Kraft Foods1

Dan Lutz

University of Massachusetts Amherst

Under the supervision of

Tom Juravich Conference Research Director

Kate Bronfenbrenner

Conference Coordinator

February 1, 2006

Prepared for the International Conference

Global Companies – Global Unions – Global Research – Global Campaigns

1 This report was funded by the universities supporting the Global Companies-Global Unions-Global Research-Global Campaigns conference and prepared in keeping with one of the primary goals of the conference– increasing our understanding of the changing nature of the structure and practices of multinational corporations in the global economy. It was prepared for educational purposes only and should not be copied, distributed, or disseminated beyond the participants of this conference. Neither Cornell nor any of the authors or other academic institutions involved in preparing this report intends to advocate or advance any particular action by any individual or organization as a result of the report.

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Table of Contents

1. Executive Summary .............................................................................................1 1.1 Description of Firm and Operations ..................................................................1 1.2 Profit Centers .....................................................................................................1 1.3 Growth Plan .......................................................................................................1 1.4 Key Decision Makers.........................................................................................2 1.5 Key Relationships ..............................................................................................2 1.6 Possibilities for Union Cross-Border Comprehensive Campaigns....................3 2. Introduction..........................................................................................................3 2.1 Basic Information...............................................................................................3 2.2 Company History ...............................................................................................4 3. Operations ............................................................................................................4 3.1 Business Segments.............................................................................................4 3.1.1 Products...........................................................................................................4 3.1.2 Organization of Production.............................................................................6 3.1.3 Facilities..........................................................................................................7 3.1.3.1 Unionization of Facilities.............................................................................8 3.2 Workforce ..........................................................................................................9 3.3 Suppliers ............................................................................................................9 3.4 Distribution ......................................................................................................10 3.5 Clients and Customers .....................................................................................10 3.6 Marketing.........................................................................................................11 4. The Industry and Competitors ...........................................................................11 4.1 Industry Overview ...........................................................................................11 4.2 Major Players and Competitors .......................................................................12 5. Financial Analysis..............................................................................................13 5.1 Balance Sheet and Income Statement ..............................................................13 5.2 Key Financial Ratios........................................................................................14 5.3 Competitors......................................................................................................15 5.4 Segment Analysis.............................................................................................15 5.5 Stock Analysis .................................................................................................16 6. Command and Control.......................................................................................16 6.1 Parent Company: The Altria Group.................................................................16 6.1.1 Operations .....................................................................................................17 6.1.2 Command and Control..................................................................................17 6.1.3 Business Strategy and Growth Plan..............................................................18 6.1.4 Outside Stakeholders ....................................................................................19 6.2 Management.....................................................................................................20 6.3 Board of Directors............................................................................................22 6.4 Stockholders.....................................................................................................25 6.5 Lenders.............................................................................................................26 6.6 Subsidiaries ......................................................................................................26 6.7 Business and Competitive Strategies ...............................................................27 7. Outside Stakeholders .........................................................................................29 7.1 Safety and Health.............................................................................................29

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7.2 Environmental..................................................................................................29 7.3 Regulation ........................................................................................................30 7.4 Community ......................................................................................................30 7.5 Politics..............................................................................................................31 8. Conclusion .........................................................................................................31 8.1 Profit Centers ...................................................................................................31 8.2 Growth Plan .....................................................................................................32 8.3 Key Decision Makers.......................................................................................33 8.4 Key Relationships ............................................................................................33 8.5 Possibilities for Union Cross-Border Comprehensive Campaigns..................34 Appendix A – Facility Locations...........................................................................35 Appendix B – Financial Analysis ..........................................................................41 Works Cited ...........................................................................................................53

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1. Executive Summary Kraft Foods is changing. Sometime in 2006, Altria will sell its daughter company. CEO Roger Deromedi is selling sections of the business, consolidating divisions, and slashing jobs. Altria and Deromedi aim to create a leaner, more independent food company. 1.1 Description of Firm and Operations A multinational company, Kraft manufactures foods in five major categories: Snacks, Beverages, Cheese and Dairy, Convenient Meals, and Grocery. Geographically Kraft has two divisions: Kraft Foods North America and Kraft Foods International. Most of Kraft’s sales come from the North American market. With 2004 revenues more than $32 billion and a global workforce of 98,000 employees, Kraft is the second-largest food company in the world. Altria owns 85% of Kraft stocks, and Altria CEO Louis Camilleri chairs Kraft’s Board of Directors. To shield Kraft from tobacco litigation, in 2006 Altria plans to spinoff Kraft. 1.2 Profit Centers The North American market is Kraft’s profit center. In 2004, the North American market brought in 63% of Kraft’s revenue. Moreover, that same year operations in North America accounted for more than four fifths of the company’s operating income.2 Strong sales and low costs in its Convenient Meals, Grocery, and Beverage sectors drive Kraft’s North American profits. Kraft faces stiff competition from store brands. Kraft’s products that are difficult to copy and different from basic commodities earn the highest revenues. Frozen pizza, for example, drives the high margins in Convenient Meals. Though just a basic commodity, Cheese, an essential part of Kraft’s profit center, brings in the largest portion of Kraft’s North American revenue.3

Bringing in one fifth of Kraft’s revenue, Europe is a weak profit center, accounting for only 14.2% of the company’s operating income, mostly from Snacks and Beverages.4 1.3 Growth Plan Kraft’s Sustainable Growth Plan aims to consolidate the company around a few core brands. Five key elements define the Plan:

• Focus on core brands and product lines, particularly Cheese, Beverages, and frozen pizza.

• Sell off brands and operations outside of the core. • Close plants and restructure production.

2 Kraft. Form 10-K. March 11, 2005. p. 2. 3 Kraft. Form 10-K. March 11, 2005. p.2. 4 Kraft. Form 10-K. March 11, 2005. p. 3.

• Develop new food technologies within their core product lines, such as DiGiorno frozen pizza and the Tassimo coffee system.

• Increase marketing and brand-building. In the past Kraft sought growth through the acquisition of other businesses and brands. Its strategy today is very different from the old merger strategy. Consolidation, not acquisition, is at the center of the company’s Sustainable Growth Plan. Over the next few years, Kraft will “shrink to grow.”5 The company will sell off more businesses and close more plants. Kraft will shift the savings into research and marketing. International Expansion: No Longer a Priority After its IPO, Kraft sought to expand aggressively into international markets. Today, overseas expansion does not immediately interest the company. Before looking for any major overseas acquisitions, Kraft will finish its consolidation in the United States. 1.4 Key Decision Makers Three primary actors define Kraft’s business strategy: Altria, CEO Roger Deromedi, and Kraft’s corporate bureaucracy. Altria holds overall control of the company, but in 2006 it will spinoff Kraft. This spinoff will reshuffle relationships among the current key decision makers. The spinoff will increase Deromedi’s control, the architect of the Sustainable Growth Plan. Nevertheless, with its strict lines of command, Kraft’s own corporate bureaucracy will resist Deromedi’s restructuring. Even if it retains a major portion of Kraft stock, Altria will abdicate control over the new company. Camilleri will probably leave the Chairmanship to either an outside, independent new Board member or to Deromedi himself. In addition, the spinoff will add a new decision maker: new potential shareholders. Deromedi will seek to please new shareholders, and they will hold significant power over him. Today, Kraft’s Board of Directors is relatively weak. Its members come largely from the Chicago business community or from inside Altria. Altria’s spinoff will shake up the board. New shareholders will demand a more independent board with more influential members. 1.5 Key Relationships As Altria’s daughter, Kraft is isolated. As a new, independent company, it will have to negotiate new relationships. First, Kraft must clarify its relationship with Altria. As much as possible, Kraft will seek to distance itself from the cigarette company. Kraft will also seek to please new shareholders. New shareholders will expect steady, sustainable growth, clear leadership from Deromedi, and independence from Altria and its liabilities. 5 Neff, Jeff. “Can Kraft Shrink to Grow?” Food Processing. May 2004. p. 37.

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1.6 Possibilities for Union Cross-Border Comprehensive Campaigns Kraft is a rich target for cross-border, comprehensive campaigns. Some of its most profitable sectors remain unorganized – especially in the profitable Convenient Meals and Beverage divisions. Kraft makes all of its frozen pizzas in just three plants in Wisconsin. Kraft is vulnerable. Kraft depends on the good name of its brands. Rising commodity prices and competition from store brands are already hurting Kraft. By identifying crossover brands, targeting regional markets and highly profitable brands, and following Kraft’s supply chains, unions can create powerful campaigns to organize Kraft workers and win good contracts. Kraft is especially vulnerable in two areas: Beverages and Frozen Pizza. The Beverage segment is highly profitable in both Europe and North America. Moreover, Kraft wants to release the new Tassimo hot beverage system without any major complications. While only dominant in the U.S., Frozen Pizza is also an important target for organizing. Two of Kraft’s frozen pizza brands, DiGiorno and Tombstone, dominate the grocery pizza market, yet all three of Kraft’s frozen pizza plants in the U.S. – all in Wisconsin – remain unorganized. 2. Introduction 2.1 Basic Information Kraft Foods is an international food manufacturer. Kraft’s corporate headquarters is located in the Chicago suburbs at Three Lakes Drive, Northfield, Illinois, 60093.6 Kraft’s main telephone number is 847 646-2000, and its fax number is 847 646-6005. Kraft maintains two websites: www.kraft.com contains corporate information, while www.kraftfoods.com provides product descriptions and recipes for Kraft’s brands.7

Kraft is publicly traded on the New York Stock Exchange. Kraft trades under the ticker symbol KFT.8 Kraft has been traded since the company’s initial public offering in 2001. Despite this public offering, Altria, formerly Philip Morris, still holds 85% of Kraft stock and controls 98% of shareholder votes.9 In 2006, Altria plans to spinoff Kraft, creating a fully-independent company.10 Kraft employs 98,000 employees in 68 countries. These employees manufacture food in five main categories: Dairy and Cheese, Snacks, Beverages, Grocery, and Convenient

6 Kraft. Form 10-K. March 11, 2005. 7 Mergent Online. “Kraft: Synopsis.” 8 Mergent Online. “Kraft: Synopsis.” 9 Kraft. DEF 14A. March 4, 2005. p. 1. 10 Jargon, Julie. “Altria May Spinoff Kraft in Early 2006.” Crain’s Chicago Business. July 13, 2005.

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Meals.11 In 2004, sales of these products in 155 countries earned Kraft revenues of more than $32 billion (see Appendix B: Income Statement). Sales of food in North America accounted for 68.6% of Kraft’s total revenue.12

2.2 Company History Over the last one hundred years, Kraft has grown from a small Chicago cheese firm to a multinational manufacturer of dozens of food brands. Today, Kraft Foods is much more than just cheese. Kraft is an empire of popular brands in dairy, biscuits, cereal, confectionery, coffee, and beverages. This growth quickened in the last two decades as several large food companies merged to form today’s Kraft Foods. In 1909, J.L. Kraft founded his cheese business in Chicago. Kraft pioneered the mass production of sterilized, packaged cheese. First, the company mastered the pasteurization of processed cheese. Later, the company developed cheese slices, Velveeta, and Cheez Whiz.13

But today cheese is only one part of Kraft. Several major mergers in the 1980s broadened Kraft’s brand base. First, in 1981, General Foods acquired Oscar Mayer. Then in Europe, Jacobs Kaffee merged with Suchard-Tobler in 1982. In 1985, two cigarette firms joined the merger wave: Philip Morris bought General Foods, and RJ Reynolds merged with Nabisco. Finally, in 1988, Philip Morris bought Kraft.14

These mergers continued in the next decade, producing Kraft Foods. First, in 1990 Kraft General Foods bought Jacobs Suchard.15 Then, at the end of the decade, Philip Morris acquired Nabisco from RJ Reynolds, integrating the company into the current Kraft Foods.16

3. Operations 3.1 Business Segments 3.1.1 Products Kraft manufactures and distributes branded food products around the world. Kraft divides its dozens of brands into five categories: Snacks, Beverages, Cheese and Dairy, Grocery, and Convenient Meals. Kraft plans to concentrate on these five categories and to sell brands outside of this core. In 2005, Kraft completed a sale of its confectionery business to Wrigley.17

11 Kraft. 10-K. March 11, 2005. pp. 2-3. 12 Kraft. 10-K. March 11, 2005. p. 3. 13 Kraft. “Kraft History. James Lewis Kraft.” www.kraft.com/100/founders/JLKraft.html. 14 Kraft. “Kraft History. 1980s.” www.kraft.com/100/timeline/time_1980s.html. 15 Kraft. “Kraft History. 1990s.” www.kraft.com/100/timeline/time_1990s.html. 16 Kraft. “Kraft History. 2000s.” www.kraft.com/100/timeline/time_2000s.html. 17 “Wrigley Completes Life Savers, Altoids Acquisition.” Associated Press. June 29, 2005.

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Each of Kraft’s product categories contains major North American and international brands:

• Snacks. Biscuits, crackers, cookies, and confectionery brands such as the Oreo and Milka brands

• Beverages. Coffee, juice, and powdered beverage brands such as the Maxwell House, Jacobs, and the new Tassimo hot beverage system

• Cheese and Dairy. Cheese brands such as Kraft Singles, Velveeta, and Philadelphia Cream Cheese

• Grocery. Cereal, salad dressings, and desserts brands such as Kraft salad dressings, Post cereals, and Miracle Whip

• Convenient Meals. Frozen pizzas, packaged dinners, and meat brands such as DiGiorno, Tombstone, and Oscar Mayer18

Kraft’s North American revenue breaks down as follows. Segment Revenue 2004 (in million $) Percent, KFNA

Revenue Percent, Worldwide

Revenue Beverages 2555 11.6 % 7.9 %Cheese and Dairy 7420 33.6 % 23.1 %Convenient Meals 4250 19.3 % 13.2 %Grocery 2425 11.0 % 7.5 %Snacks and Cereals 5410 24.5 % 16.8 %Kraft North America Revenues, 200419

In revenue, Cheese is the largest of Kraft’s North American products. While Cheese leads in revenue, its operating income has not grown significantly over the past three years. Store brands have competed easily with Kraft’s cheese brands, essentially a basic commodity. On the other hand, Convenient Meals and Grocery have expanded in operating income over the past three years.20 In these two segments, Kraft’s ability to innovate and create complex products gives it an advantage over store brands. With this advantage, the company has seen sustained operating income growth in these high-tech sectors. In particular, Kraft’s DiGiorno Pizza, with “rising crust technology,” leads the industry in sales, while Tombstone, another Kraft pizza brand incorporating the same technology, is second.21 Overseas, different segments predominate. In Europe, coffee and confectionery share a larger section of Kraft’s revenues. Beverages account for 44.8% of Kraft’s European revenue, while snacks bring in 32.1%.22

18 Kraft. Form 10-K. March 11, 2005. pp. 3-6. 19 Mergent Online. “Kraft: Company Financial Segments.” 2005. 20 Neff, Jack. “Ooey Gooey Mess.” Food Processing. September 2003. 21 Pehanich, Mike. “Pizza Breakthrough.” Food Processing. April 2002. 22 Kraft. Form 10-K. March 11, 2005. p. 3.

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Kraft is selling off non-core businesses to consolidate its priority segments. In 2004, the company sold much of its sugar confectionery business, including Life Savers and Altoids, to Wrigley for $1.46 billion.23 Industry analysts predict Kraft may intend to sell the Oscar Mayer brand of meats and Post cereals.24 Less so, Kraft is also making small purchases to fill out growth segments. In 2004 the company bought Veryfine Juice to supplement its other beverage holdings.25

Fewer Brands, But Better Kraft products are brands, food commodities sold under a brand-name, often at a higher price than similar commodities. Traditionally, Kraft has led the industry in the annual release of new branded products. In the past, Kraft measured its success in the number of new brands released.26 In recent years, Kraft has shifted its branding strategy from brand expansion to brand consolidation. As part of the company’s Sustainable Growth Plan, Kraft announced it would focus on Cheese, Biscuits, Frozen Pizza, and Beverages in 2005.27 This new strategy fits the advice of Eric Lazar at Lehman Brothers, who argues that Kraft needs to focus on increasing the success-rate of new products.28 The release of the new Tassimo hot beverage system in Western Europe is a model for Kraft’s new brand strategy: the new system is part of a priority segment, beverages; Tassimo’s complexity reduces private label competition; and Tassimo’s flexibility opens room for the future release of other new products within the Tassimo brand.29 3.1.2 Organization of Production Kraft splits its production into two sections, Kraft Foods North America (KFNA) and Kraft Foods International (KFI). The company organizes these two sections quite differently. Each major food product has its own division within KFNA, while the company divides KFI by geography. These two sections are imbalanced. Compared to most of its competitors, Kraft brings in a much smaller portion of revenue from its international section than from its North American operation.30

Until the Initial Public Offering of Kraft in 2001, Philip Morris kept the North American and international businesses isolated as separate, independent units. Betsy Holden ran the North American operations, while Roger Deromedi oversaw the international unit.

