Kraft General Foods Inc.

Kraft Court
Glenview, Illinois 60025
U.S.A.
(708) 998-2000

Wholly owned subsidiary of Philip Morris
Incorporated: 1989
Employees: 94,000
Sales: $23 billion

Kraft General Foods was formed in March, 1989, after Philip Morris’s acquisition of Kraft, Inc. in December the year before. The diversified tobacco giant’s first major push into the food industry came in 1985, when it acquired the General Foods Corporation. After the Kraft acquisition was completed, Philip Morris combined the two food companies to create one subsidiary called Kraft General Foods, divided into seven major groups: General Foods USA; Kraft USA; Kraft General Foods International; Kraft General Foods Canada; Oscar Mayer; Kraft General Foods Frozen Products; and Kraft General Foods Commercial Products. While the two companies now operate as one under a united name, each has a long and rich history.

GENERAL FOODS

General Foods is in many ways the prototypical American food processor. The company pioneered in the acquisition and assimilation of smaller food companies while building a huge multi-national, multi-product corporation. It has also historically applied leading-edge technology to its product development. For example, it snatched up Clarence Birdseye’s company just before he patented the process that made freezing fresh foods feasible. Tang instant breakfast drink, Pop-Rocks carbonated candy, and Cool Whip nondairy dessert topping all originated in the laboratories of General Foods. General Foods is also the largest coffee producer in the world. The company’s Maxwell House, Sanka, Brim, Yuban, and General Foods’ International Coffees brands make up about 25% of total sales. The company is the nation’s number-three manufacturer of breakfast cereals (Post), the leader in powdered drink mixes (Kool Aid, Country Time, Crystal Light, Tang), and the nation’s top producer of gelatin dessert products (Jell-O).

It is somewhat ironic that the nation’s largest coffee roaster was founded by Charles W. Post, a health fanatic who tried to seduce America’s coffee drinkers away from the caffeinated drink with a cereal beverage he called Postum. Post built the company that would become General Foods with a number of promising products and the marvel of modern marketing.

In 1891 Post checked into the Kellogg brothers’ renowned sanitarium in Battle Creek, Michigan in hopes of revitalizing his frail health. Post had been ill for several years and was so weak that he was confined to a wheelchair. While at the Kelloggs’ sanitarium, Post came up with several ideas which would prove very profitable.

Post later opened the La Vita Inn in Battle Creek, where he experimented with healing by mental suggestion and special diets. A few years later Post began marketing a cereal beverage like the one he had received as a coffee substitute at the Kelloggs’. He began marketing this blend of wheat, bran, and molasses called Postum cereal beverage in 1895. Post incorporated the Postum Cereal Co., Ltd. in 1896 with a paid-in capital of $100,000.

In 1897 Post introduced a new cereal called Grape-Nuts, made from whole wheat and malted barley flour. Grape-Nuts were baked for 20 hours, turning the starch into dextrose and creating a partially pre-digested cereal. In 1904 Post marketed a corn flake cereal under the name “Elijah’s Manna.” Not immediately successful, the new cereal was renamed “Post Toasties” and subsequently became a big hit with American consumers. Post continued to bring new products to the market, including Post’s Bran Flakes, Post’s Chocolate Bar, and Post’s Wheat Meal.

Within five years of its incorporation, Postum Cereal Company’s capital had risen to $5 million. The company’s Battle Creek facility was the largest of its kind in the world. Postum employed 2,500 people and its factories covered more than 20 acres. Charles W. Post had meanwhile amassed a considerable personal fortune and spent his money freely to propagate his own views. Post was an outspoken critic of closed shops and labor unions and spent thousands on advertisements attacking organized labor. This crusade against unions caused boycotts of Post products at times and incurred the personal enmity of union organizers throughout the nation. Carroll Post once told an interesting tale about his brother Charles in a letter. One day the two Post brothers sat at a lunchroom counter where two brands of corn flakes—Post Toasties and Krinkle—were for sale. While the two men were eating, a railroad worker came in and asked for corn flakes. When the waitress asked which brand he wanted, the man said, “give me Krinkle. That man Post is always fighting our union.” But the Posts had the last laugh: Krinkle was merely another name for Post Toasties, marketed as a reduced-price corn flake.

