According to Roger K. Deromedi, co-CEO of Kraft Foods Inc. and president and chief executive officer of Kraft Foods International, discipline paves the road to success. Every year innovation should add new products and revenues, but the company also targets a cost reduction of 3.5 per cent of cost of goods sold annually.
Elsevier Food International, Vol. 6, Number 4, November 2003
Pascal Kuipers

How do you spell growth? K~R~AFT" reads the 2002 annual report of this 100-year-old food company. Kraft is performing well despite financial setbacks in the first half of its current fiscal year. "Second quarter diluted earnings per share and operating companies did not meet our internal expectations" says Roger K. Deromedi, co-CEO of Kraft Foods Inc. and President and Chief Executive Officer of Kraft Foods. "While costs were generally in-line with our forecasts, volume was below our projections due to soft consumption and accelerated trade inventory reductions."
Kraft has to deal with adverse effects of global economic weakness and high price gaps in some key categories and countries. Due to all this, the management at Kraft adjusted its annual projections, but in a press release the company ( ... ) reconfirmed its full-year 2003 guidance of discretionary cash flow growth of ten per cent plus."
In 2002 the company upped its worldwide volume by 3.1 per cent, its operating income by 5.5 per cent and its net earnings by 15.2 per cent. According to Deromedi, these results are based on one central virtue: discipline

Roger K. Deromedi joined Kraft in 1988 as vice president Corporate Development, after spending more than a decade with Generat Foods in marketing positions for its Beverage Division and Maxwell House Coffee Company. After holding several management positions in the US, Asia and Europe, Deromedi was named president and chief executive officer of Kraft Foods International, headquartered in Rye Brook, New York, in 1999. In 2001, he was appointed co-CEO of Kraft Foods Inc, and president and chief executive officer of Kraft Foods International. He earned a BA in Economics and Mathematics from Vanderbilt University and an MBA from Stanford University. Deromedi is a director of The Gillette Company. He is also a member of the Management Board of EAN International, a global not-for-profit organisation that creates and manages open, multi-sectorial business information standards, with nearly one million member companies in 133 countries.

How does Kraft balance cutting cost and increasing revenues?
"An ongoing focus on cost is part of our company culture. We target to reduce 3.5 per cent of cost of goods sold on an annual basis. These cost savings allow us to invest in new products and marketing and to ensure that our pricing is right. This helps drive brand value, top-line volume growth, and scale, which in turn create opportunities for further productivity improvements. We call it a virtuous cycle, and it is a continuous process stretching across our entire business. We can keep on saving 3.5 per cent a year because it is part of the discipline within our organisation. You can always save money as the environment is constantly changing and new technologies continue to come along. As an example, we recently centralised procurement but not in a single place. We now have a geographically diverse organisation that is tied together with web-enabled technologies allowing us to communicate and leverage our total buying needs on a more regional and global basis. At the same time, we have local people purchasing locally. Information technology has also given us new opportunities, for instance with new suppliers- or when we make acquisitions, we have been able to harmonise specifications of raw materials giving us scale to achieve greater savings. "

Future growth: does Kraft focus on acquisitions or on organic growth?
"We look at both. Innovative new products are a key driver of growth. Last year we achieved over US$1.1 billion in new product revenues and this year we will be in the same range. We have a very disciplined new product process. It is a funnel of new product ideas across our five core business sectors: beverages, snacks, cheese, convenient meals and grocery. Our growth efforts are equally aligned with consumer trends particularly in beverages, snacking, convenience and health and well ness. For instance, health and well ness is an important trend, so you see us working very hard on calcium in cheese or vitamin fortification of powdered drinks. We focus heavily on new product development and our track record is very successful.

The second key driver for our growth is expansion in developing markets. These countries account for nine per cent of our revenues, but 83 per cent of the world's population. This is a huge opportunity and we see rapid growth from countries in Central and Eastern Europe, Asia Pacific, and even Latin America despite the economic crisis there last year.

Our third key driver of growth is acquisitions. We have been able to successfully make large acquisitions such as Nabisco. We also made tack-on acquisitions, smaller acquisitions that very importantly give us scale in countries we may not be in or where we do not have the size that we want. For instance in Russia, where we needed to increase our scale from a small business in coffee and salted snacks, we bought the central and eastern European interests of Stollwerck confectionery including their Russian business. Stollwerck had been very successful and it was the number two player in chocolate in Russia. That acquisition provided us with a strong distribution network, that we leveraged to make our coffee business grow very successfully. Similarly, we bought the largest coffee company in Morocco, Societe de Cafes Ennasr, which gave us sufficient scale to introduce Tang, our leading powdered beverage franchise, leveraging the sales force we obtained with the acquisition. Last April, we purchased the number one branded biscuit company in Egypt, the Family Nutrition Company. We had a small business in Egypt but along with Family Nutrition came a strong distribution network and we will be expanding from there."