23 “Wrigley Completes Life Savers, Altoids Acquisition.” Associated Press. June 29, 2005. 24 Jargon, Julie. “Kraft Meat Biz Looks Like a Sale Candidate.” Crain’s Chicago Business. March 7, 2005. p. 4; “Kraft’s Strategy Continues to Unfold.” Food Processing. April 2005. 25 “Acquisitions and Brand-Swapping Return.” Food Processing. May 2004. 26 Dornblaser, Lynn. “Top 20 Companies Synergistic Acquisitions Pay Off.” Prepared Foods. March 2003. p. 95. 27 “Kraft’s Strategy Continues to Unfold.” Food Processing. April 2005. 28 Neff, Jeff. “Can Kraft Shrink to Grow?” Food Processing. May 2004. p. 37. 29 Kraft. “Kraft Foods Debuts Tassimo Hot Beverage System in the US.” Business Wire. March 16, 2005. 30 Forster, Julie. “Can Kraft Be a Big Cheese Abroad?” Business Week. June 4, 2001. p. 54.

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Despite the formal merger of these two units into Kraft Foods, organizational differences and business cultures continue to divide these two sections of the business.31 Kraft Foods North America oversees Kraft’s operations in Canada and the U.S. Kraft divides this unit into five product segments:

• U.S. Beverages • U.S. Cheese, Canada and North America Food Service • U.S. Convenient Meals • U.S. Grocery • U.S. Snacks and Cereals

Kraft created this new segment organization after the sale of its confectionery business. Following the Sustainable Growth Plan, this new structure closely matches the priority segments. Until recently, Kraft managed its Canadian brands within the U.S. Cheese, Canada and North America Food Service division.32 Under the Sustainable Growth Plan, Kraft has separated these brands into the five major product categories.33

Kraft Foods International divides its operations geographically rather than by segment. KFI is split into two divisions:

• Europe, Middle East, and Africa • Latin America and Asia Pacific34

KFI is much smaller than KFNA. As you can see in the segment analysis chart in Appendix B, in 2004 Kraft Foods International produced less than a fifth of the company’s total operating income. Most other major food manufacturers bring in a sharply higher proportion of revenue and operating income from international sales. When Philip Morris announced the IPO, industry analysts criticized this imbalance, calling on Kraft to focus more on international expansion. Other companies like Unilever sell basic commodities in emerging markets. Kraft, on the other hand, mainly sells highly-processed products to high-income consumers.35 Since the IPO, Kraft has attempted to expand into emerging international markets such as Brazil, Venezuela, Mexico, and Russia. Nevertheless, this expansion has not significantly increased Kraft’s international revenue and operating income.36 3.1.3 Facilities

31 Edgecliffe-Johnson, Andrew. “Two Brains May Be Better Than One Big Cheese.” Financial Times. September 3, 2001. p. 9. 32 Kraft. Form 10-K. March 11, 2005. pp. 2-6. 33 Kraft. “Kraft Food Announces Additional Simplification Initiatives.” October 14, 2005. 34 Kraft. Form 10-K. March 11, 2005. pp. 5-6. 35 Forster, Julie. “Can Kraft Be a Big Cheese Abroad?” Business Week. June 4, 2001. p. 54. 36 “Kraft Reports Growth in Pizza, Breakfast Meats.” Feedstuffs. May 2, 2005. p. 6.

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Kraft operates more than 190 manufacturing facilities worldwide. With its primary market centered on the U.S., Kraft has located most of its facilities in North America: as you can see from the following chart, of all of Kraft’s facilities, 85 are in the U.S. and Canada.37

Area Number of Facilities Kraft Foods North America United States 65 Canada 20Kraft Foods International Western Europe 38 Eastern Europe, Middle East, Africa 20 Asia Pacific 17 South America 20 Central America and Caribbean 4 Mexico 4Kraft Manufacturing Facilities, by region38

In North America, most Kraft facilities largely produce for the domestic food market.39 Under KFI, on the other hand, Kraft manufacturing facilities often produce for a regional market, especially inside the European Union. Internationally, Kraft is expanding into emerging markets in Brazil, Venezuela, Mexico, Russia, and the Ukraine. New facilities in these countries primarily produce for the domestic market, with some production for neighboring countries. 40

As part of the company’s Sustainable Growth Plan, the company will close several plants and eliminate more than 6000 jobs. KFNA will cut 1300, and KFI will cut 4700. The company will close newly-acquired plants and move production into older Kraft plants. In the U.S., Kraft will close former Nabisco biscuit plants in Niles, Illinois, and Buena Vista, California.41 In Europe, Kraft will shutter factories in York, United Kingdom and Budapest, Hungary. In Herentals, Belgium, the company has eliminated three production lines without closing the plant.42 The sale of part of the company’s confectionery business in 2005 eliminated plants in Iowa, Tennessee, Romania, and the United Kingdom.43

3.1.3.1 Unionization of Facilities 37 Kraft. Form 10-K. March 11, 2005. p. 12. 38 Kraft. Form 10-K. p. 12; IUF. Kraft Domestic Production by Segment. 39 BCTGM. Kraft Facility Locations 2005. 40 “Kraft Foods Opens $5 Million Coffee Packaging Facility in Ukraine.” Datamonitor Newswire. July 12, 2005.; IUF. Kraft Facility Locations 2005. 41 Neff, Jeff. “Can Kraft Shrink to Grow?” Food Processing. May 2004. p. 37. 42 IUF. “ ‘Sustainable Growth’ Plan at Kraft Brings. 6000 Job Cuts Worldwide.” www.iuf.org. February 10, 2004. 43 Kraft. Form 10-K. p. 12.

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In the U.S., unions represent thirty percent of Kraft’s employees. Internationally, unions and works councils cover half of Kraft’s workforce. 44 Since 1996, the Kraft Foods Europeans Works Council has represented all of Kraft’s employees in the European Union.45

Several unions represent Kraft employees in the U.S.: the BCTGM, the IBT, UFCW, the RWDSU, and OPEIU. The BCTGM represents all of the company’s biscuit plants, as well as one cereal plant. The Teamsters, UFCW, and RWDSU represent workers in cereals, cheese, coffee, desserts, enhancers, and meat. OPEIU represents the Jell-O plant in Woburn, Massachusetts. In the U.S., three important categories are unorganized: all of the company’s juice and powdered beverage plants, its three frozen pizza plants, and all of its major distribution centers have no union representation.46 Kraft needs these sectors to grow. Kraft CEO Roger Deromedi specifically included Beverages and the Frozen Pizzas as priority segments in the Sustainable Growth Plan.47

Outside of North America, unions in Latin America, Eastern Europe, Australia, and Korea represent large sections of Kraft employees.48 3.2 Workforce Kraft employs 98,000 workers worldwide. More than 45,000 employees work in the U.S., while the remaining 53,000 work internationally.49 As part of its Sustainable Growth Plan, Kraft will close several factories to cut 6000 jobs. Existing plants and co-packers will increase production to make up for this lost capacity.50 Especially in segments targeted for reduction, such as biscuit manufacture, these closures will increase the workload for the remaining Kraft workers. Defined-benefit pension plans cover nearly all of Kraft’s U.S. employees; non-U.S. employees are covered by separate plans. The U.S. and Canadian retirement plans include health care coverage. In 2004, the company estimated that for three pension plans covering salaried U.S. employees, it had not set aside sufficient funds.51

3.3 Suppliers

44 Kraft. Form 10-K. pp. 8-9. 45 European Foundation for the Improvement of Living and Working Conditions. EWC Case Studies. Kraft Foods. Dublin: 2005. p.1 www.eurofound.eu.int/publications/files/EF057117EN.pdf. 46 BCTGM. Kraft Facility Locations 2005. IUF. Kraft Facility Locations 2005. 47 “Kraft’s Strategy Continues to Unfold.” Food Processing. April 2005. p. 9. 48 IUF. “Kraft Restructuring in Latin America.” www.iuf.org. November 29, 2001; National Union of Workers. Comprehensive Agreement. Kraft Foods Port Melbourne Plant and National Union of Workers. 2004. 49 Kraft. Form 10-K. March 11, 2005. pp. 8-9. 50 Neff, Jeff. “Can Kraft Shrink to Grow?” Food Processing. May 2004. p. 37. 51 Kraft. Form 10-K. March 11, 2005. pp. 74, 76.

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Kraft depends heavily on suppliers of agricultural commodities, plastic and pulp container materials, and fuel.52 Increases in basic food commodity costs and the spike in food costs hurt Kraft’s operating income. Kraft blamed higher commodity costs –especially for coffee, nuts, energy, packaging – for its decreased second-quarter earnings.53

Over the last several years, Kraft has paid high basic commodity costs for food products and for fuel. To cover increased costs, Kraft has raised food prices, limiting its revenue growth.54

While most of Kraft’s supplies come from large agricultural firms, Kraft sometimes must buy cheese from smaller producers. When it cannot purchase enough cheese from other suppliers, Kraft bids for cheese through auctions on the Chicago commodity market. Recently, the National Family Farm Coalition has alleged that Kraft, large dairy cooperatives, and large cheese producers are manipulating the cheese auction to lower commodity prices paid to family farmers.55 The new Tassimo hot beverage system requires a specialized machine in addition to Kraft’s T-Discs. Saeco International will manufacture the new machines while Braun will distribute them.56 3.4 Distribution A vast network of distribution centers and depots moves Kraft’s products to stores. In North America, Kraft operates 175 distribution centers and another 154 depots. KFI runs 25 distribution centers in nine different countries. As part of Kraft’s direct-to-store transportation plan, many of these depots move products directly from the manufacturing location to store customers.57

3.5 Clients and Customers Kraft sells the bulk of its products to supermarkets and other food retailers. Geographically, sales are very uneven. In the U.S., Kraft is the leading supplier of foods to supermarkets – nearly every supermarket aisle has at least one Kraft product. With a saturated market in the U.S., Kraft aims to increase customer “share of stomach.” Overseas, on the other hand, products from other multinational food companies overshadow Kraft; considering it a less-popular alternative to other multinational or local

52 Standard and Poor’s. Industry Surveys. Food and Non-Alcoholic Beverages. June 9, 2005. pp. 1-2. 53 “Kraft Cites Commodity Costs.” Feedstuffs. August 15, 2005. p. 7. 54 Carpenter, Dave. “Kraft Net Drops 28 Percent on Higher Costs.” Associated Press. January 26, 2005. 55 Grant, Jeremy. “‘Big Dairy’ Is Milking Cheese Prices, Say U.S. Small Farmers.” Financial Times. April 22, 2005. p. 20. 56 Kraft. “Kraft Foods Debuts Tassimo Hot Beverage System in the U.S.” Business Wire. March 16, 2005. 57 Kraft. Form 10-K. March 11, 2005. p. 12.

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brands, international retailers often neglect Kraft products.58 Wal-Mart is Kraft’s largest customer, accounting for 14% of the company’s revenue.59

3.6 Marketing Kraft must advertise to grow. To justify higher prices, Kraft must distinguish its brands from other commodities. After the IPO, Kraft has cut on advertising in order to increase its operating income.60 Reducing consumer demand for Kraft brands, this cut has hurt sales among key Kraft brands. Maxwell House for example, fell behind Procter and Gamble’s Folgers brand in 2004, as Kraft’s ad spending on the brand dropped from $57.5 million to just $31.3 million.61

As part of its new corporate strategy, Kraft is committed to spend more on advertising.62 In 2004, the company increased advertising spending by $460 million.63 To boost Maxwell House, the company will spend more than $60 million.64 Kraft uses the agency Ogilvy and Mather to handle many of its advertising projects.65

Kraft’s new marketing strategy includes a mix of traditional advertising and new, more innovative methods. Don Miceli, Kraft’s senior Vice-President of Global Marketing, plans to broaden “Kraft’s TV-heavy media buys into more integrated efforts.” Kraft used to spend 85% of its advertising budget on television; today, it spends 35% on other media.66 To launch the new Tassimo coffee system, before using traditional mass marketing methods, Kraft will first rely on “buzz marketing” techniques.67 For the South Beach Diet line, the company sponsored “showmercials” with product creator Dr. Arthur Agatston.68

4. The Industry and Competitors 4.1 Industry Overview

58 Forster, Julie. “Can Kraft Be a Big Cheese Abroad?” Business Week. June 4, 2001. p. 54. 59 Kraft. Form 10-K. March 11, 2005. p. 8. 60 Neff, Jack. “Ooey Gooey Mess.” Food Processing. September 2003. p. 46. 61 Thompson, Stephanie. “Kraft Wakes Up to the Need to Push Maxwell House.” Advertising Age. May 2, 2005. p. 9. 62 Kraft. Form 10-K. March 11, 2005. p. 23. 63 Kraft. Form 10-K. March 11, 2005. p. 23. 64 Thompson, Stephanie. “Kraft Wakes Up to the Need to Push Maxwell House.” Advertising Age. May 2, 2005. p. 9. 65 Thompson, Stephanie. “Kraft Wakes Up to the Need to Push Maxwell House.” Advertising Age. May 2, 2005. p. 9. 66 Thompson, Stephanie. “Don Miceli. Kraft Foods.” Advertising Age. September 12, 2005. p. 10. 67 Thompson, Stephanie. “Kraft’s Tassimo Coffee System Aims to Sell Its Beans, not the Machines.” Advertising Age. April 4, 2005. p. 6. 68 Thompson, Stephanie. “Don Miceli. Kraft Foods.” Advertising Age. September 12, 2005. p. 10.

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The food industry is fragmented. In the same food categories, a few extremely large food companies – such as Kraft – compete with smaller, regional food manufacturers. In addition to their own brands, often these regional manufacturers produce private-label brands for supermarket chains.69 This intense competition shapes several key trends in the food industry:

• The growth of private-label brands is hurting revenue growth among traditional popular brands. Increasingly, store customers are choosing cheaper store brands over more expensive traditional brands.70 To restore brand loyalty, companies such as Kraft are shifting more resources into marketing.71

• Major food companies are restructuring. No longer are big companies making major acquisitions. Instead, companies are building up their core operations. They are selling off businesses outside of their core, closing inefficient plants, and eliminating unprofitable brands.72

• Companies are exploring new food trends. With slow, single-digit growth in traditional food items, companies are experimenting with the sale of specialty foods, especially diet foods, organic items, and ethnic foods. The demand for specialty food brands – especially organics – often grows in the double-digits.73

• Wal-Mart increasingly influences food distribution. In 2004, Wal-Mart sold more than $117 billion in groceries, 15% of total U.S. grocery sales. With this major share of the market, Wal-Mart can increasingly dictate pricing and production standards to food manufacturers.74

4.2 Major Players and Competitors After Nestlé, Kraft is the second largest food manufacturer in the world. With the food industry so fragmented, Kraft competes both with smaller, regional firms as well as large multinational food corporations. Competition among these companies is often uneven. Usually, competition is most intense between Kraft and small private-label manufacturers.75 Reducing their direct competition, many multinationals focus more on sales outside of the U.S. than does Kraft.76 Major industry players include:

69 Joy, Richard. Standard and Poor’s Industry Survey. Food and Nonalcoholic Beverages. June 9, 2005. pp. 6-7. 70 Joy, Richard. Standard and Poor’s Industry Survey. Food and Nonalcoholic Beverages. June 9, 2005. p. 1. 71 Neff, Jeff. “Can Kraft Shrink to Grow?” Food Processing. May 2004. p. 37. 72 Joy, Richard. Standard and Poor’s Industry Survey. Food and Nonalcoholic Beverages. June 9, 2005. p. 3. 73 Thompson, Stephanie. “Kraft, Campbells Bank on Crop of Organic Efforts.” Advertising Age. April 25, 2005. p. 24; Joy, Richard. Standard and Poor’s Industry Survey. Food and Nonalcoholic Beverages. June 9, 2005. pp. 7-11. 74 Joy, Richard. Standard and Poor’s Industry Survey. Food and Nonalcoholic Beverages. June 9, 2005. p. 11. 75 Joy, Richard. Standard and Poor’s Industry Survey. Food and Nonalcoholic Beverages. June 9, 2005. p. 1. 76 Forster, Julie. “Can Kraft Be a Big Cheese Abroad?” Business Week. June 4, 2001. p. 54.