The Postum Cereal Company did not have trouble with labor in its own factories. It paid the highest wages in the industry, emphasized safe working conditions, and implemented accident and sickness benefit programs. The company also built about 100 homes for its workers which were sold on very favorable terms.

In May, 1914, Charles W. Post committed suicide at his winter home, in Santa Barbara, California. The day-to-day operations of the Postum Cereal Company had been run by a group of managers—C.W.’s “cabinet”—for several years. Upon his death, Post’s daughter, Marjorie Merriwether Post, took over the company and launched the expansion which would create the company now known as General Foods.

Marjorie Post was well acquainted with the business when she took it over. She had often accompanied her father on business trips and frequently sat in on meetings. In 1920 she married Edward F. Hutton, the investment broker. Two years later the Postum Cereal Company went public, and Marjorie Post stepped down from active management of the company, leaving her husband, who became chairman of the company in 1923, and Colby M. Chester, who became president in 1924, to run the company’s day-to-day operations. She remained a key policymaker, however, and was critical to the company’s acquisition strategy and transition into General Foods.

That transition began in 1925 with the acquisition of the Jell-O Company. Jell-O was the premier dessert brand in the days before frozen pies, cakes, and novelties entered the market. In 1926 the company absorbed Swan’s Down Cake Flour and Minute Tapioca. Franklin Baker’s Coconut, Walter Baker’s Chocolate, and Log Cabin Syrup were acquired in 1927. The company also shortened its name to Postum Company that year.

In 1928 Postum Company made a very significant acquisition: Maxwell House Coffee, whose roots date to 1885, when Joel Cheek perfected the coffee blend he served at the famous Maxwell House, in Nashville, Tennessee. President Theodore Roosevelt visited Maxwell House in 1907. When asked if he wanted a second cup of coffee, Roosevelt replied, “Yes, indeed, it’s good to the last drop,” giving rise to the company’s famous slogan.

In 1929 the company made another significant acquisition when it paid $22 million for a controlling interest of the General Foods Company, owned by Clarence Birdseye. Birdseye had developed the first successful technique for freezing vegetables and meat. An adventurer by nature, Birdseye had gotten the idea for his freezing technique while on an expedition to Labrador. Birdseye noted that the Eskimos routinely froze caribou and fish and that it retained its flavor even when stored for months before thawing. He hypothesized that the bitterly cold air had something to do with this, as previous attempts to produce palatable frozen food used much slower freezing. Birdseye returned in 1917 to begin research. Eventually, he perfected a process that could be used commercially, and in 1924 he founded the General Seafoods Corporation in Gloucester, Massachusetts.

Marjorie Merriwether Post had noticed Birdseye’s operations in 1926, but it took her three more years to convince Postum executives to acquire the company. The price doubled in that time, but Postum nevertheless happily acquired the company. The enlarged Postum Company also adopted the name General Foods in 1929, and Clarence Birdseye became head of the new General Foods laboratory, where he began work on a food dehydration process.

While the Great Depression affected all parts of the economy, food was a relatively stable industry. After record profits in 1929, General Foods’ energy in 1930 went to consolidating its recent acquisitions, and earnings that year dropped slightly. In 1932 the company acquired the remaining 49% of General Foods, which it expanded very quickly, adding six new plants that year to freeze nearly 100 different products. In 1932 General Foods also purchased the Sanka Coffee Corporation, makers of decaffeinated coffee. General Foods had been distributing Sanka since 1927 through an agreement with the company’s European owners.

Earnings, which in 1929 had reached $19.4 million, dropped to $10.3 million in 1932. But in 1933 they finally began to rise again as consumer purchasing power began to strengthen. In 1935, E. F. Hutton resigned as chairman of the company and C. M. Chester assumed the post, where he remained until 1946. Marjorie Post returned to the company as a director the next year, a position she retained until 1958.

During World War II, General Foods, like other food companies, achieved record sales, despite food shortages and other wartime exigencies; in 1943, sales of $260 million were more than double 1929’s $128 million. During the war, the company’s Denver plant produced 10-in-l rations for the U.S. Army, and General Foods began work on the development of an instant coffee for the army in 1941. In 1943, General Foods acquired the Gaines Dog Food Company, and the next year it added Yuban premium coffee to its already strong coffee line.

