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Comeback Road Hard for : Kraft Struggles to Rebuild the Old-Line Dairy

December 07, 1987|DENISE GELLENE | Times Staff Writer

Outside the Knudsen ice cream factory in a South Central Los Angeles industrial district, workers load freshly made Breyers ice cream into trucks, in subtle testimony to the changes under way in the Southern California dairy industry.

Fourteen months ago, dairy products giant Kraft Inc. acquired the venerable Knudsen name and the company's ice cream, sour cream, cottage cheese and yogurt operations in a bankruptcy sale. Now, the ice cream factory on West Slauson Avenue serves as headquarters to Kraft's Knudsen division and launch pad for Kraft's major push into the lucrative Southern California dairy food market.

Until its collapse, Knudsen had dominated the Southern California dairy market, taking a third of all dairy product sales. After the Los Angeles dairy failed, Knudsen's competitors rushed to capture pieces of its milk, ice cream, cottage cheese and yogurt businesses. Now, as firms such as Carnation Corp. and Jerseymaid aggressively act to build their share of Southern California dairy sales, Kraft struggles to rebuild a much smaller Knudsen.

The Vons Cos. acquisition of the Southern California operations of Safeway Stores last week might make Kraft's task even tougher. If the $408-million deal is approved by Vons shareholders, Vons will get not only 172 Safeway grocery stores, but Safeway's sour cream, ice cream, yogurt and milk processing operations.

With Safeway's dairy plants, Vons would be able to make all the sour cream it needs to supply its Southern California groceries. That would be a blow to Knudsen, since Vons is an important customer, accounting for about 15% of Southern California's sour cream sales, according to the grocery chain. Vons currently buys all of its sour cream from Knudsen, then resells it to consumers under the Jerseymaid label.

In Southern California, Kraft finds itself in the unusual position of underdog. As the nation's biggest manufacturer of processed cheese, Kraft enjoys an enviable position in most markets throughout the East and Midwest. From its headquarters in Glenview, Ill., the dairy giant also extends a firm hold on the nation's ice cream market with its Breyers brand, the nation's best-selling ice cream.

But Kraft has never had much luck in California, a marketplace long dominated by local brands. Breyers has just 5% of the ice cream market here, and Kraft is strong only in sliced cheeses, which make up a small portion of total cheese sales.

H. E. (Skip) Reinhart, a Kraft vice president who last year made his first trip to California to head the Knudsen division, says Knudsen is an important part of the company's strategy. "In this market, the Knudsen name means more than Kraft."

A decade ago, 68-year-old Knudsen was the leading California company in cultured dairy products, known to generations of Californians for its cottage cheese, sour cream and yogurt. In 1983, it was acquired by Winn Enterprises, a business trust controlled by three millionaire brothers from Orange County. In 1985, the brothers borrowed heavily to buy Foremost, another venerable California dairy brand, and merge it with Knudsen to form the largest dairy in the West.

But today, Knudsen is significantly smaller than the dairy giant with $1 billion in annual sales that spanned eight states and collapsed into bankruptcy under a mountain of debt in September, 1986. The old Foremost operations outside California have been sold to various buyers, while some Foremost plants in California remain idle. Under Kraft management, Knudsen's revenue is just $200 million, and it no longer sells its best-known product, milk. The company has not yet returned to profitability.

But Reinhart believes that the Knudsen name has remained untarnished in the public eye. Kraft's market research indicates that just two out of 10 Southern Californians are aware that Knudsen was in financial trouble, and even fewer people realize that Kraft acquired the company.

"As far as the consumer is concerned, Knudsen is the same as it always has been," he says.

The bankruptcy proceedings provided Kraft with several advantages. It was able to buy Knudsen cheaply, paying about $6 million less than the $74.8 million that Winn Enterprises paid. It renegotiated contracts with its labor unions, saving at least $1.2 million a year, according to Teamsters lawyer Kenneth Young. Kraft was also helped when Hughes Markets and Stater Bros. grocery chains agreed to buy Knudsen's low-profit milk business. Those supermarkets now jointly operate Knudsen's old Los Angeles dairy and sell Knudsen-brand milk under a royalty arrangement with Kraft.

But Kraft inherited problems that overshadow these advantages. When Knudsen sought bankruptcy protection in the fall of 1986, many important Knudsen customers, such as the Albertsons, Vons and Safeway supermarket chains, switched to other suppliers.

Feeling Pressure

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