Posted: March 18th, 2023

Strengths and Weaknesses of Kraft Foods

Business Studies

Strengths and Weaknesses of Kraft Foods

Kraft Foods is a major U.S. firm that has undergone change in recent years. To assess the firms’ current position, as well as look to the potential for future strategies, a common tool is a SWOT analysis. The SWOT analysis examine the firm and its environment, examining influencing factors by looking at the strength, weaknesses, opportunities and threats faced by the firm. This paper will focus in the internal factors, which are considered through the strengths and weaknesses

Strengths

The firm has a large numbers of strengths. These include the scope and scale of the operations, the firms’ position in the North American markets, the financial position of the firm, and their ability to adapt, supported by the research and development resources. These different strengths can all be examined.

The firm has a strength in terms of the number of brands that operate, which are in different segments of the grocery markets, and its’ brand management. With a total of 30 brands including many which are well know. Of the brands, 10 each have a total that have in excess of $500 million in sales (Kraft, 2014). This provides a benefit of diversification creating a position where the firm is not over exposed to a single segment, and of if the market conditions change to impact on demand for a particular type of the product (Mintzberg et al., 2008). The strategy is one of related diversification, and can be seen when looking at the make up of the firm’s portfolio; the largest product range is the cheese, which makes up 22% of revenues, followed by refrigerated meals which make up 18% of revenues (Kraft, 2014). Beverages account for 15% of sales, enhancers and snack not a 12% of sales, meals and deserts for 13% of sales, and sales from Canada account for 11% of sales. All other areas of sales make up the remaining 10% (Kraft, 2014). Therefore, the company’s business model may be argued as relatively robust, as if there is a decline in a particular segment, the company’s revenues come from diversification.

The way in which the portfolio is made up indicates a strategy of related diversification. This can also be beneficial, due to the benefits associated with cross branding, and the way in which the Kraft name is perceived. The strong performance of the company in some areas, inability to gain consumer trust, is likely to support other products from the same company (Kotler & Armstrong, 2014). This potential of a portfolio of products that are interdependent, and can support each other may be appreciated when examining the penetration rate of the company has in North America and Canada. In North America craft products may be found in 90% of all U.S. households, and in Canada this raises to 99% (Kraft, 2014). These penetration rates are extremely high, and indicate both a high level of awareness regarding the company and/or its brands, and the presence of trust in the company and/or its brands; high penetration rates are not gained about these characteristics (Kotler & Armstrong, 2014). The positioning of the brands need to their segments may also be seen as a significant strength, especially in the highly competitive environments, in 80% of the brands, they hold either the number-one market position, or number two market position in their own categories (Kraft, 2014).

The way in which the organization has embraced social marketing may also be seen as a strength, supporting these brand images. The company has a number of preferences on social media, including a Facebook page which provides information for consumers, based on tips and recipes for the use of craft products, this page alone has 1.2 million fans the company can connect with on a regular basis (Facebook, 2014).

The product range is also supported by the research and development department. The company has significant resources invested in research and development, including three R&D centers, and 525 development specialist (Kraft, 2014). This created a situation where the organization is able to adapt and change. For example, following a threaten the organization, where a blogger raise concerns regarding the health content of macaroni cheese, the organization was able to respond rapidly, and announced they would be making changes to their products so that it would be healthy (Baertlein, 2014). The company is supporting its own research and development through the undertaking of strategic alliances with other companies, for example the recent licensing agreement that the company is reached with Green Mountain (Kraft, 2014)

The company’s overall control of its supply chain may also be seen as a major advantage. The organization is not reliant on a large number of third-party, which increases the ability to control the supply chain, reduce the potential for errors, and deal with any issues as and when they emerge. The company owns 36 manufacturing facilities located in North America, which provide a degree of flexibility in terms of operations (Kraft, 2014). This is an advantage, the organization is not reliant on third-party manufacturing for the majority of its products, and is not exposed to the potential for increases in rents or leases, also creating a financial advantage. The control also extends to the distribution channels, as a firm also has its own distribution centers, a total of 39, of these 36 are in United States, and three in Canada. While the ownership of the production facilities, which are required on a permanent basis is an advantage, 34 of these distribution centers the least, which may be argued as providing an advantage in terms of flexibility, especially if the organization changes its distribution strategies.

The financial position of the firm may also be seen as a strength. The company has a slightly higher than average gross profit margin, at 35.9%, compared to 34.97% for the industry as a whole (MSN Money, 2014). The net profit margin shows an even greater differential, at 13.4%, compared to the industry average of 10.25% (MSN Money, 2014). The firm’s operations also appear to be highly efficient, as the firms income per employee is $107,000 777, compared to an industry average of $37,548 (MSN Money, 2014). This also equates to an advantage in terms of the revenue generated per employee, which for Kraft is $804,355 per employee, with industry average being $498,697 (MSN Money, 2014).