General Foods had acquired a soluble coffee with its acquisition of Sanka in 1932, but it delayed the introduction of instant coffee to consumers until it had a better product. Instant Maxwell House coffee was introduced in 1945 as one of the first new consumer foods to come out after the end of the war.

In May, 1953, General Foods acquired the Perkins Products Company of Chicago. Perkins manufactured a powdered beverage mix in a number of flavors to which the consumer added sugar and water for a fruit-flavored drink. Kool-Aid has been a favorite of kids across the nation ever since. Years later General Foods added a number of other products to its beverage division—Tang, Country Time Lemonade, and Sugar Free Crystal Light are all successful products in a market which did not even exist before the 1950s. In 1954 the company entered the salad dressing market with its purchase of the Hollywood manufacturer 4 Seasons, Inc., and in 1960 Open Pit barbecue sauce was acquired.

Large acquisitions of established companies continued as General Foods diversified outside the food industry. In 1957 the company bought the SOS Company, a leading scouring-pad manufacturer, although ten years later the Federal Trade Commission ruled that the acquisition violated antitrust laws, forcing General Foods to sell the company in 1968. That year General Foods entered the fast-food restaurant business with the purchase of the Burger Chef chain for more than $15 million. In December, 1969 General Foods purchased the Viviane Woodard Cosmetic Corporation, a door-to-door operation, for $39 million. And in 1970, Kohner Brothers, a toy company, and the W. Atlee Burpee Company, the nation’s largest seed company, were both acquired.

General Foods did not have as much luck with its nonfood subsidiaries as it did with food businesses, and most of them were eventually disposed of. Kohner Brothers was sold to Gabriel Industries after just five years; the Viviane Woodard cosmetics business was closed in 1976; Burpee was sold in 1979; and, after consistently losing money, the Burger Chef chain was sold in 1982.

In the late 1950s and early 1960s General Foods aggressively branched out into international markets. In 1956 the company acquired a controlling interest in the La India Company, Venezuela’s number-one chocolate company. In 1959 the company’s Canadian subsidiary purchased the Hostess snack-food company of Canada; in 1960 it purchased the Kibon ice cream company of Brazil and the French coffee-roaster Etablessements Pierre Lemonnier S.A.; in 1961 it bought Krema Hollywood Chewing Gum Company S. A. of Paris; and General Foods of Mexico S. A. was formed in 1962. Numerous other food processors throughout the world were purchased as well. At the end of the decade General Foods had major subsidiaries operating in Canada, the United Kingdom, Australia, France, Mexico, Brazil, Venezuela, Denmark, Sweden, Spain, the Netherlands, and Italy.

By the mid-1960s General Foods was an established giant in the industry. Chairman C. W. Cook, who took over in 1965, ran a company whose outstanding successes were based on new-product development, sweeping market research, and enormous advertising budgets.

During the 1970s international acquisitions continued at a furious pace, but domestic operations settled down a bit. Frozen foods became more popular as more double-income families had less time to spend on cooking and more money to spend for premium frozen products—the company’s Birds Eye frozen-food division also enjoyed a boost in earnings. But not all General Foods units benefited from such favorable demographic changes. Jell-O, for example, suffered as new products such as frozen novelty desserts came to the market. In 1979 the Jell-O unit made a major push to recapture the dessert market, employing an advertising campaign to reverse Jell-O’s steady decline and, in the early 1980s, introducing products like Jell-O Pudding Pops—frozen pudding on a stick—to capitalize on its well-known name and expand its share of the market.

Nonetheless, at the end of the 1970s General Foods was not performing up to expectations. The company was overly dependent on coffee for its revenues—its various coffee brands accounted for 39% of General Foods’ entire revenues in 1980.

In 1981 General Foods bought the Oscar Mayer company, the leading American hot dog maker, for $470 million, its largest acquisition to date. Oscar Mayer, founded in 1883 by a Bavarian immigrant of that name, was a family-held company until the purchase, and had a reputation for high-quality products. General Foods was trying to reduce its dependence on the cyclical coffee trade, but Wall Street critics charged that with the purchase of Oscar Mayer it was opening itself up to the wildly cyclical, low-margin packaged-meat business. Regardless, the merger did give General Foods access to an extensive refrigerated supply network. In addition, the acquisition gave General Foods a high profile in the refrigerated meat section at the supermarket: Oscar Mayer was the largest national brand of lunchmeats, and its Louis Rich turkey products unit was top in that growing segment of the market.