You quantify cost savings annually. Do you also measure the R&D budget as a fixed percentage of annual sales?
"We have an R&D budget of around US$ 350 to 360 million, which is just over one per cent of total annual sales. We have approximately 2,000 scientists worldwide working on new products, improving quality, developing productivity programmes, and just maintaining the business in terms of regulatory compliance. We are very cost effective in R&D and leverage our scale in what we do for our core categories on a global basis. For instance, our global centre of excellence for coffee development is in Banbury in the UK and our centre of excellence for cheese is in Glenview, Illinois, in the Chicago area. Researchers in Chicago for instance, work on an aspect of the business that we need in Asia Pacific. The organisation is linked together in terms of people and in terms IT, specifically Kraft's Intranet. In fact we use intranet technologies for many other functions such as production or marketing to communicate around the world. For instance, we share advertising ideas by running the ads over the Intranet, so you can see what is running in different countries. This allows us to be very cost effective whilst at the same time ensuring that we leverage our global scale."

Is efficiently leveraging global capabilities not contrary to catering to local consumer preferences?
"No I don't think so. Our philosophy is based on a 'best of global, best of local' approach. Look at our coffee brands in Europe: Jacobs coffee in Germany, Gevalia in the Nordic countries, Kenco in the UK, Carte Nair in France .. these are all different regional or national brands within Kraft. They are based on the same technology and manufacturing infrastructure, but adapted to local taste. Similarly, Philadelphia cream cheese, one of our most global brands, is adapted locally to fit local usage and local taste. We have parameters of how far we can go. A slightly saltier taste is preferred in some countries and a slightly sweeter taste in other countries. We have worldwide category councils that guide the strategic direction for our global brands, ensuring that they are globally managed but at the same time meet local consumer preferences."

Fresh food is of vital importance to retailers. Increasingly, dry groceries are pushed to the periphery of their attention. Is that not affecting Kraft's relationships with retailers?
"Every retailer has a different strategy. We sell our branded goods to many different retailers around the world. There are large global retailers, strong national retailers and, particularly in developing markets, there are small and medium-sized retailers as these are very fragmented markets. One size does not fit all and we very effectively adapt our organisation to the retail environment. In the Ukraine for instance, we have a very different organisation structure than in West European countries, which is totally different again from how we are organised in Argentina. We need to be sensitive to this environment if we are to continue to build relationships with our retail customers in ways that benefit us both."

Do retailers pay enough attention to ECR?
"ECR is gaining more and more attention. Manufacturers and retailers can clearly achieve more via collaboration and sharing information than not. We have great consumer insights in the categories in which we compete. Retailers equally understand their shoppers very well. Bringing these insights together is a huge opportunity that will help sell more products for retailers and us."

Research indicates that suppliers invest more in ECR, while retailers benefit most. There is an imbalance. Does this sound familiar to you?
"No it does not. We collaborate successfully and the retailers we work with are supportive.
It depends on how you approach the issue of partnership. It is important that both parties have the right level of resources, insights, capabilities and trust to make collaboration work. Do they have the information to do so, and do they approach this in a way that there is an open sharing and a certain level of trust? We clearly need the formats where variety and service is key. The important thing for us as manufacturers is to work with retailers to create winning propositions for both of us."

You are a board member of EAN International. Is EAN International organised efficiently enough to deal with pressure from companies or participating bodies that protect their own interests?
"Generally, I would say yes. EAN International is a global affiliation of country-based member organisations that manages open business information standards covering well over 100 countries, representing one million companies worldwide, the vast majority of whom are small companies. Given this diversity, it is important that all companies participate and support EAN efforts both at the international and local levels. It is equally important that decisions are made in line with the best interests of all organisations and members."

The Global Product Classification on which EAN International and the Global Commerce Initiative agree, leaves existing classification schemes in place and acts as a common link between these. Is this not a sub-optimal solution where ideally one global standard would be the best solution?
"The purpose of the Global Product Classification Schema has never been to replace the way in which individual companies want to classify their products within their own organisations. Individual companies will always use internal classification systems that drive their respective businesses. The Global Schema is intended to be used when companies publish data to the outside world, which is an integral component of the global data synchronisation strategy. For example, when Kraft publishes data on a jar of coffee, we want every country in the world to use the same classification schema so that when the data arrives at a multinational retailer system, it is accurate and consistent. This is what the Global Schema is intended to accomplish. One Global Schema may be of use in the new systems required to support RFID. and if so, we will have already integrated it."