A competitive water skier since high school, Kraft Foods Inc. Chief Executive Roger Deromedi is comfortable skipping atop the water at 75 m.p.h., whipping precariously at the end of a rope.
And if his penchant for living dangerously, on occasion, wasn’t immediately apparent to employees when he took over the top spot at the Northfield-based food giant Dec. 16, it is now.
The 50-year-old California native has moved swiftly, taking just eight weeks to install his management team, prepare plans for 6,000 job cuts and 20 factory closures and temper Wall Street expectations for 2004.
“I need to move quickly, but it’s because I have a knowledge of the business,” he said in an interview with the Tribune.
“I hope people understand that there is a need to reinvest in the business for the long-term.”
Even with a fast start and more than two years as co-CEO running the much smaller international division–while former co-CEO Betsy Holden ran the company’s huge domestic operation–the low-profile executive still has to prove whether he can turn the ship at a company struggling with sagging sales, shrinking products and a dearth of good new-product ideas.
“The much-anticipated coming out party for Roger Deromedi was somewhat underwhelming,” said UBS Investment Research analyst Evan Morris immediately after the Kraft chief unveiled his plans at an analyst meeting in New York Jan. 27. “When all the pieces were put together, not that much is changing.”
The Kraft boss is cognizant that the pressure is on.
“I’m the new CEO but was also the co-CEO before,” he said. “We were accountable for what happened both good and bad. What will be different is how we’ve now created our organization and the pace at which we’ll try to align ourselves with consumer needs.”
Supporters wonder
Yet even those that call themselves Deromedi supporters openly debate whether he has the right stuff to return long-term growth to Kraft’s array of brands, which range from Miracle Whip salad dressing and Maxwell House coffee to Oscar Mayer cold cuts and DiGiorno pizza.
“We are a believer in Roger Deromedi,” said David Nelson, a Credit Suisse First Boston analyst in a note to clients following the recent briefing. “The assumption of turnaround, however, seems to be fairly priced into the stock.”
What has some observers worried is that Deromedi’s plan to remake Kraft in his own image is more evolution than revolution.
“We were encouraged by the restructuring,” added Morris. “But we see no real change to the company’s strategy and believe some of the operating assumptions are still too optimistic.”
Not so, says Deromedi, who believes his actions will quickly address the sales slump and need for increased marketing spending.
“It’s all about market share,” he said. “That tells you whether more customers are buying your product or not.”
Big name problem
While market share is at the heart of Deromedi’s strategy, dubbed the “sustainable growth” plan, so is another relatively shocking reality for Kraft: Several of its long line of well-known brands are losing market share, shrinking slowly every year as competitors ranging from Kellogg to cheaper private-label players gradually gain ground.
To address this troubling reality, Deromedi wants to better leverage Kraft’s global scale and realign the company’s cost structure so that far more money goes into promotion and advertising, while the company’s plant and manufacturing capacity are more efficiently used.
The result, he hopes, is a more streamlined Kraft and a sustainable boost in the company’s results.
Instead of taking the next three to five years to make the changes, as might typically have occurred, Deromedi has accelerated the pace to “create the funding we need to reinvest back in the business.”
In the U.S. business, Deromedi expects his plan will result in $400 million in annual cost savings by 2006 through job cuts and restructuring. But he isn’t waiting until then to boost marketing spending.
Cuts don’t heal all woes
It’s a strategy that concerns many observers after recent mixed results.
Kraft pumped an extra $147 million into new marketing and price-cutting promotions in the fourth quarter, focusing on reversing declines in cheese, cold cuts, coffee and crackers.
U.S. market share rose more than half a point in crackers and was up 0.9 percent in cheese, partly reversing a dismal 1.6 percent slump in the previous nine months.
And while the decline in the coffee business showed signs of slowing, troubles in the cookie arm worsened as market share slipped by close to 1 percent.
“This is the big question,” Credit Suisse’s Nelson said of the increased marketing spending. “The company `feels good’ about the success it is having in incremental marketing, but results look somewhat mixed to us. … How can we have confidence in lagged returns if consumer preferences seem to be shifting so quickly?”
Kraft’s core operating profits will still need to rise by about 8 percent to meet the lowered expectations of $1.63 to $1.70 per share, including the restructuring charges in 2004, according to Morris.
But Deromedi is confident his plan can work and is intent on lowering prices on an array of cheese, coffee, biscuit and cracker products, which is good news for consumers.
And others are confident in Deromedi.
“He’s had more than 20 years to think about it,” said James Kilts, his mentor and former boss at Kraft who is president, chairman and CEO of Gillette Co.
Move long in the making
Kilts all but anointed Deromedi as the “chosen one,” according to Kraft insiders. Deromedi graduated with an MBA from Stanford Business School in 1977, and he was its top finance student that year.
After graduation, he joined General Foods, which later merged with Kraft, in marketing.
“I would think he would try to keep things very simple. Roger doesn’t like complexities,” Kilts said.
“What he is very good at is taking those complexities and simplifying them so the organization can understand where he’s headed. Roger has the ability to see the big picture but to drive right down to the execution level and get it done.”
But it was Deromedi’s “tremendous” analytical skills–his ability to make the right decision after sifting quickly through all the information–that drew Kilts’ attention.
He cited Deromedi’s work in Kraft’s prized cheese division between 1993 and 1995 as a prime example of how his orientation toward data and analysis can help Kraft overall.
“I remember how he was able to take a very conceptual idea of getting the right price gap on cheese. He was disciplined and rigorous enough to take it right down to an account-by-account, geography-by-geography basis across the country,” Kilts said. “That was a number of years ago, before we had all the helpful tools we have now.”
