Kraft's turnaround plan and new brand identity: Will it win against store brands?

At a CAGNY conference in Florida, Irene Rosenfeld, CEO of Kraft Foods, highlighted the progress made by Kraft against the turnaround plan announced by her in 2007. The turnaround plan is based on organizational changes, category re-framing using the 'growth diamond', sales initiatives, retailer collaboration, cost reduction and quality improvements.


Kraft also unveiled a new corporate logo and brand identity (click here for Brandweek article). Their new slogan is "Make today delicious,".

The new Kraft logo consists of an upward, red smile exploding into an array of seven "flavor bursts," each of which represents a different division. The new logo was designed by Nitro after interacting with many employees and consumers worldwide on questions as: "What do you look for in a food company?" "How do you engage with food generally?" and "What are the moments of that relationship that are important to you?". The findings resulted in a corporate logo that is "more contemporary, the colors are more vibrant and it has a life to it," CMO, Mary Beth West said.

Kraft has seen significant organic growth in H1'08 but most of it was from price increases. In Q4, it had a volume decrease of 5.2%. This was partly due to inventory reductions (especially at Walmart, which accounts for ~15% of sales). Kraft USA is experiencing significant unit volume declines in cheese, coffee, crackers, nuts and salad dressings.

I ask myself: Is Kraft losing its battle against store brands? Will its turnaround strategy and its rebranding bring success ?

I don't think the Q4 volume declines necessarily indicate loss of ground against store brands. Most of the volume declines experienced by Kraft are more than offset by pricing increases. In terms of dollar share, Kraft has lost less than 3 percentage points in most categories. Kraft continues to be the market leader in sub-categories accounting for around 70% of its sales. So long as Kraft manages its pricing such that it does not lose further significant share, Kraft will likely continue to experience healthy organic growth.

The focus on quality is also paying off for Kraft. 65% of surveyed customers preferring Kraft products to competitor products (as opposed to 44% in 2006).

Outside the US, Kraft is enjoying record sales growth in the Developing Markets (coffee, biscuits, chocolate, Tang) and margin expansion in Europe and the Developing Markets.

Going forward, the new branding appears more colorful and contemporary to me. I hope it allows Kraft Foods to better differentiate its products from store brands (by driving home the taste advantage).

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• Profit Plunges 72% at Kraft Foods (nytimes.com)

Update on Pepsi rebranding effort

I had blogged in late November about Pepsi's rebranding effort (click here). I had said at that time:

" I think these are bold moves that will revitalize the CSD market as well as position Pepsi favorably in the non-carbonated beverages market.

Some of the products launched by Pepsi recently are very notable (Diet Pepsi Max, flavored AMP variants). As a traditional Diet Coke fan, I was surprisingly attracted to the taste of Diet Pepsi Max. I personally witnessed a free sample promotion for Diet Pepsi Max outside Grand Central station in NYC in mid-October and the reviews appeared good. Pepsi has opened up a new segment in the CSD market by adding ginseng to cola. This will attract consumers who want a rush of energy with few calories at a price point below energy drinks."

Pepsi launched a new website called "Refresh Everything". Its Superbowl ad and the theme song also carried the same theme. Compete.com's PRO Daily Reach report, which tracks online visitors based on their panel, has reported that the Pepsi website generated significant web traffic in January (click here).

Pepsi and Coca Cola have released their first quarterly results after the rebranding was launched. Pepsi Americas Beverages (click here) reported a 6% decline in volume, a 10% decline in sales and a 16% decline in latest quarter division core profit. Meanwhile The Coca Cola Company (click here) reported only a 3% decline in volume in North America, attributing its relative CSD outperformance to its 'three-cola' strategy and the success of Coca Cola Zero.

Does this mean that Pepsi's rebranding has gone off to a bad start? Not really. The newly branded products began shipping at the end of the quarter. The true impact of the branding should be evident in this current quarter.

cheers....

Customer lifetime value ... how can Vonage survive?

After writing last week about why Sirius XM is likely to end up in Chapter 11, from a customer lifetime value perspective, I was looking around for other companies in a similar situation (customer subscription business, facing financial difficulties).

Vonage (www.vonage.com) is an independent US-based IP phone services provider. I can vouch for the quality of their services, since I was a user for several years. Unfortunately, they have encountered losses for several quarters and have raised debt exceeding $500 MM.