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• Nestlé, the world’s largest food manufacturer, brought in revenues of more than $76 billion in 2004, more than twice Kraft’s 2004 revenues. Nestlé’s Nescafe brand is the world’s leading coffee brand.77 Nestlé’s revenue structure is very different from Kraft’s: a third of the company’s revenue comes from Europe, a third from the Americas, and the remaining third from the rest of the world.78 This difference limits direct competition between the companies. But if Kraft shifts its focus away from North American markets, competition will surely increase.

• ConAgra, with revenue roughly half of Kraft’s, produces a variety of branded food items. Like Kraft, ConAgra focuses largely on the North American market.79 ConAgra’s Armour and Butterball meats directly compete with Kraft’s Oscar Mayer brands.80

• Groupe Danone produces foods in three of Kraft’s key areas: dairy, biscuits, and beverages.81 Danone is centered on the European market, where it brings in 68% of its revenues.82

5. Financial Analysis 5.1 Balance Sheet and Income Statement Kraft is a financially healthy but slow-growing company. Kraft has shaped its new strategy of consolidation and divestiture – the Sustainable Growth Plan – around this financial reality. Burdened with smaller debts and freed of older assets, a leaner company will cut down on operating expenses and boost Kraft’s operating income. To cut assets, Kraft and CEO Deromedi hope that long-term gains in efficiency will pay for short-term losses in operating income. Section 6.7 of this report describes Deromedi’s plan. This section is based upon the financial charts and figures in Appendix B. Balance sheet As the company has cut its debt, Kraft’s balance sheet has steadily improved for shareholders over the past three years. As the balance sheet in Appendix B shows, from 2002 to 2004, Kraft’s total current assets increased from more than $7.4 billion to $9.7 billion. Inside total assets, current and fixed assets have shifted differently. Over the last year, inventory and accounts receivable have each steadily held at around $3.5 billion, while Kraft’s other current assets have jumped from $232 million in 2002 to more than $1.7 billion.

77 Hoover’s. “Nestlé. Fact Sheet.” proquest.umi.com. 78 Hoover’s. “Nestlé. Products and Operations.” proquest.umi.com. 79 Hoover’s. “ConAgra. Products and Operations.” proquest.umi.com. 80 Hoover’s. “ConAgra. Fact Sheet.” proquest.umi.com. 81 Hoover’s. “Groupe Danone. Fact Sheet.” proquest.umi.com. 82 Hoover’s. “Groupe Danone. Products and Operations.” proquest.umi.com.

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Fixed assets have not increased steadily. Total fixed assets rose from $49.6 billion to $51.2 billion from 2002 to 2003; then dropped to $50.2 billion in 2004. Valued at more than $35.8 billion, intangibles covered the bulk of fixed assets in 2004. In the same year, buildings accounted for $3.5 billion of these assets; plant and equipment covered another $11.9 billion. From 2002 to 2004, driven largely by the increase in current assets, Kraft’s total assets increased from $57.1 billion to $59.9 billion. With assets increasing, Kraft has lowered its liability over the same period from $31.3 billion to $30.0 billion. Despite an increase in current liabilities from $7.2 billion to $9.0 billion from 2002 to 2004, in the same period non-current liabilities fell from $24.0 billion to just $20.9 billion. As the balance sheet indicates, with the help of the modest increase in Kraft’s fixed assets, this drop in liabilities lifted Kraft’s shareholder equity from $25.8 billion to $29.9 billion. Income Statement Despite steady growth in revenue, Kraft’s operating income and profit have wobbled over the past three years. The income statement in Appendix B shows that from 2003 to 2002 Kraft’s revenue increased modestly to $30.5 billion from $29.2 billion. In 2004, revenue shot up to $32.2 billion. Nevertheless, Kraft’s operating expenses grew more quickly, wiping out revenue gains. From 2002 to 2003, operating income grew insignificantly from $5.96 billion to $6.04 billion, and then this income dropped dramatically to $4.79 billion last year. Over these three years, this drop pushed down Kraft’s net profit from $3.39 billion to $2.67 billion. Kraft’s restructuring program accounts for much of this increased cost. Kraft must pay out severance benefits as well as cover the costs of shuttering several factories. Kraft hopes to absorb this loss now in order to gain significant costs savings in the next few years.83

5.2 Key Financial Ratios Kraft is stable but slow-growing. Deromedi’s Sustainable Growth Plan aims to improve growth in operating income while preserving the company’s stability. Listed in Appendix B, Kraft’s key financial ratios point out both the stability of this company and the immediate costs of this new plan. The current ratio highlights Kraft’s stability. From 2002 to 2004, it grew modestly from 1.04 to 1.07. Kraft now has more cash and other current assets to cover the immediate costs of plant closures and to increase advertising spending. 83 Neff, Jeff. “Can Kraft Shrink to Grow?” Food Processing. May 2004. p. 37.

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The increased cost of the Sustainable Growth Plan has temporarily hurt Kraft’s return on assets. With profits driven down by restructuring costs, from 2002 to 2004 this ratio declined from 5.94% to 4.45%. Kraft expects the eventual savings from restructuring to reverse this drop.84

On the other hand, as Kraft lowers its debt-load, Kraft’s debt to equity ratio highlights the company’s stability. Kraft is paying off debts and borrowing conservatively – but not too conservatively. Over the past three years, with many debts settled, debt to equity has dropped from 94.65% to 72.51%. As part of this more conservative borrowing, over the last three years Kraft’s interest coverage has risen from 6.98 to 7.08 times. Even while Kraft is accepting immediate losses as part of Sustainable Growth, the company has already significantly improved its financial stability. 5.3 Competitors As the comparison of competitors in Appendix B shows, Kraft’s performance closely matches other companies in the food industry. Among a group of competitors in 2004, only General Mills beat Kraft’s profit margin of 12.27 percent, while ConAgra and Archer-Daniels-Midland lagged far behind.85 General Mills and ConAgra beat Kraft’s return on assets by a percentage point, while at 4.43%, Cadbury closely matched Kraft’s 4.45%. Kraft’s current ratio of 1.07 was close to Cadbury (0.92) and General Mills (1.17), but Archer-Daniels-Midland and ConAgra each had significantly higher current ratios, at 1.53 and 1.71, respectively. While Kraft’s debt to equity ratio has shrunk recently, many of its competitors have seen this ratio grow much higher as their debt load increases. ConAgra (141.98%), General Mills (164.15%), and ConAgra (203.42%) each have gearing ratios much higher than Kraft’s. 5.4 Segment Analysis Kraft’s segments perform very differently. As the two segment pie charts in Appendix B show, segment revenue amounts do not correlate to operating income. Each segment has its own operating costs; these costs determine the segment’s operating income. As Kraft restructures, the company will build the sections of the company with the lowest costs. Looking at the segments shows Kraft’s focus on the North American market. Capturing 63% of the total, Kraft earns most of its revenue in the U.S. and Canada. Europe and the Middle East account for 22% of the total, while sales in the Asia Pacific and Latin America segment make up the rest. North America, though, brings in an even greater portion of operating income. North American segments bring in more than 81% of

84 Neff, Jeff. “Can Kraft Shrink to Grow?” Food Processing. May 2004. p. 37. 85 The peer group studied includes Kraft Foods, Groupe Danone, Cadbury Schweppes, General Mills, ConAgra, and Archer-Daniels-Midland.

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operating income, while Europe brings in only 14%. The operating income of the Latin American, Asian, and Pacific segment shrinks to just 5%. Within Kraft’s North American segments, revenue and operating income again diverge. Cheese is the biggest revenue source, bringing in 23% of all company revenue. But cheese only accounts for 21% of operating income. Other company segments in North America perform better. The Beverage segment brings in 8% of revenue but 10% of operating income. Even more cost-effective, Convenient Meals earns 13% of revenue but accounts for 16% of operating income. Most profitable, Grocery brings in 8% of revenue but 19% of operating income. Less profitable, Snacks and Cereals, on the other hand, bring in 17% of revenue but only 15% of operating income. With Kraft attempting to cut unprofitable brands, this poor performance supports rumors that Kraft will sell off Post cereals.86

5.5 Stock Analysis Exaggerated initial promises and climbing commodity prices have hurt Kraft’s share prices. With its IPO, Kraft promised investors double-digit growth. Instead, over the past four years Kraft has grown steadily but slowly. Analyst William Leach says Kraft is “too big to grow” that fast.87 Since the IPO, investors have slowly driven down the cost of Kraft stocks. As Appendix B shows, in 2002, stockholders paid nearly $39 for Kraft stocks. But years of slow growth dashed stockholders initial expectations. Moreover, with food commodity prices rising, Kraft stocks dropped to a low of $29.36 in September 2005.88

Despite this performance, Appendix B shows that most analysts recommend that stockholders hold onto their Kraft shares. Analyst Steven Mallas encourages investors to snap up Kraft shares while prices are low.89 Preparing for Kraft’s spinoff from Altria, analysts like Tim Ghriskey of Solaris Asset Management predict that Kraft stock will shoot up in price.90

6. Command and Control 6.1 Parent Company: The Altria Group Kraft’s parent company is the Altria Group. Altria’s corporate headquarters is located in Manhattan at 120 Park Avenue, New York, New York, 10017. Altria’s phone number is 917 663-5000. Altria maintains a website at www.altria.com. 86 “Kraft’s Strategy Continues to Unfold.” Food Processing. April 2005. p. 9. 87 Neff, Jack. “Ooey Gooey Mess.” Food Processing. September 2003. 88 Mallas, Steven. “Kraft Hits New Low.” The Motely Fool. September 23, 2005. www.fool.com/News/mft/2005/mft05092307.htm. 89 Mallas, Steven. “Kraft Hits New Low.” The Motely Fool. September 23, 2005. www.fool.com/News/mft/2005/mft05092307.htm. 90 Phan, Monty. “Altria Sees Its Breakup Soon.” Newsday. April 29, 2005. p. A59.

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Altria is publicly traded on the New York Stock Exchange. Altria trades under the ticket symbol MO.91

6.1.1 Operations Altria includes both Kraft Foods and Philip Morris cigarettes. Philip Morris manufactures and distributes the tobacco brands Marlboro, Virginia Slims, and Basic. Altria dwarfs Kraft. In 2004, Altria netted $89.6 billion, and the conglomerate’s net earnings totaled $9.4 billion.92

6.1.2 Command and Control CEO Louis Camilleri became CEO of Philip Morris in 2002.93 Altria’s Board of Directors chose Camilleri – “an unusual combination of diplomat, number-cruncher, and strategist” – as a competent leader to control the company despite increasing regulations and litigation.94 Camilleri succeeded the “blustery and beloved” Geoffrey Bible as CEO of the company.95 Despite his different style, Camilleri firmly controls Altria. “More diplomat than gunslinger,” he lacks the rough charisma of Bible, but he has developed an intense loyalty among Altria executives.96 Camilleri has worked for Altria since 1978. He led the expansion of Philip Morris brands into Eastern Europe after the fall of the Berlin Wall and oversaw the 1998 Federal tobacco settlement.97 Until the spinoff, Camilleri chairs the Kraft Board of Directors. Stockholders Institutional shareholders own a large share of Altria. Together, the top 25 institutional shareholders control 46.98% of Altria shares. The top ten shareholders control 31.99% of shares. However, no single institutional shareholder dominates. Ownership may be concentrated among a small group, but among this group, holdings do not vary dramatically in size.

91 Mergent Online. “Altria Group: Synopsis.” 92 Mergent Online. “Altria Group: Company Financials, Income Statement.” 93 Altria. “Our Management. Louis Camilleri.” www.altria.com/about_altria/biography/01_03_01_Camilleri.asp. 94 Buckely, Neil. “Food for Thought in Marlboro’s New Face.” Financial Times. January 31, 2003. p. 12. 95 Byrnes, Nanette, Julie Forster, and Christopher Condon. “A New Kind of Marlboro Man.” Business Week. April 29, 2002. p. 94. 96 Byrnes, Nanette, Julie Forster, and Christopher Condon. “A New Kind of Marlboro Man.” Business Week. April 29, 2002. p. 94. 97 Byrnes, Nanette, Julie Forster, and Christopher Condon. “A New Kind of Marlboro Man.” Business Week. April 29, 2002. p. 94; Buckely, Neil. “Food for Thought in Marlboro’s New Face.” Financial Times. January 31, 2003. p. 12.

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The largest shareholder, Capital Research and Management Company, owns 7.79% of shares. The next sixteen largest institutions, though, each own between one and four percent of shares.98 This ownership pattern suggests that while individual institutions hold little power over Altria, together the top institutional shareholders hold the deciding power over the company. Shareholder Shares Percent of ownership Capital Research and Mgmt Co. 161,153,900 7.79% State Street Corp. 82,018,768 3.97% Barclays Bank 75,547,255 3.65% Bank of America 61,023,804 2.95% FMR Corp. 59,824,329 2.89% Axa 52,866,896 2.56% Davis Selected Advisers 49,771,422 2.41% Vanguard Group 43,867,162 2.12% Fayez Sarofim 39,838,665 1.93% Wellington Mgmt Co. 35,487,168 1.72% Morgan Stanley 30,910,257 1.49% Mellon Financial 28,661,306 1.39% Putnam Investment 28,226,751 1.36% JP Morgan 26,472,356 1.28% Citigroup 24,202,527 1.17% Northern Trust 22,265,063 1.08% Deutsche Bank 22,113,320 1.07% TIAA-CREF 18,963,738 0.92% Barrow Hanley 18,655,903 0.90% Pacific Financial Research 18,097,306 0.87% Dreman Value Mgmt 17,283,287 0.84% NWQ Investement Mgmt 14,200,713 0.69% Brandes Investment 13,765,610 0.67% Bank of Ireland 13,423,978 0.65% Goldman Sachs 12,679,448 0.61% Altria Institutional Shareholders, Top 2599

6.1.3 Business Strategy and Growth Plan Threatened by massive lawsuits, Altria is seeking to reduce the danger of litigation. To preserve the food manufacturer’s profitability, Altria is preparing to spinoff Kraft. The 1998 multi-state Master Settlement Agreement is the centerpiece of Altria’s efforts to reduce the danger of litigation. The MSA settled lawsuits with 46 separate states. In exchange, Altria and the other tobacco companies promised to pay state governments

98 Mergent Online. “Altria Group: Institutional Ownership Summary.” 99 Mergent Online. “Altria Group: Institutional Ownership Summary.”

