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KRAFT FOODS INC (KFT)

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Kraft Turning To Drinks To Quench Growth In Grocery Business

03/30/2012 | 02:30pm US/Eastern
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--Kraft leans on refreshment-beverage business as growth driver for North American grocery company

--Sees $1.5 billion refreshment-beverage business growing at up to a double-digit rate

--New products like MiO behind growth, but faces newfound competition

 
   By Paul Ziobro 
   Of  
 

Though food is in its name, Kraft Foods Inc. (>> Kraft Foods Inc) is looking to its beverage business as a main ingredient of growth for its North American grocery business, which is splitting off from Kraft's faster-growing snacks brands later this year.

Of particular focus within its beverages division is its refreshment business, which includes Crystal Light powdered drinks, Capri Sun juices and a new hit product MiO, a liquid flavoring that's splashed into drinks. Kraft sees the division, currently with $1.5 billion in annual sales, growing at high-single-digit or double-digit rates going forward, up from mid-single digits in the last couple of years.

The refreshment-beverage business, which doesn't include coffee brands like Maxwell House and Gevalia, is expected "to drive a distorted amount of top-line growth," Doug Weekes, vice president of Kraft's refreshment-beverage division, said in a recent interview. "We're showing that we can, by expanding or reframing a lot of existing brands, drive growth at a really good clip."

The steeper growth trajectory for refreshment beverages will contrast with a slower growth profile projected for most of Kraft's remaining North American grocery business, a division with $18 billion in annual sales that's being renamed Kraft Foods Group Inc. as part of the split-up from the snacks group. The faster-growing snack brands like Oreo cookies and Cadbury candy are splitting off to form Mondelez International Inc., a $35 billion business that will try to capitalize on opportunities in emerging markets like Latin America and Asia.

The grocery business is being framed as a slower-growing cash cow where Kraft will fatten margins by cutting costs and pay a hefty dividend. But analysts said that investors also want to see some areas that are growing so that Kraft has some worthwhile businesses to invest in.

"Even cash cows need volume growth," said Rick Shea, president of Shea Marketing Consulting Inc. and a former marketing executive at Kraft.

The refreshment-beverages group grew 10% last year, Weekes said, well ahead of the 1.5% rate for the broader categories in which it competes.

That growth rate may have seemed far flung several years ago, when Kraft's refreshment business focused slow growers like tubs of powdered-beverages Kool-Aid and Country Time Lemonade, Shea said. But the division has grown up, shifting focus more on Crystal Light, a low-calorie drink mix aimed at women, and now toward MiO, which has expanded into energy drinks that appeal to young men.

Kraft is also expanding its brands into new forms, licensing Crystal Light and Country Time brands to SodaStream International Ltd.'s (>> Sodastream International Limited) homemade soda machines. Kool-Aid Jammers, sold in a single-serve pouch similar to Capri Sun, is also posting strong growth.

"Kraft has probably underwhelmed [in beverages] up until now, and it's exciting to see them breathing some new energy into these brands and creating new platforms," Credit Suisse analyst Robert Moskow said.

Kraft's still only a drip of a beverage player. Trade publication Beverage Digest estimates the drinks industry is about $115 billion in the U.S. But large segments like carbonated soft drinks are declining, creating opportunities for products like MiO.

Kraft had its share of skeptics when MiO launched last year, but it already eclipsed $100 million in sales in its first year, a feat accomplished by just 0.5% of new food and beverage products over the past decade, according to Chicago market-research firm Symphony IRI Group.

Others have taken note. Wal-Mart Stores Inc. (WMT) earlier this year launched a liquid water enhancer under its Great Value store brand, selling it for $2.78, below MiO's suggested retail price of $3.99. Coca-Cola Co. (>> The Coca-Cola Company), which owns bottled water brand Dasani, also appears interested in the space, having filed to trademark Dasani Drops late last year. A Coca-Cola spokeswoman declined to comment on the filing.

-By Paul Ziobro, Dow Jones Newswires; 212-416-2194; paul.ziobro@dowjones.com

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