Vonage is going to release its annual results in late February. Meanwhile I analyzed their Q3 results (click here) from a customer lifetime value perspective.

Here are the summarized customer lifetime value metrics:

• ARPU (Revenue per user per month): $ 28.96
• Direct monthly variable cash costs : $7.20
• Monthly fixed opex cash costs (excludes depreciation, interest, taxes), mainly SG&A: $9.82
  
• Subscriber acquisition cost: $ 301.4 (of which $48 is spent on equipment subsidy)
• Monthly Churn rate: 3.1% ; which implies an average lifetime of 32 months
• Capital (assets less cash) of $315 MM (which amounts to $120 per subscriber)

Each new subscriber generates $ 385 of cumulative lifetime cashflow (($28.96 - $7.20 - $ 9.82)*32).
This is barely enough to compensate for the upfront SAC of $301 per gross add and capital requirement of $120 per subscriber, after discounting.

I think Vonage can survive if they continue to improve their business in the following ways:

• Launch a proactive retention strategy (use predictive analytics to understand which customer is likely to churn, and launch proactive offers to retain them) to reduce the churn rate
• Reduce SG&A costs ($73 MM in Q3) by optimizing the salesforce
• Reduce marketing costs ($254 per gross add) by:

1. re-examining the channel strategy (using direct and other low-cost channels (e.g., referral) as opposed to distributors and retail)
2. continue reducing online advertising costs (click here)
   

• Increase ARPU (which currently is only a few $ more than the monthly unlimited subscription rate) -- by promoting services that generate incremental ARPU (international calling, faxing, virtual phonelines)

Would love to hear what you think...

Customer lifetime value ... why Sirius XM may not survive

It appears that Sirius XM, the satellite radio service provider, is close to filing for bankruptcy (click here). The company has been raking up losses for the past several years and is under a significant debt burden.

How can one figure out whether a subscription-based business is viable? The answer may lie in a concept called 'customer lifetime value'.

Customer lifetime value is the discounted value of all the expected net cash inflows from a customer over his/her expected subscription lifetime. Expected Net cash inflows are computed as Expected Revenue less Expected cash operating expenses less Acquisition Costs incurred (these can be estimated monthly and discounted). Expected subscription lifetime can be estimated using the current churn/attrition rate.

I ran some analysis based on the latest quarterly results of Sirius (click here).

• Their customers come from two major channels: Car 'OEM' companies (which install the radios in cars and offer a 3 to 12 month free service package) and Retail. Both channels account for approximately 50% each of the total subscriber base.
  
• On average, Sirius XM generated $10.74 per user per month in revenue (ARPU) and spent $3.2 per user per month on variable cash operating costs (revenue share with music companies, customer service & billing).Thus they generate $7.54 of cash per new user per month on an incremental basis.
  
• They also spent around $107 Million per month on fixed cash operating costs (Howard Stern's salary, content costs, satellite costs,etc). This does not include interest costs, taxes, depreciation, ESOP expenses, restructuring expenses or goodwill amortization (which are all substantial but not cash operating costs). This equates to $5.72 per existing subscriber per month.
  
• Their churn rate among paying customers is 1.7% per month. Thus the average lifetime of paying customers is 59 months.
  
• Their acquisition cost per new customer is $74. However given that 53% of OEM customers deactivate before becoming paying customers, the acquisition cost per paying customer is really $101.
  
• Sirius XM carries assets less cash of around $7.14 BN. That equates to $378 per existing subscriber.
  

It is simple math to see that $7.54 of monthly incremental cashflow per new customer is not enough to pay for $5.72 of fixed monthly cash expenses and for the upfront investment of $101, over a 59 month lifetime.

Note that I have not talked about generating return on the $378 fixed assets per subscriber yet. Even if Sirius XM declares a bankruptcy and brings down its asset (and liability) base down to near zero, the fundamental business needs to improve to be viable, post Chapter 11.

Here's what Sirius XM could do to make it's business viable, post Chapter 11:

• Renegotiate costs with Howard Stern and the record labels
• Increase prices (though its not the most popular move)
• Tiered pricing : higher pricing for ad-free radio and same pricing for advertising-supported service
  
• Increase the price of receivers
  
• Ask for donations from existing subscribers (the PBS model; maybe they can have Howard Stern making phone calls ;-))
  

Please don't use this blog as the basis for any investment decision. My comments are purely my personal views. Full Disclosure: I have been short SIRI for a few years now.