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more than $200 billion and to change tobacco marketing significantly.100 To reduce future liability and eliminate competition from low-cost brands, Altria supports increased regulation by the Food and Drug Administration. Camilleri summed up the company’s view of regulation: “Does society want a manufacturer that is seeking to respond to its expectations and produce and market that product responsibly, or does it want it to become the Wild West?”101

Nevertheless, Altria still faces more than a thousand individual lawsuits, including a federal lawsuit by the Department of Justice. In June 2005, the Department of Justice reduced its claim on Altria from $130 billion to just $10 billion, significantly reducing the danger of liability to the company.102 With litigation coming under control, analysts expect Altria to spinoff Kraft. Altria first announced its intention to spinoff the food manufacturer in November 2004.103 At the 2005 shareholders’ meeting in April, the company reiterated that this break-up is “imminent.”104 David Adelman of Morgan Stanley argues that with the reduction of the Department of Justice claim, Altria will not await a verdict before spinning off Kraft.105 Analysts at JP Morgan, on the other hand, expect Altria to wait for the settlement of three separate lawsuits before splitting the company. They expect Kraft will leave in early 2006.106

After the spinoff, analysts do not know how much stock Altria will continue to own. No matter how much ownership Altria retains, the split will free Kraft’s management to consolidate the company. Kraft has already taken over some corporate administrative functions from Altria. After the split, Deromedi expects “‘more freedom’” to pursue divestitures of marginal products and to focus on key brands.107 Moreover, analyst Tim Ghriskey of Solaris Asset Management estimates that Kraft stock is undervalued; he predicts a spinoff will increase the company’s equity value.108

6.1.4 Outside Stakeholders Three groups of outside stakeholders influence Altria’s corporate strategy:

100 Wilson, Joy Johnson. Summary of the Attorney Generals’ Master Tobacco Settlement Agreement. March 1999. academic.udayton.edu/health/syllabi/tobacco/summary.htm. 101 Buckely, Neil. “Food for Thought in Marlboro’s New Face. Interview Louis Camiller.” Financial Times. January 31, 2003. p. 12. 102 “Altria Rallies After DoJ Cuts Claim by $120 Billion.” MarketWatch. June 8, 2005. www.marketwatch.com;Byrnes, Nanette, Julie Forster, and Christopher Condon. “A New Kind of Marlboro Man.” Business Week. April 29, 2002. p. 94. 103 Daly, Brendon. “Kraft Ready for Spinoff.” Daily Deal. February 24, 2005. 104 Phan, Monty. “Altria Sees Its Breakup Soon.” Newsday. April 29, 2005. p. A59. 105 “Altria Rallies After DoJ Cuts Claim by $120 Billion.” MarketWatch. June 8, 2005. www.marketwatch.com. 106 Jargon, Julie. “Altria May Spinoff Kraft in Early 2006.” Crain’s Chicago Business. July 13, 2005. 107 Daly, Brendon. “Kraft Ready for Spinoff.” Daily Deal. February 24, 2005. 108 Phan, Monty. “Altria Sees Its Breakup Soon.” Newsday. April 29, 2005. p. A59.

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• The parties to the Master Settlement Agreement, especially state attorneys general organized through the National Association of Attorneys General. NAAG’s Tobacco Project monitors compliance with the MSA.109

• Consumer groups. From 1993 to 2003, Infact, now Corporate Accountability International, ran a boycott against Kraft to target Philip Morris. Even after the boycott’s end, CAI still organizes activists to oppose the tobacco industry. 110 Working with tobacco-opposition groups from the Global South, CAI is pushing the U.S. to ratify the Global Tobacco Treaty. At the 2005 Altria shareholders’ meeting, CAI activists protested Philip Morris’s rapid expansion into new markets.111

• Smokers and smoking victims. Altria fears litigation from smoking victims. To stifle these claims, Altria will continue to seek settlements and increased litigation.

6.2 Management Kraft’s management structure is highly bureaucratic. With strict product development policies and sharply-defined organizational boundaries, this bureaucracy has set Kraft’s corporate strategy and governed everyday operations for many years.112 With the IPO, Kraft’s CEO Roger Deromedi has sought to increase his own power and limit the power of the bureaucracy. Pushing his Sustainable Growth Plan, Deromedi will use this new power to consolidate the company. Roger Deromedi In December 2003, Roger Deromedi, 51, became Kraft Food’s sole CEO. Starting out at General Foods in 1977, Deromedi joined Kraft when Philip Morris merged the two companies in 1988.113 In 1999, before the company went public, Deromedi became Chief Executive Officer of Kraft Foods International.114 After Kraft’s IPO, Philip Morris appointed Deromedi as co-CEO of Kraft; the parent company appointed Betsy Holden, former head of Kraft Foods North America, as Deromedi’s co-chief.115

109 National Association of Attorneys General. “NAAG Projects: Tobacco.” www.naag.org/issues/issue-tobacco.php. 110 Corporate Accountability International. Impact of InFact’s Tobacco Industry Campaign and the Kraft Boycott, 1993-2003. June 2003. 111 Corporate Accountability International. “As Countries across Globe Ratify Tobacco Treaty, Big Tobacco is Forced to Change its Ways.” April 28, 2005. www.stopcorporateabuse.org/cms/page1253.cfm. 112 Thompson, Stephanie. “Kraft Simplification Strategy Anything But.” Advertising Age. February 28, 2005. p. 3. 113 Altria. “Our Management. Roger K. Deromedi.” www.altria.com/about_altria/biography/01_03_10_Deromedi.asp. 114 Kraft. Form DEF 14A. March 4, 2005. 115 Edgecliffe-Johnson, Andrew. “Two Brains May Be Better Than One Big Cheese.” Financial Times. September 3, 2001. p. 9.

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The co-CEO structure preserved Kraft’s bureaucracy. Before her new job, Holden was often successful: she launched DiGiorno frozen pizza and acquired of Nabisco. But as co-CEO, company insiders blamed Holden for lower cheese sales and a drop in profits.116 Altria demoted her in December 2003. In 2005, she resigned from the company.117

With Betsy Holden fired, Deromedi, now the sole CEO, is grasping for tighter control over Kraft’s sprawling operations. With the motto “work simply, act quickly,” Deromedi has encouraged Kraft’s departments to eliminate barriers to communication, to communicate more regularly, and to speed up the release of new brands. 118 Deromedi serves on the Boards of Gillette and the Grocery Manufacturers Association. His memberships include:

• Stanford Graduate School of Business Advisory Board • Field Museum of Natural History Board of Trustees • Chicago Commercial Club Civic Committee

Deromedi’s Allies: Challenging Kraft’s Bureaucracy Many analysts consider Kraft “unwieldy” and “bureaucratic.” 119 Departments communicate sporadically, and the company test-markets new products painstakingly slowly. For many years, KFI and KFNA acted as totally separate companies, and organizational barriers still divide them. According to Dave Nelson of Credit Suisse First Boston, “analysis culture at Kraft” paralyzes the company.120 To streamline the company, several Kraft managers serve Deromedi as key allies. To fill the new position of Vice President of Business Process Simplification, Deromedi has appointed David Brearton.121 Also serving as corporate controller, Brearton must carry out Deromedi’s “work simply, act quickly” mantra. Aiming to bring new products out more quickly, Brearton will especially seek to cut test-marketing of new advertising.122 Just as the old practices of the advertising department stand in the way of new products, so do the barriers between departments block the release of new, innovative products. To reduce these barriers, Deromedi has ordered technology chief Jean Spence to report directly to him. Formerly, Spence’s job, Executive Vice President of Global Technology

116 Jargon, Julie. “Brenda Came Back. Can Betsy Do It To?” Crain’s Chicago Business. July 4, 2005. p. 3. 117 “Kraft’s Holden Resigns from Marketing Post, Board.” Associated Press. June 24, 2005. 118 Thompson, Stephanie. “Kraft Simplification Strategy Anything But.” Advertising Age. February 28, 2005. p. 3. 119 Thompson, Stephanie. “Kraft Simplification Strategy Anything But.” Advertising Age. February 28, 2005. p. 3. 120 Thompson, Stephanie. “Kraft Simplification Strategy Anything But.” Advertising Age. February 28, 2005. p. 3. 121 Thompson, Stephanie. “Kraft Simplification Strategy Anything But.” Advertising Age. February 28, 2005. p. 3. 122 Thompson, Stephanie. “Kraft CEO Pledges a Faster Culture.” Crain’s Chicago Business. March 7, 2005. p. 19.

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and Quality, reported to a lower level of management.123 Without the speedy release of new products, Kraft cannot compete with private-label manufacturers. Other managers are also helping Deromedi change Kraft’s bureaucratic corporate culture. Don Miceli, Vice-President of Global Marketing, is changing how Kraft advertises. Miceli had limited spending on television advertising in favor of newer, more-targeted methods.124 Named Vice-President of Nutrition in August 2005, Richard Black will lead the reformulation of Kraft’s foods in order to avoid possible government obesity regulation.125

Lower down in the bureaucracy, Deromedi has eliminated management positions to streamline decision-making. In October 2005, he eliminated division heads with the consumer sectors. Now product leaders report directly to the head of their sector.126 These cuts eliminated 600 management jobs. In addition, the company will close its Tarrytown, New York, corporate offices in 2006.127

6.3 Board of Directors Kraft’s Board of Directors is not very independent. Despite the impending spinoff, Altria still holds significant influence over Kraft and its Board of Directors. Of the ten Board members, three are direct Altria appointees. Louis Camilleri, CEO of Altria, chairs the Kraft Board. Other Board members, such as Richard Lerner from the Scripps Research Institute, have strong connections to Altria. When Altria splits Kraft away, they will most likely remove some Board members and add others to increase Kraft’s independence. The most significant change expected is the replacement of Board Chair Louis Camilleri with Roger Deromedi. Now, Camilleri Chairs the Board even though Deromedi serves as CEO of Kraft. Camilleri joined the Kraft Board during the IPO, and when he became the CEO of Altria, he also became the chair of Kraft’s Board.128 Camilleri will most likely step down when Altria spinsoff Kraft. Deromedi is his most likely successor. The spinoff may also remove the two other Altria appointees. Dinyar Devitre joined the Kraft Board in 2002. Camilleri appointed Devitre to the Kraft Board at the same time as he promoted him to Chief Financial Officer of Altria.129 Born in India, Devitre started his career with Philip Morris in Bombay.130 Devitre is a director of the Lincoln Center, and

123 Grant, Jeremy. “Kraft Cooks Up Strategic Innovations. Microwaveable Pizzas Symbolize the Food Giant’s New Approach.” Financial Times. May 17, 2005; Kraft. “Management. Jean Spence.” www.kraft.com/profile/biosspence.html. 124 Thompson, Stephanie. “Don Miceli. Kraft Foods.” Advertising Age. September 12, 2005. p. 10. 125 “Kraft Foods Names Black to New Post as Vice President, Nutrition.” Nutrition Today. July-August, 2005. p. 150. 126 Kraft. “Kraft Food Announces Additional Simplification Initiatives.” October 14, 2005. 127 Schmeltzer, John. “Kraft Plans to Slice 600 Salaried Positions.” Chicago Tribune. October 15, 2005. 128 Kraft. DEF 14A. March 4, 2005. p. 9; see Section 6.1.1 for a biography of Camilleri. 129 Kraft. DEF 14A. March 4, 2005. p. 9. 130 Altria. “Our Management. Dinyar Devitre.” www.altria.com/about_altria/biography/01_03_04_Devitre.asp.

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he serves on the Asia Society Board with West Virginia Democratic Senator Jay Rockefeller.131 Devitre lives at 211 Central Park West, Apartment 10 G, in Manhattan, New York. His home telephone number is 212-579-4863.132

Charles R. Wall is Altria’s third appointee on the Kraft Board. Like Devitre, he also joined the Board in 2002. In addition to his board membership for the New York City Opera, Wall also serves on the Board of the Neurosciences Institute in La Jolla, California, a research institution closely connected to flawed tobacco science.133 The Director of the Neuroscience Institute, Gerald Edelman, consulted for Philip Morris from 1992 to 2002.134

New Board Member Richard A. Lerner is also connected to flawed tobacco science. Lerner is the President of the Scripps Research Institute, also in La Jolla, California. A private, non-profit biomedical research organization, Scripps researches the impact of nicotine and drug and alcohol abuse.135 Serving as a consultant for Philip Morris from 1992 to 2002, Lerner earned $700,000. Moreover, to fund his post-doctoral work in the 1970s, Lerner accepted funding from the tobacco industry’s Council for Tobacco Research.136 Lerner joined the Kraft Board in January 2005; he serves on the Audit and Nominating and Governance Committees. Lerner is also a director of the biotechnology firm Xencor and a member of the National Academy of Sciences.137

New Board Member Jan Bennink has years of experience in the food industry. As it builds a more independent Board, Kraft will seek out more Board members like Bennink – independent and experienced. Today, he is the CEO and Chairman of Royal Nummico NV, a Dutch company that specializes in infant nutrition. In 2002, he became CEO at Royal Nummico after a long career at Procter and Gamble. Bennink is also a director of Boots Group PLC in Britain. On the Kraft Board, he is a member of the Compensation and Nominating and Governance Committees.138 John C. Pope is also an experienced, independent Director. He chairs the Board of Waste Management, Inc. He also is a board member at CNF, Inc., Dollar Thrifty Automotive Group, Federal-Mogul Corp., and R.R. Donnelley and Sons. On the Kraft Board, Pope chairs the Audit Committee and also serves on the Compensation Committee.139

131 The Asia Society. “Officers.” asiasociety.erlbaum.net/about/officers.html. 132 North Point Alumni Association. “North Point Reunion in New York.” www.npalumni.org/reunion_ny100502.htm. 133 Kraft. DEF 14A. March 4, 2005. p. 11. 134 Lieberman, Bruce. “Leading SD Scientists Had Longtime Tobacco Ties.” San Diego Union-Tribune. June 25, 2004. www.signonsandiego.com/news/science/20040625-9999-1n25smoke.html. 135 Bardi, Jason Socrates. “The Down Side of Nicotine and Environmental Stimuli.” TSRI News and Views. July 18, 2005; Scripps Research Insitute. “Research and Faculty. The Pearson Center for Alcohol and Addiction Research.” www.scripps.edu/research/pearsonctr/. 136 Lieberman, Bruce. “Leading SD Scientists Had Longtime Tobacco Ties.” San Diego Union-Tribune. June 25, 2004. www.signonsandiego.com/news/science/20040625-9999-1n25smoke.html. 137 Kraft. DEF 14A. March 4, 2005. p. 10. 138 Kraft. DEF 14A. March 4, 2005. p. 9. 139 Kraft. DEF 14A. March 4, 2005. p. 10.

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Unlike Bennink and Pope, W. James Farrell comes from Chicago, Kraft’s home. The retired Chairman and CEO of Illinois Tool Works, Farrell is influential in the Chicago business community.140 He chairs the Board of the Federal Reserve Bank of Chicago, and he serves on numerous boards: Allstate Insurance, Sears, and United Airlines.141 Farrell is a member of the Nominating and Governance Committee of the Kraft Board.142

Mary Schapiro has significant experience in corporate governance. Bill Clinton appointed Schapiro acting Chair of the SEC in 1993 and Chairman of the Commodity Trading Futures Commission in 1994. Today, Schapiro is the Vice-Chairman of the private corporate governance monitor NASD.143 Deborah Wright joined the Kraft Board during the IPO in July 2001. She is the Chairman and CEO of Carver Bancorp, the nation’s largest publicly-traded African- and Caribbean-American operated bank. Wright is a member of the Harvard University Board of Overseers and she also serves on numerous boards in the New York community, including the Memorial Sloan-Kettering Cancer Center, the Partnership for New York City, and the Ministers and Missionaries Benefit Board of the American Baptist Church. On the Kraft Board, Wright is a member of the Audit and Compensation Committees.144

Board Member Vulnerabilities Kraft’s current Board is not especially vulnerable to a corporate campaign. The Board is small and narrow, with few important political figures or major economic players. However, as it prepares for the spinoff, Kraft will likely add higher-profile Board members to represent the company’s new independence. Nevertheless, even the current Board offers some opportunities for a corporate campaign. Altria’s three representatives represent the most obvious target. Louis Camilleri, Dinyar Devitre, and Charles Wall represent a company deeply distrusted by the American public and under the tight watch of government regulators. In addition, this report has uncovered the home phone number and address of Mr. Devitre. In addition, Charles Wall, along with fellow board member Richard Lerner, is connected to the bad science of the tobacco industry. Richard Lerner, head of the Scripps Research Institute, received $700,000 for consulting for Philip Morris in the 1990s. Gerald Edelman, director of the Neurosciences Institute – on whose Board sits Charles Wall –

140 Mergent Online. “Illinois Tool Works. Business Summary.”; “ITW Chief to Resign Next Month.” Crain’s Chicago Business. July 18, 2005. 141 Farrell also serves on the following Boards: Northwestern University, Trustee; Rush Presbyterian – St. Luke’s Medical Center, Trustee; The Chicago Club, President; Economic Club of Chicago, Chairman; The Business Council; Illinois Roundtable; Mid-America Committee; Museum of Science and Industry, Chair of Board of Trustees; Junior Achievement of Chicago, Chair of Board of Trustees; Lyric Opera of Chicago; United Way/Crusade of Mercy; Big Shoulders Fund; Chicago Public Library Foundation. 142 Kraft. DEF 14A. March 4, 2005. p. 10. 143 NASD, Inc. “NASD Leadership. Mary L. Schapiro.” www.nasd.com/web/idcplg?IdcService=SS_GET_PAGE&nodeId=1028. 144 Kraft. DEF 14A. March 4, 2005. p. 11.

