Financial management: comparative analysis of three competing brands – NESTLE, P&G, KRAFT

Author: Iloka Benneth Chiemelie
Published: 30th August 2015

Introduction

About Kraft foods Inc

Kraft Foods Inc. is a North American grocery producer and processing Conglomerate headquartered in Chicago USA. The company makes annual sales of US$ 19 billion with its 10 brands that are available in 98% of North American households. With 109 years in the making, Kraft Foods Inc. (Kraft Food Inc., 2012).  has built one of the most outstanding workforce in modern business environment that constantly innovate products to better suit customers’ tastes (Kraft Food Inc., 2012). The company also employee 25,000 staffs in the U.S and Canada.

Figure (1): Kraft Foods Inc.’s financial highlight

Source as adapted from: Kraft Foods (2010)

Such financial valuation as is displayed in the figure (1) above represents a firm with huge potential of achieving any level of economic growth as they have high financial backing towards making such goal a reality. Some of the company’s iconic brands includes: Cadbury, Jacobs, Kraft, LU, Maxwell House, Milka, Nabisco, Oreo, Oscar Mayer, Philadelphia and Trident and its products are available in about 170 countries (Kraft Foods, 2010). Kraft is a leader in innovation, marketing and product quality.

MANAGEMENT GAP AND BUSINESS PRINCIPLES

Kraft believes that strong Corporate Governance is Essential and for publicly-held companies like Kraft Foods Group, good governance attributes should include:

1. Disclosure of the board's processes
2. Independence of a majority of the directors
3. Respect for shareholder rights
4. Compliance with legislation and regulations (Kraft, 2013)

The board of directors in Kraft food believes in effective corporate governance as a means of increasing customer loyalty, attracting investors, increasing good public relationship, and maintain quality brand image.  John T. Cahill is Executive Chairman and Tony Vernon is Chief Executive Officer of Kraft Foods Group, Inc. (Kraft, 2013).

Kraft’s directors provide input to guide the long-term success of the company while fulfilling their fiduciary duty to its shareholders. The board, in accordance with the Corporate Governance Guidelines, has responsibility for establishing broad corporate policies and overseeing r management team, which has responsibility for the day-to-day operations of the company. The board members are kept informed about the company's businesses and challenges through a variety of means, including operational and financial reports, and discussions with management and others at board and committee meetings.

There is a high level of independence between these directors and they meet on regular bases to discuss the progress of the company. The owners (shareholders) doesn’t interfere with the day-to-day business operations, but the board of directors owe them the responsibility of constantly maximizing the company’s financial value as is common with other companies in the beverage industry.

1.2 INTERACTION WITH THE FINANCIAL MARKET AND AVAILABILITY OF INFORMATION FOR THE MARKET

Kraft just like most of the 21^st century corporations maintains transparency of their corporation information and performance through their website. The company is listed in numerous stock markets across the world and users can have insights into their financial performance by checking through their website.

1.3 MANAGEMENT OF SOCIAL OBLIGATIONS IN KRAFT FOODS

Source as adapted from: Kraft (2013).

The above figure represents Kraft’s corporate social responsibility mantra. The company aims to contribute immensely towards the development of the community they live in, increasing the health and wellness of its stakeholders by offering quality products, maintaining low level air pollution from all their production and business activities, creating a sustainable environment for quality water supply, saving the environment by reducing their packaging, and responsibly undertaking its business processes by abiding with the rules and regulations of the community and country they operate in (Kraft, 2013).

The management of corporate social responsibility in Kraft is handled by the auditing team. The team presents a review of the company’s performance in relation to social obligation to the board, and the board proceeds with making decisions on what to do next. Once the decision is finalized, it is also the responsibility of the audit team to keep a tab on how the designated team are doing in relation to their performance on social issues based on the board’s approved guidelines.

Financial analysis: Kraft Food vs P&G and Nestle

Profit margin

	KRAFT FOOD DEC
	2012	2011	2010
Ordinary Activities	$m	$m	$m	% change
Total Operating Revenues	18,339	18,655.00	17,797.00	4.82
Operating Profit	2,670	2,828.00	2,965.00	(4.62)
Net Other Expenses or Gains	(217.00)	48.00	37.00	29.73
Profit before tax	2,453.00	2,876.00	3,002.00	(4.20)
Tax on profit	(811.00)	(1,101.00)	(1,112.00)	(0.99)
Profit after tax (attributable to equity shareholders)	1,642.00	1,775.00	1,890.00	(6.08)

From the above analysis, it is very significant to note that Kraft has continued its sustainable return on investment as it ranked in positive figures within the years being review. The performance of the company can be linked to its continued drive towards establishing sustainable growth through a gained understanding of the customers’ needs and redesigning their product offerings to meet these needs.