However, despite company states, there are also a number of weaknesses which need to be recognized.

Weaknesses

Although the company has managed to gain a significant foothold in the North American and Canadian markets, in maybe argued that many the brands, although recognized and trust, have very little sustainable and effective differentiation. For example, if a consumer goes into purchase a cheese product, they may prefer a Kraft cheese, but there are a large number of acceptable substitutes, which are easily available, and may be highly aligned with the craft product (Mintzberg et al., 2008). The lack of continue differentiation create a significant vulnerability in the company’s portfolio range, as there is a high potential the consumers may switch. The vulnerability in terms of the low switching costs for consumers may also be aggravated by another type of weakness; the issue of contamination within the Kraft foods range. Contamination/quality issues can severely impact on the trust consumers have for brands (Kotler & Armstrong, 2013). This is not only a vulnerability, but a significant weakness, especially when it is realized the companies had a few product recalls over the recent years. The most recent of which was in June 2004, when the company voluntarily recalled 260 cases of Velveeta, due to quality control issues resulting in insufficient amount of preservative being placed into the products (Kraft, 2014).

The high reliance the company places on major retailers may also be seen as a weakness.

The company relies heavily on only a few major retailers, such as WalMart, Target etc. WalMart alone accounted 26% of the company’s total sales, and therefore any change in this relationship, whether as a result of risk is a determination, or just a shift in WalMart’s purchasing strategies, could have a significant impact on the company. The diversification of the products across different product ranges may minimize its potential, as changes in supply may only impact on a limited number of these ranges, but there is a clear lack of diversification in terms of distribution channels. It may also be argued that with the company dealing only in North America, there is also a lack of diversification in terms of revenue sources, and difficult economic trading conditions which impact on the entire region could also have a significant impact on the products sales.

The financial position of the company in terms of profits may be a strength. However, a particular weakness may be the declining revenues it has been seen over the last few years. In financial year ending 2011, the organization had annual sales of $18,655 million, this declined for the financial year 2012, to $18,339 million, and in 2013 it declined further to $18,218 million (Kraft, 2014). The indebtedness position of the company may also be seen as a potential weakness, especially given that interest rates are currently low, and could increase in the future. The debt to equity ratio is 1.57, and the leverage ratios 4.27 which is higher than the respective industry averages of 1.1 and 3.39 (MSN Money, 2014). In terms of liquidity, the company is slightly lower than the industry average, or the current ratio 1.07, against an industry average 1.11, and the quick ratio 0.53, against an industry average of 0.59 (MSN Money, 2014). However, it should also be noted that these liquidity ratios may indicate good capital management, rather than weaken liquidity.

References

Baertlein, L, (2014, Sept 30), Kraft challenged by “healthier” macaroni and cheese brands, Reuters, accessed at http://www.reuters.com/article/2014/03/30/us-kraft-macandcheese-idUSBREA2T09C20140330

Kraft Foods, (2014), Form 10k, accessed at http://files.shareholder.com/downloads/ABEA-3QV6OO/3479462482x0x730413/145F2E19-6958-4EA2-9111-B31F2E8CEF47/filing_10K.pdf on 21th September 21014

Kraft Foods, (2014), Keurig Green Mountain, Inc. And Kraft Foods Group, Inc. Announce Licensing Agreement [press release, accessed at http://files.shareholder.com/downloads/ABEA-3QV6OO/3479462482x0x778092/485b3a7a-8e38-47f3-aa29-6badee4b4e70/GMCR-KRFT_News_Release_2014-08-22_FINAL.pdf on 21st Sept 2014

Kraft Foods, (2014), Kraft Foods Group Voluntarily Recalls Small Quantity Of Velveeta Original Pasteurized Recipe Cheese Product Due To Low Levels Of Preservative Ingredient, [press release] accessed at http://files.shareholder.com/downloads/ABEA-3QV6OO/3479462482x0x763122/dc275271-9e00-4f7b-a350-6b1ca7b7e4fb/Kraft_Velveeta_Recall_Press_Release.pdf on 21st Sept 2-014

Kraft Foods, (2014), accessed at http://www.kraftfoodsgroup.com/home/index.aspx on 7th September 2014

Kotler, P, Armstrong, G, (2013), Principles of Marketing, Pearson

Mintzberg Henry, Ahlstrand Bruce, Lampel Joseph B. (2011), Strategy Safari: The Complete Guide Through the Wilds of Strategic Management, Financial Times / Prentice Hall

MSN Money, (2014), Kraft Foods, accessed at http://investing.money.msn.com/investments/key-ratios?symbol=KRFT on 21st Sept 2014

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