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also received $700,000 as a Philip Morris consultant. Cancer researcher Michael Cummings commented on their association with faulty tobacco research: “‘Frankly, I find it hard to believe that any scientist in the 1990s that was taking money from the (Tobacco Research Council) didn’t know that they were being used and their institutions were being used.’” Dr. David Burns, professor at the University of California San Diego, also said, “‘Certainly (Lerner) was working for an organization that denied something that was an incontrovertible fact.’”145

Finally, a corporate campaign may aim to target two of the independent board members. Mary Schapiro has political connections inside the Democratic party, plus her current job monitors transparency and fairness in corporate governance. James Farrell has far-reaching connections in the Illinois business community. Farrell is a member of numerous Chicago civic and cultural institutions, all potential targets for a corporate campaign. 6.4 Stockholders Altria owns most of Kraft. In 2001, Altria released Kraft shares in an initial public offering. Since then, Altria has sold only 14.7% of Kraft shares, retaining ownership over 85.3% of shares. Through its sole ownership of all Class B shares, each carrying 10 votes, at shareholder meetings Altria controls 98.0% of all votes. Stock Type Votes Oustanding Shares Altria’s ownership Class A 1 526,621,988 276,536,915Class B 10 1,180,000,000 1,180,000,000Kraft Stock Ownership146

No Board Member or Executive owns a significant number of Kraft shares. Nonetheless, several insiders own enough stock that a shift in stock price would lose them a significant amount of money. Kraft Class A Stock Altria Stock Jan Bennick 0 0Louis Camilleri 18,000 2,919,024Roger Deromedi 720,610 482,591Dinyar Devitre 1,204 206,858W. James Farrell 10,158 0Marc Firestone 56,220 243,486Betsy Holden 497,579 362,431David Johnson 217,576 102,787Richard Lerner 0 0John Pope 11,703 0

145 Lieberman, Bruce. “Leading SD Scientists Had Longtime Tobacco Ties.” San Diego Union-Tribune. June 25, 2004. www.signonsandiego.com/news/science/20040625-9999-1n25smoke.html. 146 Kraft. DEF 14A. March 4, 2005. p. 1.

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Hugh Roberts 200,256 191,316Mary Schapiro 10,403 0Franz-Joseph Vogelsang 125,946 123,800Charles Wall 31,620 1,567,815Deborah Wright 10,637 0Board and Executive Stock Ownership147

Shareholder Activism Despite the control of Altria, shareholder activists are targeting Kraft’s use of genetically modified foods. At the 2004 and 2005 shareholders’ meetings, a small group of shareholders, largely Catholic religious orders, called on Kraft to monitor the effect of its use of genetically-engineered foods.148 Backed by U.S. PIRG and Friends of the Earth, these shareholders knew they could not win a resolution, but they chose to use the shareholders’ meetings to publicize their issue.149 Name Shares Owned Address Missionary Oblates of Mary Immaculate 6,800 391 Michigan Ave. NE

Washington, DC 20017 Society of the Holy Child of Jesus 85,000 460 Shadeland Ave.

Drexel Hill, PA 19026 Basilian Fathers of Toronto 5,400 15015 Piedmont

Detroit, MI 48223 Green Century Capital Management 90 29 Temple Pl, Suite 200

Boston, MA 02111 Sponsors of 2005 Shareholder Proposal on GMOs150

6.5 Lenders As of December 31, 2004, Kraft held $1.8 billion in short-term debt, mainly commercial paper, and $9.7 billion in long-term debt.151 JP Morgan Chase is the trustee for all of Kraft’s reported bond releases.152

6.6 Subsidiaries Having grown through a series of mergers, Kraft has maintained many of its acquisitions as wholly-owned subsidiaries. These subsidiaries do not act as independent companies,

147 Kraft. DEF 14A. March 4, 2005. p. 15. 148 Kraft. DEF 14A. March 4, 2005. p. 33. 149 US PIRG, Friends of the Earth, and Green Century Capital Management. “Investors, Consumers, Scientists, and Environmentalists Present New Information and Voice Concerns about Genetically Engineered Foods at Kraft Shareholder Meeting.” Common Dreams Progressive Newswire. April 27, 2004. www.commondreams.org/news2004/0427-02.htm. 150 Kraft. DEF 14A. March 4, 2005. p. 33. 151 Kraft. Form 10-K. March 11, 2005. pp. 62-63. 152 Mergent Online. “Kraft: Long Term Debt.”

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however. Instead, major acquisitions such as Nabisco in the U.S. and Jacobs in Europe operate within Kraft’s existing corporate segment structure.153 6.7 Business and Competitive Strategies The Failure of Old Strategies Kraft faces a tough business environment. Investors want big returns and, as it prepares for spinoff, Kraft must pay increasing attention to their demands. With its IPO, Kraft promised investors an increase of annual earnings close to 15%.154 Since 2001, Kraft has usually grown by only 2 to 3%. Neuberger Bergman analyst William Leach attributes this slower growth to the company’s size and the maturity of the industry. In his words, Kraft is “‘too big to grow.’”155

Especially around basic commodities such as cheese, private-label manufacturers compete effectively with Kraft..156 Moreover, Kraft’s older brands such as Maxwell House and Velveeta face serious competition from newer, more hip brands.157 High prices for food commodities and oil have cut into the company’s operating income.158 With its emphasis on the production of relatively high-cost food products, rather than basic commodities, Kraft cannot expand into developing markets as easily as competitors such as Unilever and Nestlé.159

Kraft’s old corporate strategies have left it unprepared for these challenges. Earlier Kraft strategies emphasized acquisitions and overseas expansion. In 2001, shortly after the IPO and the Nabisco acquisition, Deromedi and Holden announced their intention to acquire new brands in health foods, snacks, and beverages, especially in international markets.160 According to William Leach, in the same period Kraft cut marketing spending to boost its operating income.161 A New Strategy: The Sustainable Growth Plan Kraft’s new corporate strategy rejects Holden and Deromedi’s old strategy. The old strategy focused on expansion. The new strategy, the Sustainable Growth Plan, instead seeks to consolidate the company and its product lines. The strategy is broken down into five key areas:

153 Kraft. Form 10-K. March 11, 2005. pp. 4-6. 154 Neff, Jack. “Ooey Gooey Mess.” Food Processing. September 2003. 155 Neff, Jack. “Ooey Gooey Mess.” Food Processing. September 2003. 156 Jargon, Julie. “Kraft’s Cheese Whizzes Rethink a Core Product.” Crain’s Chicago Business. August 8, 2005. p. 1. 157 Thompson, Stephanie. “Kraft Wakes Up to the Need to Push Maxwell House.” Advertising Age. May 2, 2005. p. 9. 158 Carpenter, Dave. “Kraft Net Drops 28 Percent on Higher Costs.” Associated Press. January 26, 2005. 159 Forster, Julie. “Can Kraft Be a Big Cheese Abroad?” Business Week. June 4, 2001. p. 54. 160 Edgecliffe-Johnson, Andrew. “Kraft Looks for More Purchases.” Financial Times. September 3, 2001. p. 13. 161 Neff, Jack. “Ooey Gooey Mess.” Food Processing. September 2003.

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1. Focus on core brands and product lines. Instead of acquiring new brands and

product categories, Kraft will focus on consolidating its most important product segments. Rather than adding new product lines, Kraft will seek to introduce new products within its core brands. Kraft will focus on cheese, cookies and crackers, beverages, and specialized grocery products, especially frozen pizza.162 Together, cheese, biscuits, and coffee accounted for 46% of the company’s revenue in 2004.163 With their “rising-crust technology,” Kraft’s two main pizza brands, DiGiorno and Tombstone, dominate the market for frozen pizzas.164 In addition to these high-revenue categories, Kraft will also explore brands that offer high potential for rapid growth, such as its South Beach line of diet items and organic brands.165

2. Sell brands outside of the core. Kraft will seek to sell brands and product lines outside of the core categories. Over the last year, Kraft sold its U.S. confectionery business, including the Altoids and Life Savers brands, to Wrigley for $1.46 billion.166 After Deromedi announced the focus on core brands, analysts predicted that the company will seek to sell Oscar Mayer meats and Post cereals. Deromedi denied the rumor.167 With successful new products and improving sales, Kraft will probably not sell off Oscar Mayer any time soon.168

3. Close plants and restructure production. As part of the Sustainable Growth Plan, the company will eliminate 6000 jobs. Kraft estimates that it will cut 1300 jobs in North America and 4700 internationally. Kraft will cut Nabisco plants, such as the ones in Niles, Illinois, and Buena Vista, California, and move production into older Kraft plants.169 Kraft has also cut 600 U.S. management jobs.170

4. Create new product categories in the core areas. Kraft has always researched and introduced new food products.171 Now, faced with intense competition from private-label manufacturers, Kraft will create complicated products that are hard to copy. With these products, the company seeks to include many related products within a single brand. Two brands in particular highlight this approach: • The Tassimo beverage system. Already released in Europe, the Tassimo

beverage system makes single-cup, café-style coffees and hot beverages. The Tassimo machine uses special “T-discs” of coffees, teas, and condensed milks. Bar-codes on the T-discs instruct the machine to add the proper amount of

162 “Kraft’s Strategy Continues to Unfold.” Food Processing. April 2005. p. 9. 163 Kraft. Form 10-K. March 11, 2005. p. 4. 164 Pehanich, Mike. “Pizza Breakthroughs.” Food Processing. April 2002. p. 27. 165 “Atkins Out, South Beach In.” Prepared Foods. June 2005. p. 8; Thompson, Stephanie. “Kraft, Campbell Bank on Crop of Organic Efforts.” Advertising Age. April 25, 2005. p. 24. 166 “Wrigley Completes Life Savers, Altoids Acquisition.” Associated Press. June 29, 2005. 167 Jargon, Julie. “Kraft Meat Biz Looks Like a Sale Candidate.” Crain’s Chicago Business. March 7, 2005; “Kraft’s Strategy Continues to Unfold.” Food Processing. April 2005. p. 9. 168 “Kraft Cites Commodity Costs.” Feedstuffs. August 15, 2005. p. 7. 169 Neff, Jeff. “Can Kraft Shrink to Grow?” Food Processing. May 2004. p. 37. 170 Stein, Jason. “Kraft Cuts Oscar Mayer Jobs in Madison, WI.” Wisconsin State Journal. October 15, 2005. 171 Dornblaser, Lynn. “Top 20 Companies Synergistic Acquisitions Pay Off.” Prepared Foods. March 2003. p. 95.

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water at the correct temperature. Kraft has protected the Tassimo system with more than 20 patents.172

• DiGiorno and Tombstone frozen pizzas. Kraft’s “rising crust” food technology pushed DiGiorno and Tombstone to the top of the frozen pizza industry.173 With new microwaveable rising crust pizzas, Kraft will still dominate the frozen pizza sector.174

5. Increase spending on marketing and brand-building. In the past, Kraft skimped on advertising spending to boost operating income.175 These cuts especially hurt sales of older Kraft product lines such as Maxwell House and Velveeta.176 Kraft will shift the money saved by restructuring to marketing and promotions.177

The Sustainable Growth Plan will make Kraft a better-run company. Nevertheless, as Kraft consolidates around fewer brands, it becomes increasingly vulnerable to the failure of a single brand or product release.

7. Outside Stakeholders 7.1 Safety and Health Working at Kraft is dangerous. Work often involves hazardous chemicals and fast-moving machinery. Over the past five years, OSHA has investigated eleven industrial accidents at Kraft facilities. OSHA has found machinery defects and problems with energy sources.178 In 2001, a discharge of ammonia gas at the Oscar Mayer plant in Madison, Wisconsin, killed one worker and injured another; at the same plant, exposed machinery has severed one worker’s fingers and cut off another’s arm.179 Despite these problems, Kraft has improved its safety record in the last four years. According to company data, from 2001 to 2004 Kraft’s lost-time accident rate dropped by 30 percent. The total number of accidents dropped even further, by 37 percent.180

7.2 Environmental Most Kraft facilities operate relatively cleanly. According to Environmental Defense’s Scorecard, several Kraft facilities are among the top 10% of clean manufacturing 172 Kraft. “Kraft Foods Debuts Tassimo Hot Beverage System in the US.” Business Wire. March 16, 2005. 173 Pehanich, Mike. “Pizza Breakthroughs.” Food Processing. April 2002. p. 27. 174 Grant, Jeremy. “Kraft Cooks Up Strategic Innovations. Microwaveable Pizzas Symbolize the Food Giant’s New Approach.” Financial Times. May 17, 2005. 175 Neff, Jeff. “Can Kraft Shrink to Grow?” Food Processing. May 2004. p. 37. 176 Thompson, Stephanie. “Kraft Wakes Up to the Need to Push Maxwell House.” Advertising Age. May 2, 2005. p. 9. 177 Kraft. Form 10-K. March 11, 2005. p. 23; Neff, Jeff. “Can Kraft Shrink to Grow?” Food Processing. May 2004. p. 37. 178 OSHA. “Employment Search. Kraft.” www.osha.gov. 2000-2005. 179 Newman, Judy. “OSHA Continues Investigation into Accidents at Wisconsin Oscar Mayer Plant.” Wisconsin State Journal. December 27, 2001. 180 Kraft. “Responsibility. Safety and Health.” [www.kraft.com/responsibility/people_safety.aspx]

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facilities in the U.S. Despite a clean record overall, several Kraft facilities are major polluters. Five Kraft facilities fall under Scorecard’s bottom 70% of the dirtiest facilities in the U.S., and two more are in the bottom 80%.181 Ammonia is the chief environmental problem at each of these facilities. A suspected toxin, ammonia harms the skin and the neurological and reproductive systems.182

For its ingredients, Kraft uses many genetically-modified organisms. In 2000, Friends of the Earth discovered genetically-modified StarLink – not approved for human consumption – in Kraft tortillas.183 Kraft has refused to accept shareholder resolutions calling for increased reporting of the use of genetically-modified organisms. 7.3 Regulation The Food and Drug Administration regulates the food industry. The FDA inspects manufacturing facilities and tests food products to ensure products contain safe ingredients and are labeled correctly. If a company fails to abide by its regulations, the FDA can sanction the company.184

Kraft closely follows the FDA’s rule-making and public comment procedures. In 2002, Kraft petitioned the FDA to reduce the regulation and testing of new food technologies and ingredients. Kraft sees these regulations as “barriers” that hinder “significant improvement in food safety, quality and cost.”185 In 2002, the FDA cited Kraft for a serious violation of the Food and Drug Act. The FDA alleged that Kraft cheese plants in Illinois, Minnesota, and Missouri were adding unlisted food ingredients to processed cheese.186

Kraft’s management worries that the government will increase regulation of food manufacturers to stem the obesity epidemic. As business reporter Adrienne Carter warns, “Kraft ... and its competitors risk becoming this decade’s cigarette companies: vilified for pushing junk to children, restricted by often-conflicted regulators, challenged in court.” To avoid increased regulation, Kraft has started to reformulate many of its products. These new formulations reduce trans-fats and increase vitamins and nutrients. Nevertheless, these new formulations will probably not avert increased government oversight of fat content.187 7.4 Community

181 The five in the bottom 70% are in Philadelphia, Pennsylvania; Madison, Wisconsin; Fair Lawn, New Jersey; Atlanta, Georgia; and Buena Park, California. The two in the bottom 80% are in Chicago, Illinois, and Richmond, Virginia. 182 Environmental Defense. Scorecard. Toxic Release Inventory. www.scorecard.org. 183 Crenson, Matt. “How Corn Not Approved for the Human Consumption Reached the U.S. Food Supply.” Associated Press. December 1, 2000. 184 FDA. “The Food and Drug Administration. An Overview.” www.cfsan.fda.gov/fdaoview.html. 185 Spence, Jean. E. “Re: CFSAN 2002 Priorities.” September 14, 2001. pp. 1-2. 186 Connelly, Virginia R. “FDA Warning Letter.” December 18, 2002. pp. 1-2. 187 Carter, Adrienne. “Slimmer Kids, Fatter Profits? Charles Davis, a Kraft Food Maven, Is on a Health Kick. But Then, He Has No Choice.” Business Week. September 5, 2005. p. 70.