When Deromedi left the cheese outfit, he was posted overseas in Western Europe, based first in Paris then Zurich, and he began honing his vaunted cost-cutting skills in preparation for the job he now has.
Deromedi closed, chopped, switched and moved operations, successfully integrating a mix of more than 30 different European businesses acquired during the previous half decade with almost “missionary zeal,” according to one former Kraft executive.
As a result, he has acquired a reputation internally as something of a cost-cutter, but that does not appear to bother him.
“It doesn’t frustrate me,” he said.
“I think it’s important people understand the totality of what we have to do, though. To be successful in this business you have to have marketing skills, financial skills and an ability to run the business system in an efficient way.”
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From the captain’s chair
Here’s what Kraft’s newly appointed, sole CEO has on his to-do list to reinvigorate sales and profits at Kraft Foods Inc.:
Shuffle management
How: Deromedi shook up executive ranks in search of a more unified, global focus for the company–a change that put former co-CEO Betsy Holden in a newly created, president-level global marketing post. She reports to him, as do two other presidents and eight other executives.
Why: “The most important opportunities and pressing challenges we face today and going forward demand that we become a more unified, global company,” Deromedi said.
Restructure operations
How: Deromedi wants to cut about 6 percent of Kraft’s workforce, or 6,000 jobs, and close up to 20 plants over the next three years in a bid to save $400 million in annual costs by 2006. He’ll take a total of $1.2 billion in restructuring charges, some $750 million this year, to cover redundancies and losses as a result of the moves. Almost immediately 1,300 jobs will be cut in North America as plants in Canton, N.Y.; Farmdale, Ohio; and Central Europe close.
Why: “The restructuring program has three objectives: to leverage our global scale, realign and lower our cost structure, and optimize our capacity utilization. Its key benefits are a streamlined business system and strong financial returns on our investment.”
Improve marketing
How: Although Kraft spends about $1.5 billion a year on advertising, Deromedi will increase that by between $500 million to $600 million in 2004 to help win back lost market share. He expects half the money to be spent at home and the rest overseas as he moves to close price gaps on commodity-based products, such as cheese, coffee and biscuits.
Why: “Great ideas must be supported by the right level of marketing spending and the right prices. The amount of spending was determined based on a category-by-category, country-by-country buildup of what is necessary to get the marketing spending levels and price gaps right.”
Launch new products quickly
How: Under a new, more streamlined global structure, Deromedi wants to reduce the time it takes for new products to reach markets all over the world. He is pressing internally to push through fresh health and wellness offerings, with the recently acquired Back to Nature brand scheduled to release new items this year.
Why: “We have to accelerate the shift in our portfolio to satisfy growing demand for health and wellness and convenience. We have to develop more products and packages that fit the fastest-growing channels. And we have to deepen our connection with multicultural households with more products and services tailored to their needs.”
Maximize productivity
How: Several supply-chain initiatives are under way, including plans to phase out several sizes and unusual product offerings. He also hopes to automate more plants and use packaging that is easier to produce and prepare.
Why: “The first is supply-chain initiatives, where we will be further leveraging our procurement scale on a global basis and rationalizing the number of stock-keeping units for production and distribution efficiencies. The second source is technological advances. We will continue to automate our plants and distribution centers, formulate our products in lower-cost ways that improve or maintain our product quality, and seek out alternate, lower-cost packaging materials.”
Make beneficial acquisitions
How: Buying new businesses has gone right to the top of Kraft’s uses for free cash flow. Deromedi wants to find new potential blockbuster brands, possibly in the health and low-carbohydrate arena and businesses that serve the fast-growing multicultural community at home and abroad.
Why: “We look at lots of different brands. We are very willing to buy into the area of health and wellness, buy brands that have those credentials and buy brands that also have the distribution for where those consumers are shopping.”
Keep Wall Street expectations realistic
How: Kraft expects long-term revenue growth of 3 percent annually and to cut earnings per share expectations to 6 percent to 9 percent from 8 percent to 10 percent previously.
Why: “While this EPS growth is lower than what we have communicated in the past, I believe it is realistic in today’s operating environment. We expect 2004 earnings to be skewed to the third and fourth quarters for two reasons. First, our volume momentum will build during the year behind our full year of increased marketing spending. And second, we will not realize the majority of the 2004 restructuring savings until the second half.”
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Roger Deromedi’s career
– Dec. 2003-now:
Chief executive officer Kraft Foods Inc.
– March 2001-Dec. 2003:
Co-CEO, Kraft Foods Inc. and president and chief executive officer, Kraft Foods International
– April 1999-March 2001:
President and chief executive officer, Kraft Foods International
– Dec. 1998-April 1999:
Group vice president, Kraft Foods International and president, Asia Pacific
– Dec. 1995-Dec. 1998:
Executive vice president, Kraft Foods International and president, Western Europe, Kraft Jacobs Suchard in Zurich
– July 1995-Dec. 1995:
Executive vice president and area director, France, Iberia and Benelux
– Aug. 1993-July 1995:
Executive vice president and general manager of Kraft’s cheese division
– April 1992-Aug. 1993:
Executive vice president and general manager of the specialty products division
– Oct. 1989-April 1992:
Vice president of marketing for Kraft USA’s grocery products division and retail cheese division
– June 1988-Oct. 1989:
Joined Kraft in 1988 as vice president for corporate development when General Foods was acquired by Kraft.
EDUCATION
– 1975: BA, economics and mathematics, Vanderbilt University
– 1977: MBA, Stanford University Roger Deromedi’s career
Source: Kraft Foods Inc.