However, the company underperformed its competitors (see attached excel file). In 2010, while Kraft returned US$ 1,890 billion after tax, Nestles returned US$ 34,374 billion in the same year while P&G returned US$10, 851 billion. It can be seen from the above analysis that the company is well below par in terms of comparing their returned valued after tax with that of its competitors. This is significant when measuring the potential competiveness of the brand as the higher returned value obtained by its competitors gives them high competitive advantage over Kraft as they can use such profits to invest in new and innovative products as well as enter markets that Kraft might find difficult to operate in as a result of lower financial capability.

Capital structure

From a presentation by morning star as illustrated in the figure below, it can be seen that the two sources of funds for operation in Kraft are debt (borrowings) and equity.

Figure 1: capital structure of Kraft foods

Source as adapted from: MorningStar.com (2013)

Significant, equity over weights debt by a high margin and this is important for sustainability in the company because equity is more capable of creating sustainability in funding a business process as opposed to debts. However, it should be noted that the company’s debt represents 44.7% in repayment for its total revenue. This is very high as it influences the potential for sustainable growth negatively.

In terms of understanding how Kraft’s competitors are aligned with respect to the capital structure, it can be seen debt of Nestle below is lower than what was obtained in the case of Kraft. Considering the fact that the company ranked in higher revenue and debt represents shares dividends, it can be seen that the impact will significant reduce when it comes to measuring debt as part of the total revenue and profitability.

Figure 2: capital structure of Nestle

MorningStar.com (2013)

P&G has the highest capital ratio because its debt is only 20% (MorningStar.com, 2013)of the total revenue, creating the right room for continued investment and new product development as it has high funds from the maintain profitability margin to ensure that success is not lacking from the company’s business scope.

On that account, it can be stated that P&G and Nestle are better positioned than Kraft to maintain sustainable business. This is because while debt represents significant part of Kraft’s business funding, this is different in the case of its competitors where funding are done by more of the company’s resources than debt. On that ground, profitability margin is increased for the competitors and they can use the gained profit to expand into other business segments.

DIVIDEND POLICY

Figure 3: Dividend payment by Kraft Food

Source as adapted from: DiviData.com (2013)

Kraft has a simple dividend policy just like most American companies of paying dividend per quarterly base. The company’s dividend has been increasing since 2001 when they started paying dividend till the first quarter of 2008. Since then, the company has frozen its 0.275 up till date.

The idea of freezing dividend at a fixed price is not fair to the investors and not a good factor for attracting investors. Instead, it is pushing current investors out. For instance, Warren Buffet sold off his entire Kraft share because of the lack of increase in dividend (GuardianNews, 2010). Thus it is recommended that Kraft food should adopt a change in their dividend policy and offer competitive pricing with other competitor sin the beverage industry, in order to attract more investors.

In terms of Nestle, dividends are paid once a year, five working days after the Annual General Meeting; the ex-dividend date is three working days before the dividend payment date. Dividend growth for the past year was a staggering 15.6%, from CHF 1.60 to 1.85. Free cash flow has grown by an average of 4.8% for the past 5 years, and 2010′s fcf of 9 billion is more than enough to cover the 5.4 billion paid out to shareholders.

The significant thing in this case is that P&G maintains similar dividend payment like Kraft and this is based on the understanding that it is an American firm. Dividends are paid on quarterly bases, but the company pays higher dividend to its investors than what is obtainable in Kraft. The underlying element for such is based on the understanding that P&G generates higher revenue with lesser debts as compared to Kraft foods.

Key performance indicators in Kraft

Superior consumer brand value – Carnegie (2004) made known that this is one of the key performance indicator in the company and in 2004, Kraft made a reversal of its two year trend of losing shares in consumer brand by improving its brand value within 25 top categories. This as such helped increased in the performance of the company through higher understanding with the needs of customers and production of tailored products designed to effectively and efficient meet these needs.

