Kraft Foods Inc.

History

Precursor

Kraft Foods traced its roots to the National Dairy Products Corporation, formed on December 10, 1923, by Edward E. Rieck and Thomas H. McInerney. The firm was initially set up to execute on a rollup strategy in the fragmented United States ice cream industry. Through acquisitions it expanded into a full range of dairy products. By 1930 it was the largest dairy company in the United States and the world, exceeding Borden.

McInnerney operated the Hydrox Corporation, an ice cream company located in Chicago, Illinois. In 1923 he went to Wall Street to convince investment bankers there to finance his scheme for consolidating the United States ice cream industry. He initially found "hard sledding" with one banker saying the dairy industry "lacked dignity". He persevered and convinced a consortium including Goldman Sachs and Lehman Brothers to finance a roll-up strategy.

As a result of his efforts, National Dairy Products Corporation was formed in 1923 in a merger of McInnerney's Hydrox with Rieck McJunkin Dairy Co of Pittsburgh, Pennsylvania. The resulting firm was then listed on the New York Stock Exchange with the offer of 125,000 shares having been oversubscribed.

The firm grew quickly through a large number of acquisitions. As is typical in a roll-up strategy, acquisitions were primarily for stock in National rather than cash. National Dairy Products Corporation acquired more than 55 firms between 1923 and 1931, with a few notable entities among those being:

Beginning

Born in Stevensville, Ontario, Canada, in 1874, James L. Kraft immigrated to the United States in 1903 and started a wholesale door-to-door cheese business in Chicago; its first year of operations was "dismal", losing US$3,000 and a horse. It then took hold and Kraft was joined by his four brothers to form J.L. Kraft and Bros. Company in 1909. As early as 1911, circulars and advertisements were in use by the company.

In 1912, the company established its New York City headquarters to prepare for its international expansion. By 1914, 31 varieties of cheese were sold around the U.S. because of heavy product development, expansion by marketing, and opening a wholly owned cheese factory in Stockton, Illinois.

In 1915, the company invented pasteurized processed cheese that did not need refrigeration, thus giving a longer shelf life than conventional cheese. The process was patented in 1916 and about six million pounds of the product were sold to the U.S. Army for military rations during World War I.

In 1916, the company began national advertising and had made its first acquisition—a Canadian cheese company.

In 1924, the company changed its name to Kraft Cheese Company and listed on the Chicago Stock Exchange. In 1925, Marye Dahnke began her career at Kraft as the company home economist, the first woman for that sector of the food industry.

In 1926, Kraft was listed on the New York Stock Exchange. The listing strengthened the company’s national profile and provided additional capital for expanding its manufacturing and distribution network.

From the mid‑1920s through 1930, Kraft acquired a number of regional dairy and cheese firms as it expanded its national production network.

The table below summarizes the acquisitions documented in a judicial document, official corporate announcements,

and newspaper coverage.

Post-National Dairy acquisition of Kraft-Phenix

At the time of the acquisition in 1930, National Dairy had sales of $315m compared with $85m for Kraft Phenix. National Dairy management ran the combined business. Following the Kraft-Phenix acquisition, the firm continued to be called National Dairy until 1969, when it changed its name to Kraftco.

Historically, all of the firm's sales came from dairy products. Its product lines began to diversify away from dairy products to caramel candies, macaroni and cheese dinners and margarines. From the 1950s onward, the firm began to move away from low value added commodity dairy products, such as fluid milk. This trend would continue for the firm, through neglect and divestiture, until the primary remaining dairy product produced by the firm would be cheese. As a result, the modern history of the firm emphasizes the cheese history.

In 1933, the company began marketing by radio sponsorship. In 1935, the Sealtest brand of ice cream was launched as a unified national brand to replace the firm's numerous regional brands.

During World War II, the company sent four million pounds of cheese to Britain weekly.

Product development and advertising helped the company to grow during the postwar years, launching sliced processed cheese and Cheez Whiz, a brand of process cheese sauce, in the 1950s.

During these years, Thomas McInnerney, National Dairy's founder, and James L. Kraft, Kraft's founder, died, and at the end of the decade, the divisions became less autonomous and even diversified to the glass-packaging business with the acquisition of Metro Glass in 1956.