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In recent years, several farm activists, environmentalists, and anti-tobacco activists have raised objections to Kraft’s supplier policies, environmental practices, and its relation to Altria. Farmers. The National Family Farm Coalition works with farmers and rural communities to preserve family farms through sustainable agriculture.188 The NFFC has mobilized farmers to push for tighter regulation of food commodity auctions. Their campaign targets both the Dairy Farmers of America as well as Kraft.189 Anti-GMO Activists. Activists opposed to the use of genetically-modified organisms (GMOs) have targeted Kraft’s distribution of foods containing GMOs. Friends of the Earth and the U.S. Public Interest Research Group have targeted Kraft. They are allied with shareholders including Green Century Capital Management and several Catholic monastic orders. At the last two shareholders’ meetings, these groups proposed that Kraft disclose the use of GMOs in its food and examine the health effects of its genetically-modified food.190

Anti-Tobacco Activists. Anti-tobacco activists, especially around the group Corporate Accountability International (formerly Infact), have pressured Altria to stop marketing tobacco to children and to halt tobacco marketing overseas. Infact ran a boycott of Kraft to protest Altria’s connection from 1993 to 2003.191

7.5 Politics Today, Kraft handles most of its political work through Altria’s Political Action Committee. Kraft’s PAC spent just a little les than $3,000 in the 2004 election, while Altria’s PAC spent $1.7 million. More than two thirds of Altria’s money went to Republican candidates.192 Roger Deromedi made a small contribution of $832 to the Altria PAC.193 In 2004, Altria also spent more than $13 million in political lobbying.194 8. Conclusion 8.1 Profit Centers 188 National Family Farm Coalition. “NFFC Issues.” www.nffc.net/issues/index.html. 189 Grant, Jeremy. “‘Big Dairy’ Is Milking Cheese Prices, Say US Small Farmers.” Financial Times. April 22, 2005. p. 20. 190 U.S. PIRG, Friends of the Earth, and Green Century Capital Management. “Investors, Consumers, Scientists, and Environmentalists Present New Information and Voice Concerns about Genetically Engineered Foods at Kraft Shareholder Meeting.” Common Dreams Progressive Newswire. April 27, 2004. www.commondreams.org/news2004/0427-02.htm; Kraft. DEF 14A. March 4, 2005. p. 33. 191 Corporate Accountability International. Impact of InFact’s Tobacco Industry Campaign and the Kraft Boycott, 1993-2003. June 2003. 192 Center for Responsive Politics. “Political Action Committees. Kraft.” www.opensecrets.org; Center for Responsive Politics. “Political Action Committees. Altria.” www.opensecrets.org. 193 Center for Responsive Politics. “Individual Search. Roger Deromedi.” www.opensecrets.org. 194 Center for Public Integrity. “Lobbywatch. Altria Group.” www.publicintegrity.org/lobby/.

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North America is Kraft’s main market. Sales in North America not only provide most of Kraft’s revenue, but operations provide an overwhelming amount of Kraft’s operating income. In 2004, the North American market brought in 63% of Kraft’s revenue, and operations there provided four fifths of Kraft’s operating income. With high revenues and lower costs, brands within Convenient Meals, Grocery, and Beverage drove this high performance.195 Frozen pizza, for example, drives the high margins in Convenient Meals. Even though the Cheese division is relatively less profitable than the other segments, it continues to bring in the largest portion of the company’s U.S. revenue.196 Without this revenue, Kraft cannot expand and consolidate its operations. Europe brings in less revenue and even less operating income than North America, but the region is still an important market for Kraft. With expensive products, Kraft does not compete well in the Global South. Without a plan for international expansion, Kraft needs the European market – especially for beverages and snacks – to balance its dependence on the U.S.197 8.2 Growth Plan Traditionally, Kraft has aggressively bought out other companies. For now, though, Kraft has put aside these mergers. Instead, the company plans to grow by building on the core brands within its profit center. Consolidation is at the center of the company’s Sustainable Growth Plan. Kraft’s growth strategy contains five key elements:

• Focus on core brands and product lines. • Sell off brands and operations outside of the core. • Close plants and restructure production. • Develop new food technologies within their core product lines. • Increase attention to marketing and brand-building.

Kraft will “shrink to grow.”198 This consolidation started with the elimination of 6000 jobs, the closing of several plants, and the sale of Altoids and Lifesavers. These cuts are probably just the beginning. Over the next few years, Kraft will likely sell off more businesses and close more plants in order to shift more resources into research and development and marketing. With fewer plants and fewer workers, Kraft will force the remaining employees to work harder and longer. Despite these cuts, new products – such as the Tassimo coffee system and DiGiorno pizza with microwaveable crust – are still essential to Kraft’s growth strategy. With fewer brands and products, consumers must buy Kraft’s new products. A small change in consumer preferences can ruin the release of a new product. With fewer products, Kraft is now more vulnerable to the failure of any single item. 195 Kraft. Form 10-K. March 11, 2005. p. 2. 196 Kraft. Form 10-K. March 11, 2005. p.2. 197 Kraft. Form 10-K. March 11, 2005. p. 3. 198 Neff, Jeff. “Can Kraft Shrink to Grow?” Food Processing. May 2004. p. 37.

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The Sustainable Growth Plan has put international expansion on hold. With its IPO, Kraft aimed to expand aggressively into international markets. Today, the Plan does not mention international expansion. Kraft will seek modest expansion in emerging markets such as Brazil, Mexico, and Russia. But until it has completed its consolidation, Kraft will delay any major international acquisitions and product releases. 8.3 Key Decision Makers Today, three primary actors define the business strategy of Kraft: Kraft’s corporate bureaucracy, new CEO Roger Deromedi, and Altria. With sparse internal communication, Kraft’s individual departments make many of the day-to-day business decisions of the company. These corporate decision-makers oversee production and design new products. Their rigorous, painstakingly slow corporate style largely shapes Kraft’s corporate culture. The result is not a unified plan but an “ooey gooey mess.”199

Roger Deromedi will try to tame Kraft’s bureaucracy. He is encouraging departments to communicate more and to report directly to him. His Sustainable Growth Plan captures his leaner style. Altria still holds overall control over the company. But Altria often defers to Kraft’s departments. Altria itself is controlled by a few large institutional shareholders. The spinoff will re-shuffle the key players. Deromedi will play an even more independent role in the company. His greater independence will give him more opportunities to weaken Kraft’s internal bureaucracy and carry out his corporate strategy of consolidation. Even if Altria keeps a major portion of Kraft stock, it will seek a smaller role. Stockholders will demand independence for the new company. Altria will change the composition of the Board to make it more independent. Camilleri will probably step down as Chairman. Either Deromedi or an independent representative of stockholders will take this position. Who assumes control over the Board will largely determine Deromedi’s power within the company. 8.4 Key Relationships The spinoff will dramatically end Kraft’s isolation. Today, Kraft relies on Altria for political influence. Furthermore, Kraft’s current Board of Directors is heavily centered on Chicago, Illinois. As Kraft negotiates the spinoff, it will have to renegotiate many key relationships:

• Altria. To enhance its value to new stockholders, Kraft will distance itself from Altria, even if the parent company retains significant holdings in Kraft.

• New Shareholders. Kraft will work hard to please new shareholders. At the time of the IPO, Kraft promised quick and easy expansion; instead, it has grown slowly. New shareholders will expect the company to continue the consolidation begun under the Sustainable Growth Plan. Moreover, they will expect the

199 Neff, Jack. “Ooey Gooey Mess.” Food Processing. September 2003.

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company to operate with clear leadership. These expectations will strengthen Deromedi’s position and encourage the company to expand the Board beyond its narrow Chicago base.

• Suppliers. Higher commodity prices have hurt Kraft’s revenue and operating income in the last year. Some suppliers, such as dairy farmers, are now organizing to win even higher prices. Kraft will seek out new supplier relationships to counter rising prices.

• Regulators and Politicians. Kraft has an existing relationship with regulators, but Altria’s stewardship has shielded the company from developing other political relationships. As politicians start to target the “obesity epidemic,” Kraft will seek out new relationships with politicians.

8.5 Possibilities for Union Cross-Border Comprehensive Campaigns Kraft’s Sustainable Growth Plan will make the company more efficient. But, the company will also rely on fewer brands. It will also make the company more vulnerable to cross-border, comprehensive campaigns. As they seek to organize Kraft workers and fight for stronger contracts, unions and works councils will likely find more vulnerabilities in Kraft’s leaner structure. Kraft is especially vulnerable – and ripe for organizing – in its Beverage and Frozen Pizzas divisions. Looking for Crossovers. Kraft is consolidating only a few key product segments. Although these priority segments differ by region, there are crossovers. In particular, Kraft’s Beverage segment is important for its North American, European, and developing nation markets. All of the company’s U.S. juice and powdered beverage plants are unorganized. Targeting Regional Markets. Not all Kraft plants produce for only local markets. Plants in Europe, Asia, and Latin America often produce for regional markets. Cross-border campaigns can often seek alliances regionally among different Kraft facilities. Targeting Key Brands. Kraft is focused on releasing a few, big brands, such as the Tassimo coffee system and the new DiGiorno microwaveable frozen pizzas. Consumer indifference can cripple the release of any new product. This vulnerability presents cross-border campaigns with an opportunity to interfere with the release and initial marketing of these new brands. Even minor interference could cost Kraft significant new market share. Following the Supply Chains. Kraft usually manufactures food products in the country of sale. But despite its preference for local manufacture, Kraft must rely on a global supply chain to bring together the raw materials for its products. Interference with suppliers can interfere with Kraft operations worldwide.

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Appendix A – Facility Locations Kraft Foods North America United States200

Category Location Employees Union Product Beverage Fresno, CA n/a Non-union Capri-Sun, Kool-Aid Beverage Granite City, IL 300 Non-union Capri-Sun, Kool-Aid Beverage Littleton, MA n/a Non-union Veryfine Beverage Berlin, NH n/a Non-union Veryfine Beverage Winchester, VA 300 Non-union Capri-Sun, Kool-Aid Biscuit Atlanta, GA 370 BCTGM Saltines, Nilla Wafers,

Cheeze Nips, Ritz Biscuit Bronx, NY 161 BCTGM Stella D’Oro Biscuit Chicago, IL 1160 BCTGM Oreo, Grahams, Chips

Ahoy, Wheat Thins Biscuit Fairlawn, NJ 600 BCTGM Oreo, Ritz Biscuit Buffalo, NY 150 BCTGM Milkbone Biscuit Philadelphia, PA 550 BCTGM Oreo, Ritz Biscuit Portland, OR 250 BCTGM Oreo, Wheat Thins, Chips

Ahoy Biscuit Richmond, VA 520 BCTGM Oreo, Ritz, Wheat Thins,

Nilla Wafers, Chips Ahoy, Cheeze Nips

Cereal Battle Creek, MI 1500 RWDSU Banana Nut Crunch, Grape Nuts, Pebbles

Cereal Jonesboro, AR 70 Non-union Grape Nut Flakes, Cocoa Pebbles, Almond Crunch, Honey Nut Shredded Wheat

Cereal Modesto, CA 230 IBT Grape Nuts, Banana Nut Crunch

Cereal Naperville, IL 300 BCTGM Frosted Shredded Wheat Cheese Albany, MN 75 Non-union Cheese powder Cheese Beaver Dam, WI 250 Non-union Philadelphia Crème

Cheese Cheese Bentonville, AR 100 Non-union Processed cheese Cheese Campbell, NY 400 IBT Mozzarella, Ricotta, Dry

whey powder Cheese Lowville, NY 335 Non-union Cream Cheese Cheese Melrose, MN 300 Non-union Parmesan, Romano, Vat

Cheeses, Cream Cheese Cheese North Lawrence, 130 IBT Cottage Cheese

200 BCTGM. Kraft Facility Locations 2005.

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NY Cheese New Ulm, MN 600 Non-union Kraft Singles, Velveeta Cheese Rupert, ID n/a Non-union Low fat and fat free

cheeses Cheese Springfield, MO 1300 Non-union Processed cheese, cream

cheese, pizza sauce Cheese Tulare, CA n/a Non-union Grated cheese, Whey

powder, Parmesan, Whey cream

Cheese Visalia, CA 150 IBT Knudsen, Breakstone Cheese Walton, NY 200 IBT and UFCW Knudsen, Light n Lively Cheese Waupaca, WI n/a Non-union Athenos Feta and

Spreads, Hoffman’s Cheese Wausau, WI 285 Non-union Kraft Parmesan and

Romano Coffee Houston, TX 650 UFCW Maxwell House Coffee Jacksonville, FL 425 UFCW Maxwell House Coffee San Leandro, CA 400 IBT Maxwell House,

Starbucks, Nabob Convenient Meals Fullerton, CA 500 IBT Lunchables Desserts Avon, NY 350 IBT Lunchables and Cool

Whip Desserts Dover, DE 900 UFCW and IBT Jell-O, Kool-Aid, Stove-

Top, Shake n Bake Desserts Mason City, IA 200 Non-union Jell-O Desserts Rochelle, IL n/a Non-union Handi-Snacks, Pudding Desserts Woburn, MA 250 OPEIU Jell-O Distribution Columbus, OH 220 Non-union Distribution Ft Worth, TX 125 Non-union Distribution Bethlehem, PA 100 Non-union Distribution Bethlehem, PA 135 Non-union Distribution Norcross, GA n/a Non-union Distribution Ontario, CA n/a Non-union Distribution Ontario CA n/a Non-union Distribution Stockton, CA n/a Non-union Distribution Stockton, CA n/a Non-union Distribution Aurora, IL n/a Non-union Enhancers Champaign, IL n/a IBT Kraft Singles, Miracle

Whip, Taco Bell, Salad Dressings

Enhancers Lehigh Valley, PA

n/a Non-union Sauces, Salad dressings

Enhancers Garland, TX 500 Non-union Miracle Whip, Sauces, Margarine

Meat Columbia, MO 400 Non-union Oscar Mayer

36

Meat Coshocton, OH 500 UFCW Oscar Mayer, Hickory Country

Meat Davenport, IA 1500 UFCW Oscar Mayer, Louis Rich Meat Kirksville, MO 380 Non-union Oscar Mayer Meat Madison, WI 3000 UFCW and IBT Lunchables, Oscar Mayer Meat Newberry, SC 1100 Non-union Louis Rich Pasta Birmingham, AL 100 Non-union DiGiorno pasta Pickles Woodstock, IL 300 IBT Claussen Pizza Little Chute, WI 500 Non-union DiGiorno, Tombstone,

Jack’s Pizza Medford, WI n/a Non-union DiGiorno, Tombstone,

Jack’s Pizza Sussex, WI 400 Non-union DiGiorno, Tombstone,

Jack’s Kraft Foods International European Union

Category Location Employees Product Market Cheese Fallinbostel,

Germany 802 Ketchup, Miracle

Whip, Philadelphia Cream Cheese, Miracoli

Germany, Italy

Cheese Namur, Belgium 611 Lunchables, Handisnacks, Processed cheese

UK, Italy

Cheese Mahon, Spain 176 Caserio, Sante, Trachettes

Spain

Cheese Zamora, Spain 138 Grated and Parmesan cheeses

Spain

Coffee Bremen, Germany 840 Kroenung Germany, France, Greece, Lithuania

Coffee Banbury, UK 708 Desserts UK Coffee Liege, Belgium 99 Familial, Carte

Noir, Degustation France, Switzerland

Coffee Strasbourg and Le Havre, France

80 Decaffeinated Belgium, France

Coffee Gavle, Swedem 111 Gevalia Sweden, US Coffee Sevilla, Spain 53 Coffee Spain Coffee Andezeno, Italy 91 Caramba Germany,

Switzerland, Italy, France

Coffee Vienna, Austria 29 Kenco UK, Italy Coffee Laverune, France 118 Regal, Carte Noir,

JV Nectar France

37

Coffee Valasske Mezirici, Czech Republic

230 Coffee pods Czech Republic, Poland, Ukraine, Slovakia

Confectionery Halle/Herentals, Belgium

735 Tablets and Seasonals

Belgium, France, Spain, Sweden, Germany

Confectionery Strasbourg, France

452 Milka Germany, France

Confectionery Loerrach, Germany

696 Milka, Suchard Express

Germany, Austria, Switzerland

Confectionery Bern, Switzerland 290 Toblerone UK, Germany Confectionery Bludenz, Austria 397 Milka Austria, Germany,

