.asp]. Altria Rallies After DoJ Cuts Claim by $120 Billion. MarketWatch. June 8, 2005. [www.marketwatch.com]. Atkins Out, South Beach In. Kraft Foods Introduces Ready Meals under South Beach Diet Brand. Prepared Foods. June 2005. p. 8. Bakery, Confectionery, Tobacco and Grain Millers International Union. Kraft Domestic Production by Segment. Bardi, Jason Socrates. The Down Side of Nicotine and Environmental Stimuli. TSRI News and Views. July 18, 2005. Buckely, Neil. Food for Thought in Marlboros New Face. Interview Louis Camilleri. The Head of the Former Philip Morris Hopes the Groups Name Change Will Raise Its Profile in Food. But It Has Nothing to Do with Hiding from Tobacco. Financial Times. January 31, 2003. p. 12. Byrnes, Nanette, Julie Forster, and Christopher Condon. A New Kind of Marlboro Man. Business Week. April 29, 2002. p. 94. Carpenter, Dave. Kraft Net Drops 28 Percent on Higher Costs. Associated Press. January 26, 2005. Carter, Adrienne. Slimmer Kids, Fatter Profits? Charles Davis, a Kraft Food Maven, Is on a Health Kick. But Then, He Has No Choice. Business Week. September 5, 2005. p. 70. Connelly, Virginia R. FDA Warning Letter. [www.fda.gov.] December 18, 2002. Corporate Accountability International. As Countries across Globe Ratify Tobacco Treaty, Big Tobacco is Forced to Change its Ways. Pressure Builds on Philip Morris/Altria at Annual Shareholders Meeting. April 28, 2005. [www.stopcorporateabuse.org/cms/page1253.cfm].

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_____. Impact of InFacts Tobacco Industry Campaign and the Kraft Boycott, 19932003. June 2003. Crenson, Matt. How Corn Not Approved for the Human Consumption Reached the U.S. Food Supply. Associated Press. December 1, 2000. Daly, Brendon. Kraft Ready for Spinoff. Daily Deal. February 24, 2005. Dornblaser, Lynn. Top 20 Companies Synergistic Acquisitions Pay Off. Prepared Foods. March 2003. p. 95. Edgecliffe-Johnson, Andrew. Kraft Looks for More Purchases. Food Company Aims to Have Broader Range of Products. Financial Times. September 3, 2001. p. 13.
_____. Two Brains May Be Better Than One Big Cheese. The Food Groups Two Chief

Executives Must Convince Investors They Can Act as One Even if They Do Not Yet Quite Finish Each Others Sentences. Financial Times. September 3, 2001. p. 9. Environmental Defense. Scorecard. Toxic Release Inventory. www.scorecard.org. European Foundation for the Improvement of Living and Working Conditions. EWC Case Studies. Kraft Foods. Dublin: 2005. [www.eurofound.eu.int/publications/files/EF057117EN.pdf]. Food and Drug Administration. The Food and Drug Administration. An Overview. [www.cfsan.fda.gov/fdaoview.html]. Forster, Julie. Can Kraft Be a Big Cheese Abroad? Business Week. June 4, 2001. p. 54. Grant, Jeremy. Big Dairy Is Milking Cheese Prices, Say U.S. Small Farmers. Financial Times. April 22, 2005. p. 20.
_____. Kraft Cooks Up Strategic Innovations. Microwaveable Pizzas Symbolize the Food

Giants New Approach. Financial Times. May 17, 2005. Jargon, Julie. Altria May Spinoff Kraft in Early 2006: Analysts. Crains Chicago Business. July 13, 2005. _____. Brenda Came Back. Can Betsy Do It Too? After Missteps as Kraft co-CEO, a Tricky Hiatus. Crains Chicago Business. July 4, 2005. p. 3.
_____. Krafts Cheese Whizzes Rethink a Core Product. Cooking Up New Ideas to Win

Back Marketshare. Crains Chicago Business. August 8, 2005. p. 1.

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_____. Kraft Meat Biz Looks Like a Sale Candidate. Crains Chicago Business. March 7, 2005. p. 4. Joy, Richard. Standard and Poors Industry Survey. Food and Nonalcoholic Beverages. June 9, 2005. pp. 6-7. Hoovers. ConAgra. Fact Sheet. [proquest.umi.com].
_____. ConAgra. Products and Operations. [proquest.umi.com]. _____. Groupe Danone. Fact Sheet. [proquest.umi.com].

_____. Groupe Danone. Products and Operations. [proquest.umi.com].

_____. Nestl. Fact Sheet. [proquest.umi.com]. _____. Nestl. Products and Operations. [proquest.umi.com].

International Union of Food Workers Associations. Kraft Facility Locations 2005.

_____. Kraft Restructuring in Latin America. [www.iuf.org]. November 29, 2001. _____. Sustainable Growth Plan at Kraft Brings 6000 Job Cuts Worldwide.

[www.iuf.org]. February 10, 2004. ITW Chief to Resign Next Month. Crains Chicago Business. July 18, 2005. Kraft. Form 10-K. March 11, 2005. _____. Form DEF 14A. March 4, 2005. _____. Kraft Food Announces Additional Simplification Initiatives. October 14, 2005. _____. Kraft Foods Debuts Tassimo Hot Beverage System in the U.S. Revolutionary Technology Delivers Unrivaled Variety, Convenience, and Quality Business Wire. March 16, 2005. _____. Kraft History. 1980s. [www.kraft.com/100/timeline/time_1980s.html]. _____. Kraft History. 1990s. [www.kraft.com/100/timeline/time_1990s.html]. _____. Kraft History. 2000s. [www.kraft.com/100/timeline/time_2000s.html]. _____. Kraft History. James Lewis Kraft. [www.kraft.com/100/founders/JLKraft.html]. _____. Management. Jean Spence. [www.kraft.com/profile/biosspence.html].