In 1984 the company agreed to sell its Gaines Pet Food division for $157 million. General Foods’ overall performance went down as coffee sales dipped, and the Post Cereals unit, too, began to slide.

In September, 1985 Philip Morris purchased General Foods for $5.6 billion. Philip Morris had long been known as an aggressive marketer. Its chairman, Hamish Maxwell, had plans for turning around the giant food processor and at the same time decreasing Philip Morris’s reliance on the shrinking tobacco market. In January, 1987, Philip Smith became CEO of General Foods. Smith began a massive reorganization of General Foods in 1987, splitting its three core product lines—coffees, meats, and assorted groceries—into separate units.

KRAFT

Kraft is one of the oldest and best-known food brands in the world. Many of Kraft USA’s products, such as Velveeta pasteurized process cheese spread, Parkay margarine, Miracle Whip salad dressing, and Philadelphia Brand cream cheese, have become integral parts of the American diet, and Kraft products are sold in 130 countries around the world. Such stability seems enviable, yet it has been a mixed blessing. Kraft has long sought a proper balance between the traditional products on which its reputation is based and the development of new endeavors aimed at sustained growth.

One of Kraft, Inc.’s primary predecessor companies was established by James L. Kraft, the son of a Canadian farmer. In 1903 Kraft started a wholesale cheese distribution business in Chicago. Kraft hoped to relieve grocers of the need to travel daily to the cheese market by delivering cheese to their doors. Business was dismal at first and Kraft lost $3,000 as well as his horse the first year.

But the business eventually took hold and James was joined by his four brothers Fred, Charles, Norman, and John. In 1909 the business was incorporated as J.L. Kraft & Bros. Company. New-product development and innovative advertising fueled the company’s growth. As early as 1911, Kraft was mailing circulars to retail grocers and advertising on elevated trains and billboards. Later, he was among the first to use color advertisements in national magazines. In 1912 Kraft opened a New York office to begin developing an international business. By 1914 the company sold 31 varieties of cheese throughout the country, and that year it opened its own cheese factory in Stocton, Illinois.

Before the advent of refrigeration, cheese was sold in large wheels, which spoiled quickly after they were cut open. Kraft developed a blended, pasteurized cheese that did not spoil and could be packaged in small tins. Kraft began producing what it called process cheese in 1915, and received a patent in 1916. Six million pounds of this cheese were sold to the U.S. Army during World War I.

In 1919 Kraft placed its first advertisements in national magazines. The next year, Kraft made its first acquisition, of a Canadian cheese company. In 1924, Kraft’s name was changed to Kraft Cheese Company and it offered its first shares to the public. That year Kraft also opened its first overseas sales office, in London, which led to the establishment of Kraft Cheese Company Ltd. there in 1927, the same year it moved into Germany by opening a sales office in Hamburg. In 1928, Kraft merged with Phenix Cheese Corporation, the maker of Philadelphia Brand cream cheese. The newly formed Kraft-Phenix Cheese Corporation had captured 40% of the nation’s cheese market by 1930 and had operations in Canada, Australia, Britain, and Germany.

The 1920s spawned another growing dairy concern, the National Dairy Products Corporation, whose fortunes were soon to be linked with Kraft-Phenix. National Dairy was the product of a 1923 merger between the Hydrox Corporation of Chicago, an ice cream company established in 1881 and purchased in 1914 by pharmacist Thomas Mclnnerney, and the Rieck-McJunkin Dairy Company of Pittsburgh. Throughout the remainder of the 1920s, National Dairy acquired other small dairying concerns in the East and Midwest, including the Breyer Ice Cream Company and Breakstone Bros., Inc., the sour cream and cottage cheese company. In 1929, National Dairy set out to acquire Kraft-Phenix; the merger was completed on May 12, 1930. The group of companies assembled by Mclnnerney prior to the Kraft-Phenix merger eventually formed the core of Kraft’s dairy group.

The merger did not radically affect the way the two companies operated. Mclnnerney’s strategy had always been to provide essentially autonomous subsidiaries with the resources needed for growth. Consequently, Kraft functioned independently from New York-based National Dairy, which acted primarily as a holding company.