This concept is also obtainable from its competitors as Janel et al  (2009) made known that the core aspect of P&G’s success is based on clear understanding of the customers’ needs and designing products and services meant to meet these needs. The company takes extra time to evaluate the market conditions obtainable define the needs of customers based on information obtained through survey. Nestle is also building its higher revenue through superior brand valuation that is based on designing products that meet the needs of customers effectively and efficiently. On that ground, it can be seen that superior consumer brand value is very important in the FCMGs product segment where these three brands operate in and they all understand the needs for increased revenue generation through increased sales. Thus, they are all keen on building sustainable development through higher customer satisfaction.

Building shopper demand through customer collaboration – another factor highlighted by Carnegie (2012) is that making the products readily available to the customers is very important and it would influence the performance of the company effectively, and this is the factor that have influenced the growth of Kraft as the company broadened its presence in shopping malls across the USA and the globe (Carnegie, 2      004)

A similar report was presented by Janel et al (2009) and it was made known that P&G a well as Nestle has increased the demand for their products through shopper demand designed with customer’s collaboration. The process of doing this involves understanding the needs of customers in their respective markets and making the products designed for solving these needs available in their shopping malls. The outcome now becomes that the demands of customers will be effectively meet and it will also increase their loyalty to the brands. Besides direct sales, this is also a form of indirect advertisement in the sense that customers shopping for other products are given the glimpse of the brand’s products offerings and it directly increase their purchase intention in the future.

Internal and external development – another factors highlighted by Carnegie (2004) is that financial performance is ensured through the development of Kraft’s internal and external system in which the internal system represents its workforce and the external system represents the suppliers, distributors, and subsidiaries. Carnegie (2004) also proceeded to present a documentation of the company’s gain financial performance by stating that it was directly influence by its experienced and advanced system. Additionally, Kraft has also made numerous acquisitions over the years and this has also increased their financial performance through an increase in revenue generation from these subsidiaries.

Janel et al. (2009) are in support of this view and they also presented an understanding of the view as it relates to P&G and Nestle, which are the competitors of Kraft, by stating that the success of these brands have been to a great extent influenced by their acquisition of highly numerous subsidiaries, recruitment of highly experienced workforce and establishment of a reliable supply chain that makes needed raw materials available for productions and finished goods available for consumption. The implication now becomes that the management of internal and external resources plays significant impact on the performance of companies in the FCMG sector.

External Environment Analysis (PESTEL)

Political factors – the company maintain global presence and as such have mixed political influences on its businesses. In the cases of North America and Europe, the political environment is very stable and business operations are stable as well, but this is quite different in some Asian and African nations where political instability is quite prevalent and that influence the company negatively (Carnegie, 2004). However, there seems to be no negative political influence on the brand. This is based on the understanding that Kraft has been successful in establishing itself in the markets it maintains presence in and it has acquired high market share in the process of such effective management approach. Notwithstanding the less political influence on business growth as documented above, it must be noted that the company needs to monitor the political situations within its markets especially with reference to the Asian and African regions as this will give them the better understanding of how to handle issues that might arises from the business process.

Economic factors – basically, most of nations that the company maintains presence in are developing and emerging economies, with high consumer purchasing power and increasing level of per capita GDP such as China, Indian, Mexico and a host of them. This creates a favourable business environment for the company. Besides, it have also gained huge market share in the US market. Overall, the demand for FCMG products is on the rise and this is linked t the increase in population. Supporting this increase in demand for products is a subsequent increase in globalization and all of these factors combine together to create the right business environment for sustainable economic development in the company.

Socio-cultural factors – there is a growing trend for healthy eating, which mainly features products with lesser calories. Kraft has also been successful in reducing the calories and sugar level of their products. The notable highlights of their progress is that since 1999, Kraft Foods has helped provide the U.S alone with over 1 billion serving of food, and have improve the nutrition serving of 5,500 products in the course of doing so (Kraft Foods, 2010).. In 2010, the company reduced the volume of sodium in its 340 North American products by 3 million kilograms (6.5 million pounds) of salt removed (Kraft Foods, 2010). The qualities of their beverages have also been improved through the purchase of certified coffee and cocoa beans. All these factors have increased the social value of the Kraft brand and it puts them in better position to sustain their profitability through an increase in demand as a result of their rich and nutritious product offerings.

