Kraft slices 8,000 jobs, 20 factories

Kraft slices 8,000 jobs, 20 factories

Kraft slices 8,000 jobs, 20 factories

Foodmaker says latest cuts to help save $750 million

Kraft Foods Inc., stung by sluggish sales and skyrocketing commodity costs for everything from coffee to hot dogs, said Monday that it would cut another 8,000 workers and close 20 more factories worldwide.

The cuts follow Kraft's announcement in 2004 that it would cut 5,500 jobs and close 19 factories, and it comes as the nation's largest foodmaker battles higher costs for ingredients and stiffer competition from generic store brands that have become more appealing to consumers watching their budgets.

The Northfield-based manufacturer of Kraft cheese, Oscar Mayer hot dogs and Oreo cookies hopes the latest cuts will help it save $750 million a year, in addition to the $450 million annually from the prior reductions. The two rounds of cuts will cost $3.7 billion in restructuring charges, the company said.

Kraft said the move was necessary to counter the drain on profit from the higher costs, while sales volume is flat.

"In the first half of the year, we saw our category growth rates slow down in the
U.S. as higher prices impacted consumption," said Kraft Chief Executive Roger Deromedi.

Kraft's parent, Altria Group Inc., has said it plans to spin off the food company once tobacco litigation facing its Philip Morris USA unit in
Florida and Washington, D.C., is settled.

Kraft's current slowdown is a reminder of the sharp drop in sales that occurred in 2003, when consumers revolted against hikes in cheese prices, allowing store brands to capture market share.

This time the drop isn't as sharp, said Deromedi, who expects profit margins to improve in 2006. But he also said the margins would not return to the levels seen in 2000.

"This is a different environment," Deromedi said.

Kraft, like other food companies, has been hit hard by rising commodity costs. It spent $800 million more on raw materials in 2005 than it did the previous year. Kraft also can't pass through price increases to consumers as easily, putting more pressure on profit margins.

Deromedi said the first round of cuts saved 12 percent more than estimated. Of the 19 plants closed, eight were in
North America. One was located in Niles, resulting in the elimination of jobs for 393 people.

In the second round, Kraft said it intends to close plants in
Australia and Hoover, Ala., but did not announce the other facilities targeted. The planned closures represent 8 percent of the company's workforce and 11 percent of its factories. Worldwide, Kraft operates 175 plants, including 77 in North America, and employs 94,500 workers.

Illinois, Kraft operates nine plants, including Nabisco plants on the South Side and in Naperville. It employs 8,500 workers in the state, including 1,500 at its headquarters.

Wall Street cheered the cuts in after-hours trading, driving Kraft's stock up 70 cents, to $30.70. Shares had closed Monday on the New York Stock Exchange at $30, up 71 cents.

Many analysts participating in a conference call with Kraft executives Monday said they were surprised at the size and timing of the new round of restructuring, considering the first program wasn't complete.

"How inefficient is the structure and the business if you are able to more forward and take so much versus the first program?" asked Eric Katzman, an analyst with Deutsche Bank.

Deromedi said they had found "additional opportunities" for savings that "two years ago we didn't think we could get at."

He said the company has cut the number of items it sells in the past two years by 20 percent and expects to cut another 10 percent this year.

Bob Boutin, executive vice president of Knechtel Laboratories in
Skokie, said Kraft is "still trying to figure what they want to produce and what they don't want to produce.

"They want to have a healthy image, but the healthy stuff is not making the money that the bad stuff does because the costs are so much higher," he said. "They were planning to dump Kraft Caramels and Marshmallows until somebody took another look and saw the amount of money it makes."

But Deromedi said the company isn't focusing on cuts alone. It also is pushing hard for product introductions, which last year accounted for $1.5 billion in new revenue, about 50 percent higher than in recent years.

"The South Beach Diet product line exceeded our expectations, with over $170 million in revenues, and was one of the most successful new product ranges in the food industry last year," he said.

Deromedi also cited the introduction of an Oscar Mayer Roast Beef deli brand that generated $125 million in sales, and new pizzas that produced $200 million in sales as proof.

Kraft announced the cuts in its fourth-quarter earnings call. It reported Monday that profit for the fourth quarter ended Dec. 31 rose 23 percent, to $773 million, or 46 cents a share, up from $628 million, or 37 cents a share, a year earlier.

Revenue rose to $9.66 billion from $8.78 billion a year ago.

For the year, net income declined to $2.63 billion, or $1.55 per share, from $2.66 billion, or $1.55 per share, in 2004. Revenue rose 6 percent, to $34.11 billion.

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