France, Norway, Sweden, Denmark

Confectionery Oslo, Norway 334 Melkerull Norway, Sweden Confectionery Upplands Vasby,

Sweden 522 Pralines, Daim,

Kaba Germany, Norway, Sweden

Confectionery Athens, Greece 159 Tablets and Pralines Greece Confectionery Kaunas, Lithuania 344 SSN, Jazz, Bingo,

Fregata Lithuania, Russia

Confectionery Bratislava, Slovakia

960 Milka Czech Republic, Slovakia, Hungary, Poland, Germany

Confectionery Cieszyn, Poland 282 Coffee, Wafers Poland, Czech Republic

Confectionery Poznan, Poland 194 Milka Poland Convenient Meals Aprilia, Italy 147 Spunti, Tripe,

Pressatella Italy

Grocery Orbigo, Spain 227 Mayonnaise, Philadelphia Cream Cheese, Tang

Spain, Italy, UK, Belgium (mayo only)

Salted Snacks Angered, Sweden 119 Chips Sweden Salted Snacks Disena, Norway 125 Chips Norway

Eastern Europe, Middle East, and Africa (EEMA)

Category Location Employees Product Market Coffee Kostinbrod,

Bulgaria 60 Jacobs Bulgaria

Coffee St. Petersburg, Russia

129 Coffee Russia

Coffee Casablanca, Morocco

77 Coffee Morocco

Confectionery Brasov, Romania 471 Tablets and Pralines Romania Confectionery Johannesburg,

South Africa 483 Beverages and

Biscuits South Africa

38

Confectionery Svoge, Bulgaria 403 Pralines and Tablets Bulgaria, Poland, Russia

Confectionery Trostyanets, Ukraine

716 Korona Ukraine, Russia

Confectionery Cairo, Egypt Rasco Egypt Confectionery Pokrov, Russia 789 Stollwerk Russia Confectionery Dammam, Saudi

Arabia Oreo, Ritz Saudia Arabia

Salted Snacks Pendik, Turkey 297 Potato and corn chips Turkey Salted Snacks Vyshhorod, Ukraine 333 Lux Ukraine, Russia,

Bulgaria Asia and Pacific

Category Location Employees Product Market Beverages Tianmei, China 309 Tang China, Hong Kong Beverages Khon Kaen, Thailand 192 Tang Philippines, Thailand,

Vietnam Biscuit Cikarang, Indonesia 1040 Ritz, Oreo, Chips

Ahoy Indonesia, Malaysia, Singapore, Brunei

Biscuit Suzhou, China 1286 Ritz, Marubu, Oreo, Chips Ahoy

China, Hong Kong, Philippines

Biscuit Beijing, China 705 Ritz, Oreo, Trakinas China, Australia, Hong Kong

Biscuit Tainan, Taiwan 67 Lucky Egg Roll China, USA Biscuit Broadmeadows,

Australia 208 Crackers, Vegemite

In-a-Biskit Australia

Cheese and Grocery

Port Melbourne, Australia

277 Vegemite, Peanut butter, Salad dressings, Snacksabout

Australia

Cheese and Grocery

Strathmerton, Australia

371 Philadelphia Cream Cheese, Kraft Singles

Australia

Cheese and Grocery

Suttontown, Australia 79 Philadelphia Cream Cheese, Bulk Cheese

Australia, Japan

Cheese and Grocery

Otahuhu, New Zealand

12 Vegemite New Zealand

Cheese and Grocery

Sucat, Philippines 400 Processed Cheese Phillippines

Cheese and Grocery

Bandung, Indonesia 175 Processed Cheese Indonesia, Thailand

Coffee Guangtong, China 191 Maxwell House China, Australia, Hong Kong

Latin America

39

Category Location Employees Product Market Grocery Curitiba, Brazil 2396 Confectionery Brazil Grocery Curitiba, Brazil 498 Tang, Fresh Brazil Grocery Jundiai, Brazil 501 Tang, Q-Fresco,

Royal Puddings, Royal Baking Powder

Brazil

Grocery Villa Mercedes, Argentina

265 Tang, Gelatin, Dry Mixes

Argentina

Grocery Aracati, Brazil 31 Cashew and Passion Fruit juices

All to Araguari plant

Grocery Araguari, Brazil 186 Fruit juice Brazil Grocery Cali, Colombia 419 Tang, Kool-Aid,

Royal Pudding Colombia, Venezuela, Peru, Ecuador

Grocery Valencia, Venezuela 293 Cheese Colombia and Brazil Grocery Pedreira, Brazil 87 Gelatin All to Jundiai plant Grocery Ambato, Ecuador 90 Gelatin All to Cali and San

Jose Gallito plants Grocery Curitiba, Brazil 20 Philadelphia Cream

Cheese Brazil

Grocery Medellin, Colombia 285 Housewares Colombia Grocery Encatepec, Mexico n/a201 Grocery Mexico Grocery Fenix, Mexico n/a Grocery Mexico Grocery Monterrey, Mexico n/a Grocery Mexico Grocery Victoria, Mexico n/a Grocery Mexico Snacks Pacheco, Argentina 2299 Club Social, Oreo Argentina, Uruguay Snacks Piracicaba, Brazil 1342 Oreo, Chips Ahoy,

Club Social Brazil

Snacks Lima, Peru 535 Club Social, Oreo Peru Snacks Barquisimeto,

Venezuela 1074 Club Social, Oreo Venezuela

Snacks Kingston, Jamaica 154 Club Social, Oreo Jamaica Snacks Managua, Nicaragua 276 Club Social, Oreo Nicaragua Snacks San Jose, Costa Rica 214 Tang, Royal Gelatin Costa Rica Snacks San Jose Gallito,

Costa Rica 279 Milka Costa Rica

201 Total employment in the four Mexican facilities is 2651.

40

Appendix B. Financial Analysis Kraft Foods Balance Sheet (mil $)

ASSETS Total Current Assets 9,722 8,124 7,456 7,006 7,152 Net Stated Inventory 3,447 3,343 3,382 3,026 3,041 Raw Materials 1367 1375 1372 1,281 1,175 Work in Progress n.a. n.a. n.a. n.a. n.a. Finished Goods 2,080 1,968 2,010 1745 1866 Inventory Prepayments n.a. n.a. n.a. n.a. n.a. Net Accounts Receivable 3,541 3,369 3,116 3,131 3,231 Accounts Receivable 3,659 3483 3235 3282 3383 Doubtful Accounts -118 -114 -119 -151 -152 Others 2,734 1,412 958 849 880 Other Current Assets 1,703 217 232 221 185 Prepaid Expenses & Advances 749 681 511 466 504 Deferred Charges n.a. n.a. n.a. n.a. n.a. Total Cash & Short Term Investment 282 514 215 162 191 Cash or Equivalent 282 514 215 162 191 Short Term Investment n.a. n.a. n.a. n.a. n.a. Fixed Assets 50,206 51,161 49,644 48,792 44,919 Net Properly, Plant & Equipment 9,985 10,155 9,559 9,109 9,405 Land 400 407 387 387 419 Total Land Depreciation n.a. n.a. n.a. n.a. n.a. Net Stated land n.a. n.a. n.a. n.a. n.a. Buildings 3,545 3,422 3,153 2,915 2,949 Total Buildings Depreciation n.a. n.a. n.a. n.a. n.a. Net Buildings n.a. n.a. n.a. n.a. n.a. Plant & Machinery 11,892 11,293 10,108 9,264 8,858 Plant & Machinery Depreciation n.a. n.a. n.a. n.a. n.a. Net Stated Plant & Machinery n.a. n.a. n.a. n.a. n.a. Transportation Equipment n.a. n.a. n.a. n.a. n.a. Transportation Equipment Depreciation n.a. n.a. n.a. n.a. n.a. Net Transportation Equipment n.a. n.a. n.a. n.a. n.a. Leased Assets n.a. n.a. n.a. n.a. n.a. Leased Assets Depreciation n.a. n.a. n.a. n.a. n.a. Net Leased Assets n.a. n.a. n.a. n.a. n.a. Other Property Plant & Equipment 646 683 802 706 816 Other Property Plant & Equip. Deprec. n.a. n.a. n.a. n.a. n.a. Net Other Property Plant & Equipment n.a. n.a. n.a. n.a. n.a. Accumulated Deprec., n.e.s. -6,498 -5,650 -4,891 -4,163 -3,637 Intangibles 35,811 36,879 36,420 35,957 31,584 Goodwill 25,177 25,402 36,420 35,957 31,584 Other Intangibles 10,634 11,477 n.a. n.a. n.a. Other fixed assets 4,410 4,127 3,665 3,726 3,930 Exploration n.a. n.a. n.a. n.a. n.a. Long Term Receivables n.a. n.a. n.a. n.a. n.a. Investments n.a. n.a. n.a. n.a. n.a. Long Term Associated Companies n.a. n.a. n.a. n.a. n.a. Investment Properties n.a. n.a. n.a. n.a. n.a. Other Long Term Assets 4,410 4,127 3,665 3,726 3930 Total Assets 59,928 59,285 57,100 55,798 52,071

41

LIABILITIES Total Current Liabilities 9,078 7,861 7,169 8,875 7,590 Loans 750 775 352 540 713 Current Long Term Debt 750 775 352 540 713 Trade Creditors (payables) 2,207 2,005 1,939 1,897 1,971 Other 6,121 5,081 4,878 6,438 4,906 Other Short Term Debt 1,818 553 220 681 146 Other Creditors 227 543 895 1,652 865 Income Tax Payable 170 451 363 228 258 Social Expenditure Payable n.a. n.a. n.a. n.a. n.a. Dividends Payable n.a. n.a. n.a. n.a. n.a. Other Current Liabilities 3,906 3,534 3,400 3,877 3,637 Non Current Liabilities 20,939 22,894 24,099 23,445 30,433 Total LT Interest Bearing Debt 9,723 11,591 12,976 13,134 24,102 Bank Loans 9,723 11,591 12,976 13,134 24,102 Debentures & Convertible Debt n.a. n.a. n.a. n.a. n.a. Lease Liabilities n.a. n.a. n.a. n.a. n.a. Other Long Term Interest Bearing Debt n.a. n.a. n.a. n.a. n.a. Other non-current liabilities 11,216 11,303 11,123 10,311 6,331 Pension Fund Provisions 1887 1894 1889 1850 1867 Deferred Taxes 5850 5856 5428 5031 1446 Provisions n.a. n.a. n.a. n.a. n.a. Deferred Revenue n.a. n.a. n.a. n.a. n.a. Other LT Non-Interest Bearing Debt 3479 3553 3806 3430 3018 Minority Interest n.a. n.a. n.a. n.a. n.a. Total Liabilities and Debt 30,017 30,755 31,268 32,320 38,023 Total Shareholders Equity 29,911 28,530 25,832 23,478 14,048 Share Capital n.a. n.a. n.a. 0 0 Common Stock/Shares n.a. n.a. n.a. 0 0 Participation Shares n.a. n.a. n.a. n.a. n.a. Preferred Shares n.a. n.a. n.a. n.a. n.a. Redeemable Prefered Shares n.a. n.a. n.a. n.a. n.a. Other 29,911 28,530 25,832 23,478 14,048 Share Premiums 23,762 23,704 23655 23655 15230 Treasury Shares -950 -402 -170 n.a. n.a. Revaluation Reserves n.a. n.a. n.a. n.a. n.a. Retained Earnings 8,304 7,020 4814 2391 992 Other Shareholders Reserves -1,205 -1,792 -2,467 -2,568 -2,174 Total Liabilities and Equity 59,928 59,285 57,100 55,798 52,071 Net Assets 29,911 28,530 25,832 23,478 14,048 Net Debt -282 -514 -215 -162 -191 Enterprise Value 61,501 55,388 67,329 58,880 n.a. Number of Employees 98,000 106,000 109,000 114,000 117,000

42

Kraft Foods Income Statement (mil $)

12/31/2004 12/31/2003 12/31/2002 12/31/2001 12/31/2000 Total revenues 32,168 30,498 29,248 29,234 22,922 Gross sales 32,168 30,498 29,248 29,234 22,922 Adjustments/excise tax n.a. n.a. n.a. n.a. n.a. Net sales 32,168 30,498 29,248 29,234 22,922 Other revenues n.a. n.a. n.a. n.a. n.a. Cost of Goods Sold -20,281 -18,531 -17,463 -17,566 -13,959 Research & Development expenses n.a. n.a. n.a. n.a. n.a. Other Operating Items -7,084 -5,916 -5,817 -5,822 -4,416 EBITDA 4,803 6,051 5,968 5,846 4,547 Total Depreciation, Amort. & Depl. -11 -9 -7 -962 -535 Depreciation n.a. n.a. n.a. n.a. n.a. Amortization & Depletion -11 -9 -7 -962 -535 Operating Income After Deprec. & Amort. 4,792 6,042 5,961 4,884 4,012 Unusual/Exceptional Items n.a. n.a. n.a. n.a. n.a. Earnings Before Interest & Tax 4,792 6,042 5,961 4,884 4,012 Interest income 11 13 7 15 18 Interest expenses -677 -678 -854 -1,452 -615 Net interest -666 -665 -847 -1,437 -597 Other non Oper./Financial Inc./Exp. -180 -182 n.a. n.a. n.a. Earnings before tax 3,946 5,195 5,114 3,447 3,415 Income taxes -1,274 -1,812 -1,813 -1,565 -1,414 Earnings after tax 2,672 3,383 3,301 1,882 2,001 Minority interest -3 -4 -4 0 0 Other n.a. n.a. n.a. n.a. n.a. Extraordinary items after tax -4 97 97 n.a. n.a. Preferred dividends n.a. n.a. n.a. n.a. n.a. Net Profit 2,665 3,476 3,394 1,882 2,001 Ordinary dividends -1,320 -1,141 -971 -483 0 Dividend share capital other n.a. n.a. n.a. n.a. n.a.

43

Kraft Foods Cash Flow Statement (mil $)

12/31/2004 12/31/2003 12/31/2002 12/31/2001 12/31/2000 Operating Cash Flows Net Income 2,665 3,476 3,394 1,882 2,001 Depreciation 879 813 716 1,642 1,034 Depletion n.a. n.a. n.a. n.a. n.a. Depreciation/Depletion 879 813 716 1,642 1,034 Amortization of Intangibles n.a. n.a. n.a. n.a. n.a. Amortization of Acquisition Costs n.a. n.a. n.a. n.a. n.a. Amortization n.a. n.a. n.a. n.a. n.a. Deferred Taxes 41 244 278 414 245 Accounting Change n.a. n.a. n.a. n.a. n.a. Discontinued Operations 107 n.a. n.a. n.a. n.a. Extraordinary Item n.a. n.a. n.a. n.a. n.a. Unusual Items 495 -51 173 74 -172 Purchased R&D n.a. n.a. n.a. n.a. n.a. Equity in Net Earnings/Loss n.a. n.a. n.a. n.a. n.a. Other Non-Cash Items n.a. n.a. n.a. n.a. n.a. Non-Cash Items 602 -51 173 74 -172 Cash Receipts n.a. n.a. n.a. n.a. n.a. Cash Payments n.a. n.a. n.a. n.a. n.a. Accounts Receivable 23 -45 116 23 204 Inventories -65 197 -220 -107 175 Prepaid Expenses n.a. n.a. n.a. n.a. n.a. Other Assets -436 -419 -34 -245 n.a. Accounts Payable 152 -116 -116 -73 13 Accrued Expenses n.a. n.a. n.a. n.a. n.a. Payable/Accrued n.a. n.a. n.a. n.a. n.a. Taxes Payable -251 -125 277 74 35 Other Liabilities 74 169 -244 138 n.a. Other Assets & Liabilities, Net 90 -167 -552 -407 -195 Other Operating Cash Flow 234 143 -68 -87 -86 Changes in Working Capital -179 -363 -841 -684 146 Total Cash from Operating Activities 4,008 4,119 3,720 3,328 3,254 Investing Cash Flows Purchase of Fixed Assets -1,006 -1,085 -1,184 -1,101 -906 Purchase/Acquisition of Intangibles n.a. n.a. n.a. n.a. n.a. Software Development Costs n.a. n.a. n.a. n.a. n.a. Capital Expenditures -1,006 -1,085 -1,184 -1,101 -906 Acquisition of Business -137 -98 -122 -194 -15524 Sale of Business 18 96 219 21 300 Sale of Fixed Assets n.a. n.a. n.a. n.a. n.a. Sale/Maturity of Investment n.a. n.a. n.a. n.a. n.a. Investment, Net n.a. n.a. n.a. n.a. n.a. Purchase of Investments n.a. n.a. n.a. n.a. n.a. Sale of Intangible n.a. n.a. n.a. n.a. n.a. Intangible, Net n.a. n.a. n.a. n.a. n.a. Other Investing Cash Flow 69 38 35 52 -8 Other Investing Cash Flow Items, Total -50 36 132 -121 -15,232 Total Cash from Investing Activities -1,056 -1,049 -1,052 -1,222 -16,138