Technological factors – this is another factor that has strong influence on the business growth of the company because there level of technological advancement is fact growing across the globe and as such increases production efficiency in the company. Carnegie (2004) made known that the company maintains one of the most resourceful technologies in the industry and it gives them the much needed technical advantage for new product development.

Legal factors – most of the countries in which Kraft maintain presence in have a well-established legal process for business operations and this increases the chance of success, but some of these countries especially in Asian and African setting have systems that are corrupt and as such can influence business success negatively. However, the increasing level of globalization means that even these corrupt nations are bound by rule set in the UN and WHO to protect foreign brands in their homeland. As such, legal issue won’t be much of a problem for the brand except in cases where it is being held accountable for misconducts or unethical business practices.

Environmental factors – this is a factor that stands the highest threat on the success of the company. There have been numerous cases of environmental influence on business such as the Japanese tsunami and the Mexican quake, in which the company also maintains businesses in. As such, this factor has high negative influence on the success of the business. Since the company maintains presence in vast markets, it becomes very important to understand the environmental settings of these markets in order to ensure that success is not negatively influenced by bad environment.

Industry Analysis (Porter’s 5 Forces)

Consumers’ bargaining power – besides the three brands discussed in this paper, it was made known by Jamle (2009) that the FCMG industry is littered with numerous brands on both the international and national level. As such, this creates numerous options for consumers to choose from and raises the bargaining power of consumers. It has also been noted that companies in the industry has engaged in price way in numerous occasions as they fight for higher market share.

Supplier bargaining power – just like the consumers’ bargaining power discussed above, it was also noted by Jamle (2009) that suppliers’ bargaining power has also increased effectively. This is because there are numerous producers in the industry and the suppliers effectively focus on producers with high pay. As such, they can easily switch between producers. In any case, the top brands such as Kraft, P&G and Nestle have already identified this case and have switched to owing their own farms for direct supply and acquiring most of their suppliers in order to control the supply network.

Substitute products – the level of substitutes products in the FCMG is very high because of the high competition and brands that serves customers on both the national and internal level. Across the globe, hundreds of brands offer the same products such as biscuits, juice, lotion, soap and so on. Therefore, this is a very big issue for Kraft because its products can easily be substitute for another lower priced brand.

Threat of new entrants – since the company is operating in numerous economies, there is a high level of new entrants in any of these economies and such threat can influence business profitability negatively if the new entrants happen to be successful. Thus, Kraft’s overall success can be influenced by the potential entrance of new companies in the industry.

Industry rivalry – the competition is also high and it can be seen from the understanding presented above in which it was made known that potential for new entrance is high, substitute products is high and the internationalization of brands has further enhanced this competition because Kraft no longer needs to focus only on the domestic firms but also have to wade off competition from foreign brands entering the market.

Limitations of PORTER 5 FORCES AND PESTEL

In the business field, both the Porter’s five forces and the Pestle analysis are very common business tools that are used to gain an understanding of the business environment and the influence laid by this business environment on the growth and profitability of the company. However, there are a number of criticisms for these two models and these criticism focuses on their limitation in terms of important elements they fail to cover.

Porter’s five forces – the criticism on this tool as presented by the Kaplan Foundation Knowledge Bank (2013) is that it ignores the importance of customers. This is because the focus of any business should not be on how to develop an effective supply and distribution network that will be used to enhance competition, but ignores the fact that the customers are key for any business as sales will not be possible if these customers don’t make demand. The critiques argue that the tool should be redesigned to incorporate the need to understand what customers want and use this defined wants as the bedrock for increased growth through enhancement of their competition with other factors discussed.

Pestle analysis – the Kaplan Foundation Knowledge Bank (2013) also presented a criticism of this tool by stating that while it is designed to understand the potentials for business growth by reviewing the influence of business environment on profitability, a market that has been defined to be profitable doesn’t necessary mean that the company will growth in that market. As such, even though the American and European markets have been described as profitable in the above analysis, it doesn’t mean that Kraft will succeed in this market on the long-run.