After the merger, Kraft settled down to introduce many of the brands that now form the heart of its consumer product line; Velveeta pasteurized process cheese spread had been introduced in 1928; Miracle Whip salad dressing and Kraft caramels came in 1933, the famous macaroni and cheese dinner in 1937, and Parkay margarine in 1940. Again, innovative advertising, this time on radio, encouraged quick public acceptance of the new products. In 1933 the company sponsored the “Kraft Musical Review,” a two-hour musical variety show. Later the program was shortened to one hour and broadcast weekly as the “Kraft Music Hall,” hosted by Bing Crosby. Overseas operations, guided by a policy that mandated local control and products tailored to meet the needs and tastes of foreign consumers, expanded. Meanwhile, in 1935 National Dairy introduced Sealtest ice cream, named after a quality-control system for its dairy products.

Kraft was a major food supplier during World War II. By the end of 1941, four million pounds of cheese a week were being shipped to Britain. Many Kraft products, including field rations of cheese, were produced for the U.S. government. Kraft’s labs researched better methods of food production while home economists at Kraft Kitchens, a division established in the home economics department in 1924, developed recipes to make wartime shortages less painful.

In 1945 the Kraft Cheese Company became Kraft Foods Company. In the postwar years, Kraft resumed the formula of new-product development and advertising that had built the company. In 1947, Kraft created and sponsored the first network program on television, the “Kraft Television Theatre.” Along with the new advertising vehicle new products, like sliced process cheese in 1950 and Cheez Whiz pasteurized process cheese spread in 1952 were introduced.

In 1951 the postwar economic boom drove National Dairy’s sales over the $1 billion mark for the first time. Thomas Mclnnerney died in 1952 and J. L. Kraft died the following year. Kraft’s death marked the end of the Kraft family’s leadership of the business. The company began to reorganize along more centralized lines soon after its founders died. The autonomous subsidiaries became divisions of a single operating company in 1956 and 1957. Meanwhile, the company took its first cautious steps toward diversification with the acquisition of Metro Glass, a maker of glass packaging, in 1956.

During the late 1950s and the 1960s, Kraft continued to expand its product line, adding new products like jellies and preserves in 1956, marshmallows in 1959, barbecue sauce in 1960, and individually wrapped cheese slices in 1965. During the 1960s, Kraft also introduced many of its products in foreign markets.

In 1969 National Dairy renamed itself Kraftco and in 1972 it transferred its headquarters from New York to the Chicago suburb of Glenview. The company name was changed again in 1976 to Kraft Inc. to emphasize the company’s focus on food processing and to more clearly identify it with the internationally known Kraft trademark. Reorganization accompanied the name change. The movement toward a more centralized structure that had begun in the 1950s was accomplished by partitioning the company into divisions according to specific markets or products.

Kraft manifested a decidedly conservative business strategy during the 1970s. While other major food companies sought acquisitions to shore up sagging profits, Kraft did not. New-product introductions also slowed somewhat; after the introduction of Light n’ Lively yogurt and ice milk in 1969, squeezeable Parkay margarine came in 1973 and Breyers yogurt in 1977. The difficult business climate of the 1970s may have encouraged a defensive posture as inflation increased costs and cut into profits.

John M. Richman, who began at Kraft as a lawyer at the National Dairy Products Corporation, became Kraft’s chairman and CEO in 1979. Richman’s plan was to strengthen the company’s position in its traditional markets while diversifying into higher-growth industries. His first move in this direction was truly a bold stoke: a merger with Dart Industries, a Los Angeles-based conglomerate headed by the flamboyant Justin Dart.

Dart Industries was established in 1902 as the United Drug Company. Dart himself began his career in the retail-drug business and built Rexall Drugs into one of the largest chains of drugstores in the country. With Rexall as his base, Dart began an aggressive acquisition campaign, diversifying into chemicals, plastics, glass, cosmetics, electric appliances, and land development. In 1969, the company name was changed to Dart Industries to reflect this diversity. At the time of the merger, the flagship of Dart Industries was its hugely successful Tupperware subsidiary, which sold plastic food containers through direct sales by independent dealers using a “home party” plan.