44

Financing Cash Flows Other Financing Cash Flow -605 -473 660 142 -44 Financing Cash Flow Items -605 -473 660 142 -44 Cash Dividends Paid – Common -1,280 -1,089 -936 -225 -1,009 Cash Dividends Paid – Preferred n.a. n.a. n.a. n.a. n.a. Total Cash Dividends Paid -1,280 -1,089 -936 -225 -1,009 Sale/Issuance of Common n.a. n.a. 0 8425 n.a. Repurchase/Retirement of Common -688 -372 -170 n.a. n.a. Common Stock, Net -688 -372 -170 8,425 n.a. Sale/Issuance of Preferred n.a. n.a. n.a. n.a. n.a. Repurchase/Retirement of Preferred n.a. n.a. n.a. n.a. n.a. Preferred Stock, Net n.a. n.a. n.a. n.a. n.a. Sale/Issuance of Common/Preferred n.a. n.a. n.a. n.a. n.a. Repurch./Retirement of Common/Preferred n.a. n.a. n.a. n.a. n.a. Options Exercised n.a. n.a. n.a. n.a. n.a. Warrants Converted n.a. n.a. n.a. n.a. n.a. Treasury Stock n.a. n.a. n.a. n.a. n.a. Issuance (Retirement) of Stock, Net -688 -372 -170 8,425 n.a. Short Term Debt Issued n.a. n.a. n.a. n.a. n.a. Short Term Debt Reduction n.a. n.a. n.a. n.a. n.a. Short Term Debt, Net -635 819 -1036 2,505 -816 Long Term Debt Issued 832 1577 3325 4077 15087 Long Term Debt Reduction -842 -3248 -4459 -17055 -236 Long Term Debt, Net -10 -1671 -1134 -12978 14851 Total Debt Issued n.a. n.a. n.a. n.a. n.a. Total Debt Reduction n.a. n.a. n.a. n.a. n.a. Issuance (Retirement) of Debt, Net -645 -852 -2170 -10,473 14,035 Total Cash from Financing Activities -3,218 -2,786 -2,616 -2,131 12,982 Balance Foreign Exchange Effects 34 15 1 -4 -2 Net Change in Cash -232 299 53 -29 96 Net Cash - Beginning Balance 514 215 162 191 95 Net Cash - Ending Balance 282 514 215 162 191 Supplementals Depreciation, Supplemental 879 813 716 1,642 1,034 Cash Interest Paid, Supplemental 633 642 825 1433 605 Cash Taxes Paid, Supplemental 1,610 1,726 1,368 1,058 1,051

45

Kraft Foods Ratios

Liquidity Current ratio 1.07 1.03 1.04 0.79 0.94 Quick ratio 0.42 0.49 0.46 0.37 0.45 Liquidity ratio 0.69 0.61 0.57 0.45 0.54 Working capital ratio 0.01 0.00 0.01 -0.03 0.00

Profitability Return on equity 8.91% 12.18% 13.14% 8.02% 14.24% Return on assets 4.45% 5.86% 5.94% 3.37% 3.84% Gross margin 36.95% 39.24% 40.29% 39.91% 39.10% Operating margin 14.90% 19.81% 20.38% 16.71% 17.50% Net margin 8.28% 11.40% 11.60% 6.44% 8.73%

Activity Asset turnover ratio 0.54 0.51 0.51 0.52 0.44 Days Sales Outstanding (DSO) 39.20 38.81 38.98 39.72 51.45 Inventory turnover 5.97 5.51 5.45 5.79 4.59 Revenue per employee (mil $) 0.33 0.29 0.27 0.26 0.20

Capital Structure Debt/Equity (gearing) 72.51% 82.96% 94.65% 102.16% 221.71% Interest coverage ratio 7.08 8.91 6.98 3.36 6.52

46

Kraft Foods Peer Analysis

Total revenues mil USD 2004 2003 2002 2001 2000 KRAFT FOODS INC 32,168 2 30,498 2 29,248 1 29,234 1 22,922 2 GROUPE DANONE 18,661 3 16,584 4 14,215 4 12,785 4 13,303 4 CADBURY SCHWEPPES 13,014 5 11,496 5 8,539 5 7,194 5 6,826 5 GENERAL MILLS INC 11,070 6 10,506 6 7,949 6 5,450 6 5,173 6 CONAGRA FOODS, INC. 14,082 4 16,939 3 22,336 3 25,061 2 25,485 1 ARCHER-DANIELS-MIDLAND 36,151 1 30,708 1 22,612 2 19,483 3 18,612 3 Net Income mil USD 2004 2003 2002 2001 2000 KRAFT FOODS INC 2,665 1 3,476 1 3,394 1 1,882 1 2,001 1 GROUPE DANONE 432 6 1,060 2 1,345 2 116 6 671 3 CADBURY SCHWEPPES 832 3 653 5 883 3 786 2 740 2 GENERAL MILLS INC 1,055 2 917 3 458 6 665 3 614 4 CONAGRA FOODS, INC. 811 4 764 4 772 4 639 4 382 5 ARCHER-DANIELS-MIDLAND 495 5 451 6 511 5 383 5 301 6 Gross Margin (%) 2004 2003 2002 2001 2000 KRAFT FOODS INC 36.95 4 39.24 4 40.29 4 39.91 4 39.1 4 GROUPE DANONE 73.65 1 72.47 1 71.23 1 68.97 1 70.11 1 CADBURY SCHWEPPES 59.44 2 59.46 2 47.89 2 47.5 3 56.13 2 GENERAL MILLS INC 44.13 3 45.33 3 45.07 3 51.94 2 51.48 3 CONAGRA FOODS, INC. 25.43 5 22.1 5 18.34 5 17.2 5 15.06 5 ARCHER-DANIELS-MIDLAND 7.84 6 7.72 6 9.95 6 10.29 6 9.8 6 EBIT Margin (%) 2004 2003 2002 2001 2000 KRAFT FOODS INC 14.9 2 19.81 1 20.38 1 16.71 3 17.5 3 GROUPE DANONE 12.52 4 12.66 3 15.97 3 6.62 4 11.86 4 CADBURY SCHWEPPES 12.88 3 11.57 4 17.67 2 18.53 2 17.6 2 GENERAL MILLS INC 18.22 1 17.73 2 13.62 4 22.09 1 21.24 1 CONAGRA FOODS, INC. 9.85 5 8.62 5 7.11 5 5.98 5 3.62 5 ARCHER-DANIELS-MIDLAND 2.06 6 2.54 6 3.79 6 3.6 6 2.63 6 Profit Margin (%) 2004 2003 2002 2001 2000 KRAFT FOODS INC 12.27 2 17.03 1 17.48 1 11.79 3 14.9 3 GROUPE DANONE 11.15 3 11.23 3 14.3 3 4.63 4 9.65 4 CADBURY SCHWEPPES 9.53 4 8.76 4 15.67 2 16.39 2 16.52 2 GENERAL MILLS INC 13.63 1 12.53 2 8.39 4 18.31 1 18.31 1 CONAGRA FOODS, INC. 8.21 5 7.27 5 5.5 5 4.37 5 2.42 5 ARCHER-DANIELS-MIDLAND 1.99 6 2.05 6 3.18 6 2.68 6 1.9 6

47

ROE (%) 2004 2003 2002 2001 2000 KRAFT FOODS INC 8.91 4 12.18 5 13.14 4 8.02 3 14.24 2 GROUPE DANONE 6.93 5 17.39 2 25.22 1 2.22 5 10.03 4 CADBURY SCHWEPPES 15.08 3 13.17 4 18.15 2 18.82 1 18.84 1 GENERAL MILLS INC 20.1 1 21.96 1 12.81 5 n.a. -212.6 6 CONAGRA FOODS, INC. 16.92 2 15.85 3 17.21 3 14.17 2 11.2 3 ARCHER-DANIELS-MIDLAND 6.43 6 6.38 6 7.57 6 6.05 4 4.92 5 ROA (%) 2004 2003 2002 2001 2000 KRAFT FOODS INC 4.45 3 5.86 2 5.94 3 3.37 4 3.84 4 GROUPE DANONE 2.4 6 5.87 1 8.28 1 0.77 6 4.18 3 CADBURY SCHWEPPES 4.43 4 3.59 5 6.97 2 7.3 2 7.5 2 GENERAL MILLS INC 5.72 1 5.03 4 2.77 6 13.06 1 13.42 1 CONAGRA FOODS, INC. 5.7 2 5.05 3 4.96 4 3.87 3 3.13 5 ARCHER-DANIELS-MIDLAND 2.55 5 2.63 6 3.32 5 2.67 5 2.08 6 Current ratio 2004 2003 2002 2001 2000 KRAFT FOODS INC 1.07 5 1.03 4 1.04 4 0.79 5 0.94 4 GROUPE DANONE 1.28 3 1.08 3 1.22 3 1.01 3 0.99 3 CADBURY SCHWEPPES 0.92 6 0.79 6 0.79 5 0.81 4 0.64 5 GENERAL MILLS INC 1.17 4 0.92 5 0.6 6 0.64 6 0.47 6 CONAGRA FOODS, INC. 1.71 1 1.59 2 1.49 2 1.06 2 1.07 2 ARCHER-DANIELS-MIDLAND 1.53 2 1.64 1 1.61 1 1.59 1 1.42 1 Liquidity ratio 2004 2003 2002 2001 2000 KRAFT FOODS INC 0.69 5 0.61 5 0.57 4 0.45 4 0.54 3 GROUPE DANONE 1.11 1 0.94 3 1.1 1 0.83 2 0.82 1 CADBURY SCHWEPPES 0.64 6 0.57 6 0.59 3 0.61 3 0.49 4 GENERAL MILLS INC 0.78 4 0.61 4 0.41 6 0.4 5 0.27 6 CONAGRA FOODS, INC. 0.88 2 0.96 1 0.55 5 0.33 6 0.33 5 ARCHER-DANIELS-MIDLAND 0.85 3 0.95 2 0.89 2 0.91 1 0.77 2

48

Interest Coverage 2004 2003 2002 2001 2000 KRAFT FOODS INC 7.08 2 8.91 1 6.98 1 3.36 3 6.52 2 GROUPE DANONE 27.45 1 8.28 2 6.91 2 5.32 1 5.89 3 CADBURY SCHWEPPES 3.2 4 3.18 4 5.89 3 4.75 2 15.88 1 GENERAL MILLS INC 3.81 3 3.21 3 2.45 4 n.a. n.a. CONAGRA FOODS, INC. n.a. n.a. n.a. n.a. n.a. ARCHER-DANIELS-MIDLAND n.a. n.a. n.a. n.a. n.a. Gearing (%) 2004 2003 2002 2001 2000 KRAFT FOODS INC 72.51 5 82.96 5 94.65 4 102.16 3 221.71 1 GROUPE DANONE 109.48 4 113.91 4 109.79 3 119.07 1 79.39 3 CADBURY SCHWEPPES 164.15 2 168.27 2 81.59 5 74.86 4 43.41 5 GENERAL MILLS INC 203.43 1 256.6 1 208.75 1 n.a. -951.14 6 CONAGRA FOODS, INC. 141.98 3 144.44 3 155.77 2 114.46 2 97.79 2 ARCHER-DANIELS-MIDLAND 66 6 70.69 6 64.76 6 71.44 5 65.66 4 EV / EBITDA 2004 2003 2002 2001 2000 KRAFT FOODS INC 12.8 1 9.15 2 11.28 2 10.07 2 n.a. GROUPE DANONE 6.71 5 8.84 3 8.26 4 10.15 1 11.67 2 CADBURY SCHWEPPES 11.55 2 11.63 1 8.51 3 9.57 3 11.74 1 GENERAL MILLS INC 6.65 6 7.35 4 11.35 1 8.41 4 9.8 3 CONAGRA FOODS, INC. 8.23 3 6.73 5 6.15 5 5.4 6 7.74 4 ARCHER-DANIELS-MIDLAND 6.79 4 5.08 6 5.31 6 5.81 5 4.48 5 Number of Employees 2004 2003 2002 2001 2000 KRAFT FOODS INC 98,000 1 106,000 1 109,000 1 114,000 1 117,000 1 GROUPE DANONE 89,499 2 88,607 2 92,209 2 100,560 2 86,657 2 CADBURY SCHWEPPES 58,442 3 59,534 4 42,314 4 38,488 4 36,460 4 GENERAL MILLS INC 27,580 5 27,338 5 28,519 5 11,001 6 11,077 6 CONAGRA FOODS, INC. 39,000 4 63,000 3 89,000 3 89,000 3 85,000 3 ARCHER-DANIELS-MIDLAND 26,317 6 26,197 6 24,746 6 22,834 5 22,753 5

49

Kraft Foods Segment Analysis

Sales by Business 2004(Source: Osiris, Bureau van Dijk Electronic Publishing)

U.S. Beverages8%

U.S. Cheese, Canada & North America Foodservice

23%

U.S. Convenient Meals13%

U.S. Grocery8%

U.S. Snacks & Cereals17%

Europe, Middle East & Africa23%

Latin America & Asia Pacific

8%

Operating Income by Business 2004

(Source: Osiris, Bureau van Dijk Electronic Publishing)

U.S. Beverages10%

U.S. Cheese, Canada & North America Foodservice

21%

U.S. Convenient Meals16%U.S. Grocery

19%

U.S. Snacks & Cereals15%

Europe, Middle East & Africa14%

Latin America & Asia Pacific

5%

50

Operating Magin by Business 2004

19%

13%

18%

37%

14%

9%

10%

0% 5% 10% 15% 20% 25% 30% 35% 40%

U.S. Beverages

U.S. Cheese, Canada & NorthAmerica Foodservice

U.S. Convenient Meals

U.S. Grocery

U.S. Snacks & Cereals

Europe, Middle East & Africa

Latin America & Asia Pacific

Sales by Geography 2004

(Source: Osiris, Bureau van Dijk Electronic Publishing)

United States63%

Europe22%

Other15%

51

Kraft Foods Stock Analysis

Source: http://www.investor.reuters.com/Charts.aspx?ticker=KFT&target=%2fstocks%2fquickinfo%2fhistoricalchart, July 23, 2005

Valuation 12/31/2004 12/31/2003 12/31/2002 12/31/2001 Stock price 35.61 32.22 38.93 34.03 Tangible book value (mil $) -5,900 -8,349 -10,588 -12,479 Price to tangible book value -10.47 -6.70 -6.38 -4.73 Enterprise value 61,501 55,388 67,329 58,880 Enterprise value to EBITDA 12.80 9.15 11.28 10.07 Earnings per share 1.54 2.00 1.96 1.08 Price earnings ratio 23.18 16.08 19.90 31.37 Dividend yield (diluted) 2.14% 2.04% 1.44% 0.82% Price to sales 1.92 1.83 2.31 2.02 PEG Ratio 4.23 3.76 415.56 1.14

Analyst Recommendations 1-5 Linear Scale July 22, 2005 1 Month Ago 2 Months Ago 1 Year Ago (1)BUY 1 1 1 0 (2)OUTPERFORM 2 3 2 3 (3)HOLD 13 12 13 12 (4)UNDERPERFORM 3 3 3 3 (5)SELL 0 0 0 0 No Opinion 0 0 0 0

Mean Rating 2.95 2.89 2.95 3

Consensus Recommendation: Hold Source: http://www.investor.reuters.com/CompanyEstimates.aspx?ticker=XOM&target=%2fstocks%2fprofessionalanalysis%2frecommendations, July 22, 2005

52

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53

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54

_____. “Kraft Meat Biz Looks Like a Sale Candidate.” Crain’s Chicago Business. March 7, 2005. p. 4.

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55

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56

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57

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58