All of America may have learned the jingle "America spells cheese K*R*A*F*T", but that doesn't mean Kraft is a good investment.  When the recession first began, investors were excited about buying companies that had well known brands – especially in food.  The idea was that everyone has to eat, so food companies won't get hammered like an industrial company (think Caterpillar or General Electric) when the economy shrinks.  Second, people will eat out less and in more so food might actually see an uptick in growth.  Third, people will want well known brands because it well help them feel good during the depressing downturn.  So, Kraft was to be a good, safe investment.  After all, even though it's only been spun out of cigarrette company Altria a few months, this thinking was powerful enough for the Dow editors to replace failed AIG with Kraft on the (in)famous Dow Jones Industrial Average.

Too bad things didn't work out that way (see chart here).  Although the stock held up through the summer near it's spin-out high at 35, Kraft's value fell out of the proverbial bed since then.  Down about 40%.  What's worse, as several companies have "bounced back" during the recent stock market rebound Kraft shares have gone nowhere.  And now Crain's Chicago Business reports "Analyst downgrades Kraft on volume risk."  This UBS analyst has noted that instead of going up, or sideways, sales (and volume) at Kraft have declined.  While he might have expected a potential 1% decline, instead he's seeing drops of more like 2.5%.  In light of this poor performance, he thinks the best Kraft can do for the next 12 months is a meager improvement – or more likely sideways performance.

Kraft has been in a growth stall for a long time.  Since well before spinning out of Altria.  The company stopped launching new products years ago.  Instead, it has been trying to increase sales with line extensions of its existing products – things like 100 calorie packs of Oreos.  There hasn't been a real new product at Kraft since DiGiorno pizza and Boboli crust some 10 years ago.  Simultaneously, the company sold some of its high growth businesses, like Altoids, in order to "focus on core brands".  All of which meant that while cash flow has been stable, there's been no growth.  Turns out folks may be eating at home more, but they aren't paying up for worn-out brands like Velveeta, instead turning to store brands and generics.  Shoppers are looking for new things to improve their meals during this recession – but Kraft simply doesn't have any.

Without innovation, Kraft has gone nowhere.  For a decade the company has merely Defended & Extended its 1940s business model.  It keeps trying to do more of the same, perhaps faster and better.  It couldn't do cheaper because of rising commodity prices last year, so it actually raised prices.  As a result, customers are quite happy to buy comparable, but cheaper, products setting Kraft up for price wars in almost all its product lines.  And there's nothing Kraft can point to as a new product which will actually grow the top line.  Just a hope in more advertising of its old products, doing more of the same.

When Kraft spun out the CEO was replaced in order for Kraft to revitalize its moribund organization.  Good move.  The previous CEO was so in love with D&E management that he bragged about his "strategy" of spending more on Velveeta and older brands – in other words he was wedded to the outdated Success Formula and had no plans to change it. 

So he was replaced by a competent executive named Irene Rosenfeld.  This was touted as a big move, by bringing in the Chairman of PepsiCo's Frito-Lay Division.  PepsiCo is noted for its fairly Disruptive environment, instituted during the reign of Chairman Andrall Pearson who aggressively moved people around (and out) in his effort to "muscle build" the organization.   But reality was that Dr. Rosenfeld had worked at Kraft for many years before going to PepsiCo, and was returning (according to her bio on the Kraft web site).  And her leadership has been, well, more of the same.  There have been no Disruptions at Kraft – no White Space – and no new products.  So the growth stall that began during the Altria ownership has continued unabated.

Despite Kraft's lack of performance – and you could say poor performance given that sales and volume are down, as well as profits since she took the top job – Dr. Rosenfeld's salary was increased at the end of March (according to Marketwatch.com "Compensation rose for Kraft Foods' CEO in 2008").  It seems the Board of Directors was concerned that the stock options she was awarded in early February had fallen in value (because the share price dropped dramatically – hurting all investors) so they felt they had to raise her base pay.  Since the "at risk" pay didn't pan out, well they felt compelled to make her compensation less risky.  Then they invented some excuses to make themselves feel better, like they want the CEO to be paid comparably with other CEOs. 

(I guess they don't care about the 20 other senior execs who have seen their base pay frozen.  Say, do you suppose I could appeal to my publisher that I want pay like other authors?  Like Barack Obama who got almost $3million in royalties last year?  Or do you suppose the publisher might tell me if I want that much money I should sell more books – looking at my results to determine how much I should get?  I rather like this "comparable pay" idea – sounds sort of like union language for CEO contracts.)

Kraft is going nowhere, and Dr. Rosenfeld is the wrong person in the Chairman/CEO job.  Kraft is stalled, and investors as well as employees are suffering.  Kraft desperately needs leaders that will Disrupt the organization, refocus it externally on market needs, become obsessive about improving versus competitors in base businesses while identifying fringe competitors changing the market landscape.  And above all introduce some White Space where Kraft can innovate new products and services that will get the company growing again!  Kraft has enormous resources, but the company is frittering them away Defending & Extending a 60+ year old Success Formula that has no growth left in it.  More than ever in Kraft's long history, the company needs to overcome it's Lock-in to innovate – and the Board needs to realize that requires a change in leadership.