The aggressive, innovative, and rapidly growing Dart Industries fit perfectly into Richman’s plan; it offered Kraft instant diversification. The merger also offered advantages for Dart and his company. Richman’s boldness appealed to Dart, who thought that Kraft would give Dart Industries some stability. Thus, Dart & Kraft was launched on September 25, 1980 with John Richman as its chairman and CEO and Justin Dart as chairman of the executive committee. Kraft and the subsidiaries of Dart—Tupperware, West Bend appliances, Duracell batteries, Wilsonart plastics, and Thatcher glass—continued to operate independently. However, some analysts doubted that such a diverse company would succeed.

As in many restructurings, there were some early rough spots, but major changes in operating procedure were confined to top managers, leaving middle managers in their familiar roles and easing their transition. Altogether, management apparently succeeded in uniting two very different firms with a minimum of friction.

Industry analysts, nonetheless, felt compelled to ask which partner would dominate the merger. Although Kraft was the larger of the two companies, the consensus favored the more aggressive and growth-oriented Dart. Dart was, after all, given preference in the new company’s name and it was Kraft’s desire to become more like Dart that initially led to the merger. On the first anniversary of the merger, Richman himself commented that “in terms of organization and outlook, we’re more a Dart than a Kraft.”

Indeed, Dart & Kraft’s initial activities bore out this assessment. Soon after the merger, the company bid $460 million for the Hobart Corporation, a manufacturer of food-service equipment; the deal was completed in April, 1981. And even while the Hobart deal was being negotiated, Dart & Kraft announced that it was considering further acquisitions.

Although several smaller acquisitions followed in the next two years, diversification slowed because several subsidiaries experienced managerial problems or proved vulnerable to the recession of the early 1980s. Poor performers included Kraft’s European operations and its food-service business, and Dart’s plastics unit and its West Bend appliances. Even Hobart was troubled by sagging profits and declining market share in its Kitchen Aid division, which produced top-of-the-line kitchen appliances. Company efforts to get these businesses back on track were beginning to show results when trouble struck Tupperware.

Tupperware had been a phenomenal success; it doubled sales and earnings every five years prior to 1980. But in 1983 sales slipped 7% and profits were down 15%. Tupperware’s slide was attributed to attrition among its dealers, as more women took jobs outside the home, leaving fewer to sell, and to buy, Tupperware.

In 1984 the company planned to increase returns from 13.3% to 18%, to place Dart & Kraft in the top fifth of the consumer-products industry. This ambitious goal was to be attained by adding new products, extending existing lines, and using aggressive marketing and advertising.

Michael A. Miles, the man who had revived Kentucky Fried Chicken, was brought into direct the new effort. Miles first cut costs by overhauling the European division. Many of Kraft’s brands competed in mature markets. Additions to these lines—for example, bacon and cream cheese-flavored salad dressings—boosted sales. The company also acquired promising new brands that appealed to the upscale consumer. Among these were the import-style cheeses of Churny Company, Inc., Celestial Seasonings herb teas, Lender’s bagels, and Frusen Gládjé premium ice cream.

Similar tactics were encouraged in Dart & Kraft’s non food businesses, but when by 1986 they continued to lag, the company decided, in effect, to dissolve the six-year-old merger. Hobart, Tupperware, Wilsonart, and West Bend were spun off into a new company called Premark International, Inc. Kraft retained all the product lines it brought with it into the 1980 merger, with the addition of Duracell batteries.

Kraft followed through on its plan to expand its product lines and market them aggressively, a strategy that won visible gains. The company’s management seemed to have rediscovered J. L. Kraft’s strategy, which combined the stability of well-known brand names with creative marketing and the continuous development of new products aimed at changing American tastes.

Philip Morris’s designs on the packaged-foods industry became clear when the company purchased Kraft in October, 1988. In March, 1989 Philip Morris merged the Kraft and General Foods units into one giant entity called Kraft General Foods. At the helm was Kraft’s Michael Miles.

There is little doubt that a corporation the size of Kraft General Foods will be able to make a profound impact on the packaged-foods industry. Whether the company will become the well-oiled machine parent Philip Morris hopes it will remains to be seen. Nonetheless, with Michael Miles’ experience in corporate turnarounds and the company’s strength in so many categories, it is a good bet that Kraft General Foods will succeed.

Principal Operating Units

General Foods USA; Kraft USA; Kraft General Foods International; Kraft General Foods Canada; Oscar Mayer Foods Corporation; Kraft General Foods Frozen Products; Kraft General Foods Commercial Products.