CONCLUSION

Sustainability of business in the marketplace and society is not a new topic of discussion (e.g. Carson, 1962). Brundtland (1987) went on to define sustainability as the ability to meet the needs of present generation without compromising the ability of future generation meeting their own needs. Sustainability in business management include proper coordination of product design, manufacturing, delivery, distribution and waste management throughout a product’s life cycle (Hong et al., 2009). In order to achieve sustainability, corporations must look far beyond financial gain and take extra step towards handling environmental and social issues that are influenced by their productions (Carter and Rogers, 2008).

This paper has been successful in analysing the impact of Kraft’s business on its success. The focus was to conduct a comparative analysis with its main competitors (P&G and Nestle), highlighting the differences in financial performance and how these differences influence its potential for sustainable business through increase in competition.

The finding in this case shows that every increase in profit of Kraft, there is more than double that figure in terms of increase of profit experienced in P&G and Nestle. The main reason for this is because these brands have higher assets and market share, with lower debts that means increase in profit is inevitable. On that ground, the market environment of Kraft was also analysed and the finding is that the market is favourable in the American and European market but the African and Asian markets presents high level of instability as a result of political instability in these regions of the world. However, the high level of globalization means that the brand is protected internationally. In any case, competition is high because the FCMG industry is littered with renowned brands on both the national and international phase, which means that customers can easily switch to lower priced brands and Kraft needs to adopt a price competition approach in order to remain afloat in the market.

RECOMMENDATION

In terms of making the choice for a way forward, Johnson and Scholes (2010) presented the acceptability, acceptability, suitability and feasibility framework as the right tool for such decision. This is adopted below in the case of Kraft.

Acceptability - the decision rule should not be against any raw or rules in the market where it is expected to be deployed.

Suitability – it should be suitable and compatible with the current and expected market environment.

Feasibility – it must be considered feasible and capable of meeting the purpose for which it was designed.

On that account, the recommendations for Kraft are:

1.      Competitive pricing – the company should price its products competitively in order to ensure that their chances of gaining high market shares are not reduced as a result of lower pricing offered by producers.

2.      Reduce production costs effectively – in order to meet the recommendation of competitive pricing, the company should also look to understand possible ways of reducing its production cost and adopt strategies that will make such a possibility.

3.      Maintain good corporate governance – the company needs to maintain great corporate governance in order to attract new investors for its business.

All these will effectively ensure that the company maintains its current market share while also development new potentials through expansion into other potential markets.

REFERENCES

Brundtland, G.H. (1987), Our Common Future. Report of the World Commission on Environment and Development, Oxford University Press, Oxford.

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Carson, R. (1962), Silent Spring, Houghton Mifflin, Boston, MA.

Carter, R.C. and Rogers, D.S. (2008), “A framework of sustainable supply chain  management: moving toward new theory”, International Journal of Physical Distribution & Logistics Management, Vol. 38 No. 5, pp. 360-87

DiviData (2013), “Kraft Foods Inc (KFT) Dividend History.” Available at: http://dividata.com/stock/KFT/dividend [Accessed on: 16-03-2013].

Hong, P., Kwon, H.B. and Roh, J.J. (2009), “Implementation of strategic green orientation in supply chain: an empirical study of manufacturing firms”, European Journal of Innovation Management, Vol. 12 No. 4, pp. 512-32.

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Johnson and Scholes (2010), “strategic choices – suitability, acceptability and feasibility model.” Available at: http://www2.accaglobal.com/pubs/hongkong/students/newsupdate/archive/2010/25/learning_strategic_choice.pdf [Accessed on: 19/08/2013].

Kaplan Foundation Knowledge Bank (2013), “Criticism of Pestle and Porter’s five forces.” Available at: http://kfknowledgebank.kaplan.co.uk/KFKB/Wiki%20Pages/Porter's%20five%20forces%20model.aspx [Accessed on: 19/08/2013].

Kraft Food (2012), “Creating a more delicious world: 2010 annual report.” Available at: http://www.kraftfoodscompany.com/SiteCollectionDocuments/pdf/kraftfoods_responsibility_report.pdf [Accessed on: 24/12/12].

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MorningStar.com (2013), “Kraft Foods Inc KFT.” Available at: http://quicktake.morningstar.com/stocknet/bonds.aspx?symbol=kft [Accessed on: 16-03-2013].

TheGuardianNews (2010), “Warren Buffet Sells Kraft Share.” Available at: http://www.guardian.co.uk/business/2010/may/18/buffett-sells-kraft-shares [Accessed on: 16-03-2013].