I would love to hear your views...

Can a private label manufacturer manage a national brand?...the case of Ralcorp and Post Cereals

In November 2007, Ralcorp Holdings, one of the biggest manufacturers of store brand groceries, bought the Post brand (iconic products such as Honey Bunches of Oats, Post Raisin Bran, Grape-Nuts, Spoon Size Shredded Wheat, Pebbles and Post Selects,....) from Kraft for $2.6 BN (click here) in an all-stock deal.

Many people, including myself, wondered whether a private label manufacturer like Ralcorp can handle a national brand in a slowing economy?

One line of thinking questioned the logic of a private label company, that is gaining share from national brands, in buying a brand at a high valuation (2.6 times sales). After all, the marketing activities (promotion, advertising) in selling a branded product are much different than those involved in selling a store brand to a store. Also selling a branded product with store brands creates internal competition. This is what had led Ralcorp to sell off its brands (Chex, Beech-Nut) many years ago.

What worked for Ralcorp is that private labels traditionally have had a small market share in the cereals market (around 13%).

Ralcorp announced their FY09 Q1 results last week (click here). The sales contribution of Post was $256 MM (which is nearly the same run rate as at the time of acquisition). I estimate the profit contribution of the Post brand was more than $50 MM in the quarter.

Hats off to the Ralcorp folks and to the Post guys to have posted such strong results in a recessionary environment!

Is gender a meaningful way to segment office products customers?

OfficeMax is now targeting working women (aged 28-45) according to this Ad Age article (click here). They have launched a new ad campaign called 'Life is Beautiful' (click here), targeted squarely at women.

OfficeMax is known for unusual promotions like it's hugely popular three-year old Elf Yourself holiday promotion, which allows customers to convert themselves (or their friends) into animated elves and send it to others. Their Back-to-School 2008 campaign "Power to the Penny" and their "A Day Made Better" program have been noticed by many business writers.

Officemax spends approximately half the money that Office Depot spends on advertising and only a fourth of what Staples spends.

Is this unusual way of segmenting the office products market (working women) a good idea?

I think this is a brilliant idea only so long as OfficeMax does not alienate the male buyers.

• None of the other major players (Staples, Office Depot) actively target the working woman, a significant portion of the working population.
  
• Research studies have shown that women hate shopping for office supplies
  
• I assume that mothers make a lot of buying decisions during Back-to-School season as well (for their kids).
• However the risk that OfficeMax runs is that men may not like to associate themselves with a store that is seen as 'feministic'.
  
• Also the purchasing departments of many corporates may not be affected by gender-specific advertising. (When is the last time, you as an employee told your purchasing department where to buy printing paper and office supplies from?)

Let me know what you think...

Is Woolworth's online rebirth a good idea?

Woolworth's, the iconic hundred-year old British retail store chain, was forced into administration in December. It had to shut its 800 stores after Christmas. Click here to get a wonderful series of blog articles on the history and trivia of Woolworths UK.

If you permit me some diversions, here are some interesting trivia:

• Woolworths was started in the US (Yes, the Woolworth building belonged to FW Woolworth). The first UK store opened 30 years after the first US store!
• Woolworth in the UK (also called the Woollies) is not related to Woolworths in Australia, NZ, South Africa and Mexico
• The remnant of FW Woolworths Company in the USA is Foot Locker, the sportswear store chain!
• Woollies continue to operate successfully in Germany

Yesterday, Shop Direct, UK's largest online and home shopping retailer (1.6 BN GBP) announced that it has acquired the Woolworth's brands in the UK and will relaunch it online (click here).

Is relaunching the Woolworth's brand online a good idea?

I don't know how much Shop Direct paid for Woolies, but going by this newspaper article, they would have paid a few tens of millions of GBP. I think it is a brilliant idea because:

1. Woolworths is a strong brand in the UK. many generations of Britishers have gone through the shopping experience at their local Woollies. Here's an interesting TimesOnline column on the big void left by Woolies demise.
   
2. They were rated as one the top 200 brands of retailing by Deloitte as recently as January 2008 (click here).

Woolies is dead. Long live Woolies !