In 1947, the company tested the marketing power of the emerging medium of television by producing an hour-long drama/anthology series, Kraft Television Theatre. The product advertised on the program, MacLaren's Imperial Cheese, was selected because "... [it had] not only had no advertising appropriation whatsoever, but had not even been distributed for several years." As described by internal documents of J. Walter Thompson—the advertising firm which conceived of the marketing test—the result was "although there was no other advertising support for it whatsoever, still grocery stores could not keep up with the demand."

National Dairy becomes Kraft

In 1969, the firm changed its name from National Dairy to Kraftco Corporation. The reason for the name change was given at the time: "Expansion and innovation have taken us far afield from the regional milk and ice cream business we started with in 1923. Dollar sales of these original products have remained relatively static over the past ten years and, in 1969 accounted for approximately 25% of our sales."

At the same time, the firm transferred to Glenview, Illinois, in 1972. In 1976, its name changed to Kraft, Inc. to emphasize the trademark the company had been known for and as a result of the fact that dairy, other than cheese, was now only a minor part of the company's sales. Reorganization also occurred after the name change.

Dart merger

In 1980, Kraft merged with Dart Industries—makers of the Duracell brand of batteries, Tupperware brand of plastic containers, West Bend brand of home appliances, Wilsonart brand of plastics and Thatcher glass—to form Dart & Kraft.

During the 1980s, Dart & Kraft offered mixed results to its shareholders, as new acquisitions in the food business—such as Churny premium cheeses, Tombstone Pizza, Lender's Bagels, Frusen Gladje ice cream and Celestial Seasonings tea—slightly offset the lagging nonfood business, due to Tupperware's decrease in sales and KitchenAid's (acquired soon after the merger) slide in market share, leading Dart & Kraft to spin off its nonfood business (except Duracell batteries) into a new entity (Premark International, Inc.) while changing its name back to Kraft, Inc. Premark was bought by Illinois Tool Works in 1999. Kraft then acquired General Host's All American Gourmet Co. unit in 1987. In 1988, Kraft sold Duracell to private equity firm Kohlberg Kravis Roberts, who then put it into an initial public offering in 1989. Gillette bought Duracell in 1996, and itself was acquired by Procter and Gamble in 2005. Kraft sold the Celestial Seasonings tea to Vestar Capital Partners in 1988.

Philip Morris acquisition and merger with General Foods

At the end of 1988, Philip Morris Companies purchased Kraft for $12.9 billion. In 1989, Kraft merged with Philip Morris's General Foods unit—makers of Oscar Mayer meats, Maxwell House coffee, Jell-O gelatin, Budget Gourmet frozen dinners, Entenmann's baked goods, Kool-Aid, Crystal Light and Tang powdered beverage mixes, Post Cereals, Shake 'n Bake flavored coatings and numerous other packaged foods—as Kraft General Foods. Its aggressive product development was reversed after the merger, as it became slow in addressing issues on its product lines due to its size, and also company politics.

In 1990, the company acquired Jacobs Suchard (a European coffee and confectionery giant that owns Jacobs, Suchard, Sugus, Milka, Toblerone, Cote d'Or, Nabob, and other confectionary and coffee brands) and Freia Marabou (a Scandinavian confectionery maker that owns Freia, Daim bar, Marabou, Twist, and other confectionary brands) to expand overseas as its business was heavily dependent on the U.S. In 1993, it acquired RJR Nabisco's cold cereal business (mainly Shredded Wheat and Shreddies cereals), Terry's of York from United Biscuits, while selling its Breyers ice-cream division to Unilever and its Birds Eye unit to Dean Foods. In 1994, it sold its frozen dinners unit to H.J. Heinz and in 1995, it sold its foodservice unit. Also in 1994, it acquired an 82% stake in Romanian confectionary company Poiana-Produse Zaharoase SA.

In 1995, it changed its name to the present name, Kraft Foods. The same year, it sold its bakery division (except Lender's Bagels, which was sold in 1996 to Kellogg Company), its caramel & marshmallow divisions and its tablespreads division. Log Cabin syrup was sold in 1997.

On August 2, 1996, Kraft announced a deal with PepsiCo to market the Taco Bell brand of grocery products.

