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Kraft Loses as Americans Avoid the Cookie Jar

The company reports its first quarterly decline in more than two years as consumers opt for more healthful snack foods.

October 20, 2003|From Reuters

It's enough to make the Cookie Monster cry.

Shouts of "Cookies! Cookies!" by the "Sesame Street" TV show character may be falling on deaf ears as concerns over bulging waistlines find more Americans changing lifelong habits and turning their backs on the cookie shelves.

Instead, some are heading for more healthful snacks, and that has caught Kraft Foods Inc., the largest U.S. cookie maker with an estimated market share of nearly 40%, off guard.

Last Wednesday, Kraft said softening sales of Oreos and other cookie brands in its Nabisco division were partly responsible for lower third-quarter earnings. It was the first quarterly earnings decline for Kraft since the company went public more than two years ago.

Kraft's co-chief executive, Betsy D. Holden, conceded that diet-conscious shoppers were seeking more alternatives in the so-called healthy bar category.

A growing awareness of the obesity crisis in the United States, where one of nearly every three Americans is considered overweight, was partly responsible, analysts said.

"We've identified cookies as an at-risk category," said Merrill Lynch analyst Leonard Teitelbaum. "I think there is definitely a migration from those products that are perceived as unhealthy to those products that are perceived as healthy."

Kraft increased its marketing budget this year to sweeten sales of cookies and other slow-growing businesses such as cheese, and executives said this week that it would maintain that effort at least through 2004.

The company gave its flagship Oreo cookie line a face-lift last year, introducing several new flavors and configurations. That and other new products boosted sales, raising the bar for this year's sales effort.

U.S. retail sales of cookies were estimated at $5 billion a year. Shipments showed a dramatic drop in the third quarter, down 5% in the 12 weeks ended Sept. 7, according to Information Resources Inc. The firm tracks spending in groceries, mass retailers and drugstores, excluding the world's largest retailer, Wal-Mart Stores Inc.

Analysts estimate that discounter Wal-Mart accounts for nearly 40% of all U.S. retail cookie sales.

Another problem for branded cookies is an economic recovery that has yet to create jobs. That has pushed consumers toward cheaper brands as they trim their budgets. To offset this trend, Kraft, based in Northfield, Ill., has lowered some prices.

Meanwhile, purchases of health-oriented bar snacks and granola bars have jumped, with shipments up nearly 15% in the 52 weeks ended Sept. 7, Information Resources said. The category, excluding Wal-Mart, amounts to about $1.8 billion in yearly retail sales.

In a recent report on obesity trends, Merrill's Teitelbaum identified Kraft and cereal maker Kellogg Co. as among the food makers most at risk with large portions of their sales tied up in categories that Americans may view as unhealthful.

"I think there's no question that all of this discussion on diet and obesity has moved some people toward healthier snacking," said Willard Bishop, a food industry consultant.

Merrill said about 72% of Kraft's revenue is derived from foods such as candy, salty snacks, refrigerated dough, cookies and crackers. The latter two accounted for nearly 23%.

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