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_____. Responsibility. Safety and Health. [www.kraft.com/responsibility/people_safety.aspx]. Kraft Cites Commodity Costs. Feedstuffs. August 15, 2005. p. 7. Kraft Foods Names Black to New Post as Vice President, Nutrition. Nutrition Today. July-August, 2005. p. 150. Kraft Foods Opens $5 Million Coffee Packaging Facility in Ukraine. Datamonitor Newswire. July 12, 2005. Krafts Holden Resigns from Marketing Post, Board. Associated Press. June 24, 2005. Kraft Reports Growth in Pizza, Breakfast Meats. Feedstuffs. May 2, 2005. Vol. 77 p. 6. Krafts Strategy Continues to Unfold. Deromedi Hints at Whats Key, Whats Not in Presentations to Analysts. Food Processing. April 2005. p. 9. Lieberman, Bruce. Leading SD Scientists Had Longtime Tobacco Ties. San Diego Union-Tribune. June 25, 2004. [www.signonsandiego.com/news/science/20040625-9999-1n25smoke.html]. Mallas, Steven. Kraft Hits New Low. The Motely Fool. September 23, 2005. [www.fool.com/News/mft/2005/mft05092307.htm]. Mergent Online. Altria Group: Institutional Ownership Summary. _____. Illinois Tool Works. Business Summary. _____. Kraft: Company Financial Segments. 2005. _____. Kraft: Long Term Debt. _____. Kraft: Synopsis. [www.mergentonline.com]. NASD, Inc. NASD Leadership. Mary L. Schapiro. [www.nasd.com/web/idcplg?IdcService=SS_GET_PAGE&nodeId=1028]. National Association of Attorneys General. NAAG Projects: Tobacco. [www.naag.org/issues/issue-tobacco.php]. National Family Farm Coalition. NFFC Issues. [www.nffc.net/issues/index.html]. National Union of Workers. Comprehensive Agreement. Kraft Foods Port Melbourne Plant and National Union of Workers. 2004.

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Neff, Jack. Ooey Gooey Mess. Food Processing. September 2003. _____. Can Kraft Shrink to Grow? Is There Opportunity for Competitors or Copackers as the Top Food Company Reorganizes? Food Processing. May 2004. p. 37. Newman, Judy. OSHA Continues Investigation into Accidents at Wisconsin Oscar Mayer Plant. Wisconsin State Journal. December 27, 2001. North Point Alumni Association. North Point Reunion in New York. [www.npalumni.org/reunion_ny100502.htm]. OSHA. Employment Search. Kraft. www.osha.gov. 2000-2005. Pehanich, Mike. Pizza Breakthroughs. In Search of the Breakthrough Pizza. Food Processing. April 2002. p. 27. Phan, Monty. Altria Sees Its Breakup Soon. Newsday. April 29, 2005. p. A59. Schmeltzer, John. Kraft Plans to Slice 600 Salaried Positions. Chicago Tribune. October 15, 2005. Scripps Research Institute. Research and Faculty. The Pearson Center for Alcohol and Addiction Research. [www.scripps.edu/research/pearsonctr/]. Spence, Jean. E. Re: CFSAN 2002 Priorities. [www.fda.gov]. September 14, 2001. pp. 1-2. Stein, Jason. Kraft Cuts Oscar Mayer Jobs in Madison, WI. Wisconsin State Journal. October 15, 2005. Thompson, Stephanie. Don Miceli. Kraft Foods. Advertising Age. September 12, 2005. p. 10. _____. Kraft, Campbell Bank on Crop of Organic Efforts. Health Factors and Fast Growth Attractive, But Its a Small Patch of Land. Advertising Age. April 25, 2005. p. 24. _____. Kraft CEO Pledges a Faster Culture. Controller Appointed to New Exec Post Leads Simplification Effort. Crains Chicago Business. March 7, 2005. p. 19. _____. Kraft Simplification Strategy Anything But. Advertising Age. February 28, 2005. p.3.

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_____. Krafts Tassimo Coffee System Aims to Sell Its Beans, not the Machines. Product Key to Whether It Can Innovate and Raise Prices in Other Categories. Advertising Age. April 4, 2005. p. 6.
_____. Kraft Wakes Up to the Need to Push Maxwell House. Advertising Age. May 2,

2005. p. 9. U.S. PIRG, Friends of the Earth, and Green Century Capital Management. Investors, Consumers, Scientists, and Environmentalists Present New Information and Voice Concerns about Genetically Engineered Foods at Kraft Shareholder Meeting. Common Dreams Progressive Newswire. April 27, 2004. [www.commondreams.org/news2004/0427-02.htm]. Wilson, Joy Johnson. Summary of the Attorney Generals Master Tobacco Settlement Agreement. March 1999. [academic.udayton.edu/health/syllabi/tobacco/summary.htm]. Wrigley Completes Life Savers, Altoids Acquisition. Closing NJ Plant. Associated Press. June 29, 2005.

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