In 1998, Kraft announced a partnership with Starbucks to market and distribute the Starbucks brand of coffee beans in grocery stores.

By 2007, Philip Morris (now Altria Inc.) sold its stake in Kraft Foods and the companies separated.

Financial expansion

In 2000, Philip Morris (renamed Altria in 2003) acquired Nabisco Holdings for $18.9 billion and merged the company with Kraft Foods the same year. Also in 2000, the company acquired Balance Bar. In 2001, Philip Morris sold 280 million Kraft shares via the third-largest IPO of all time, retaining an 88.1% stake in the company. Also in 2001, Kraft acquired the Bulgarian and Romanian coffee businesses, as well as the Moroccan coffee business. On January 4, 2002, Kraft acquired Stollwerck's Eastern European confectionery businesses. In March 2004, Kraft acquired juice maker Veryfine.

In 2004, it sold its sugar confectionery division to Wrigley, while doing minor divestitures—including its hot cereals division (Cream of Wheat) to B&G Foods in 2007, its fruit snacks division to Kellogg's in 2005, its pet snacks division (Milk-Bone) to Del Monte Foods in 2006, juice drinks and Fruit2o to Sunny Delight Beverages in 2007, its yogurt division to CoolBrands International, its British desserts business to Premier Foods and some grocery brands in 2006.

In 2006, the company bought the Southern European business of United Biscuits, acquiring several local brands such as Galletas Fontanenda.

Investor Nelson Peltz bought a three-percent stake at Kraft Foods and discussed revitalizing the business with executives, with options such as buying Wendy's fast-food chain or selling off Post cereals and Maxwell House coffee.

On January 31, 2007, after months of speculation, the company announced that its 88.1% stake would be spun off to Altria shareholders at the end of March 2007, giving each approximately 0.7 shares of Kraft for each share of Altria they owned. Kraft became an independent publicly held company.

In July 2007, the company bought Groupe Danone's biscuit (cookie) and cereal division for $7.2 billion, including iconic French biscuit brand Lefèvre-Utile. While two years earlier fiery protests had arisen over plans for American PepsiCo's hostile takeover of the French company, Kraft's announcement was not met with the same protests, in part because Kraft agreed not to close French factories and keep the new merged divisions headquarters near Paris for at least three years.

Proposed split

After a period of poor share performance and investor criticism, Rosenfeld was forced to announce in 2011 the proposed split of the company into two new entities. Both were to be listed on the New York Stock Exchange, but the company has recently decided to move to NASDAQ, and the split companies will also trade on NASDAQ. The first entity would retain the Kraft foods names and brands, and focus on the North American foods business. The second, later proposed to be named Mondelēz International, would focus on the global snacks business, and would include the former Cadbury businesses, plus global brands including Dairylea. On April 2, 2012, Kraft Foods Inc. announced that it had filed a Form 10 Registration Statement to the SEC to split the company into two companies to serve the "North American grocery business". The split was structured so that the old Kraft Foods changed its name to Mondelez International and spun off Kraft Foods Group as a new publicly traded company.

Sponsorships and promotions

Kraft Foods Inc was an official partner and sponsor of Major League Soccer and sponsored the Kraft Nabisco Championship, one of the four "majors" on the LPGA tour. The company also sponsored the Kraft Fight Hunger Bowl, a post-season college football bowl game.

Kraft Hockeyville was a Canadian reality television series developed by CBC Sports in 2006 and sponsored by Kraft Foods, in which communities across Canada competed to demonstrate their commitment to the sport of ice hockey. The contest revolved around a central theme of community spirit in Canada. In 2007, the contest was relegated to a series of segments aired on Hockey Night in Canada.

Kraft released an iPad app called "Big Fork Little Fork" in 2011 which, in addition to games and other distractions, provided information regarding how to use Kraft foods in nutritious ways. The app cost $1.99; a version for home computers was also available on the iTunes app store.

Brands

Before the company was split, its core businesses were in beverage, cheese, dairy foods, snack foods, confectionery, and convenience foods.

Kraft's major brands (those that generated revenues exceeding $1 billion) were:

Cadbury

Jacobs

Kraft, including Kraft Dinner, Kraft Singles, Kraft Mayo

LU

Maxwell House

Milka

Nabisco

Oreo

Oscar Mayer

Philadelphia

Trident

Tang

Seventy additional brands have revenues greater than $100 million. In total, 40 brands are at least 100 years old.

Controversies

Trans-fat litigation

In 2003, a California lawyer made national headlines by suing Kraft for using trans fat in Oreo cookies. Kraft Foods announced a trans-fat free reformulation of Oreos shortly after the 2003 lawsuit was filed, and the lawsuit was dropped. Kraft denied that the change was made in response to the lawsuit, noting that the reformulation had been in planning long before the lawsuit.

In 2010, two California residents filed a class action lawsuit against Kraft Foods for claiming certain products are healthy when in fact they contain unhealthy trans fat. Kraft denied any wrongdoing, saying all packaging claims are true and legal. A United States district judge certified the class on June 6, 2012.

The lawsuit cites current scientific consensus on the dangerous health effects of trans fat, which causes coronary heart disease

and has been linked to type 2 diabetes and some forms of cancer. The American Heart Association concludes that there is "no safe level" of trans fat in the diet. On October 25, 2012, the final ruling ordered Kraft Foods Inc. to cease the use of certain phrases on packaging, for example that Honey Grahams "Support Kids' Growth and Development".

Political campaign

In 2012, Kraft contributed $1,950,500 to a $46 million political campaign known as "The Coalition Against The Costly Food Labeling Proposition, sponsored by Farmers and Food Producers" The organization was founded to oppose Proposition 37, a California citizen's initiative mandating the labeling of foods containing genetically modified ingredients. As a result, there were calls for a boycott of Kraft products.

Environmental record

For years Kraft purchased paper for its packaging from Asia Pulp & Paper, the third-largest paper producer in the world which was called a "forest criminal" for destroying "precious habitat" in Indonesia's rain forest. In 2011, when Kraft cancelled its contract with Asia Pulp & Paper, Greenpeace executive director Phil Radford commended the company for "taking rainforest conservation seriously".

In the news

Kraft began a major restructuring process in January 2004, following a year of declining sales (blamed largely on the rising health consciousness of Americans) and the sacking of co-CEO Betsy Holden. The company announced closures of 19 production facilities worldwide and the reduction of 5,500 jobs, as well as the sale of 10% of its branded products.

On January 19, 2010, Kraft sealed the deal to buy 100% of the share capital of Cadbury for over $19 billion.

On March 17, 2010, Kraft Foods said it was "truly sorry" over its closure of a Cadbury factory in Somerdale. Senior Kraft executive Marc Firestone made the public apology to MPs at a parliamentary select committee hearing.

In March 2011, in the US, Kraft Foods introduced MiO, a liquid flavoring product with zero calories and sugar-free geared to 18 to 39-year-old consumers. MiO has no artificial flavors but it does have artificial colors, artificial sweeteners and artificial preservatives, unlike some competing flavoring products, according to USA Today.

In August 2011, Kraft Foods announced plans to split into two publicly traded companies—a snack food company and a grocery company.

On September 10, 2010, a disgruntled employee angered over a recent suspension, Yvonne Hiller, opened fire inside the Philadelphia factory where she had worked for 15 years. Armed with a .357 gun, Yvonne shot 3 co-workers, killing 2 of them. Philadelphia Police responded within minutes of the 911 call. SWAT took Yvonne into custody at 8:30pm.

Recalls

In September 2000, up to $50 million worth of taco shells were recalled by Kraft from supermarkets and Taco Bell restaurants. The shells contained genetically modified corn, which was not approved for human consumption by the Food and Drug Administration; the recall was the first of a genetically modified food. The corn was supplied to a plant from which Kraft bought the shells.

In April 2009, Kraft Foods recalled products containing pistachios after the discovery of salmonella at one of its Illinois manufacturers. Kraft pinpointed as the source a California pistachio grower, which initially recalled over 2,000,000 pounds (910,000 kg) of nuts before broadening the recall to much of its 2008 crop. A Washington Post editorial credited the "aggressive food safety system at Kraft Foods" with effectively addressing the danger.

In September 2011, Kraft recalled over 130,000 cases of Velveeta Shells and Cheese microwaveable cups because of possible wire bristles in the cups.