The Oreo in China_ Time to Get It Right or to Get Out

8/11/2019 The Oreo in China_ Time to Get It Right or to Get Out

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Singapore Management University

Institutional Knowledge at Singapore Management University

Case Collection Case Writing Initiative

10-2012

e Oreo in China: Time to Get it Right or to GetOut

Srinivas K . ReddySingapore Management University, [email protected]

Kevin W. SprouleSingapore Management University, [email protected]

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CitationReddy, Srinivas K. and Sproule, Kevin W.. e Oreo in China: Time to Get it Right or to Get Out. (2012). Case Collection.Available at: hp://ink.library.smu.edu.sg/cases_coll_all/27
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SMU-12-0020

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SMU-12-0020 The Oreo in China: Time to Get it Right or to Get Out

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regulation, large tobacco companies looked to broaden their product offerings throughacquisition. In 1985 Phillip Morris, the large US-based tobacco company, acquired GeneralFoods for US$5.6 billion. General Foods, the maker of Post Cereals, Maxwell House Coffee,and Jell-O Desserts, was soon joined by other food companies in the Phillip Morris portfolio. In1988 Phillip Morris purchased Kraft for US$12.9 billion. Then in 2000 Phillip Morris acquiredNabisco Holdings Corp.maker of the Oreo biscuit for US$19.2 billion.

Phillip Morris had merged several food companies and created the number two food companyin the world. In 2000 the purchase of the National Biscuit Company (Nabisco) meant that threecompanies operating in China moved under the Kraft banner and included Beijing NabiscoFood Co. Ltd., Nabisco Food (Suzhou) Co. Ltd. and United Biscuits (China) Ltd. With theseadditions Kraft became the number one biscuit company in China and had a diverse productportfolio, and for the first time sold the famous Oreo biscuit.1 The merged company had someof the most recognized brands in the world, which included Philadelphia Cream Cheese, ClubSocial Crackers, Kraft Macaroni & Cheese and the worlds most popular biscuit, the Oreo. In2004 Kraft had global revenue of US$32.2 billion, and the Oreo accounted for sales of nearly

US$900 million.

The Oreo An American Icon

In 1912 the Nabisco wanted to try a new idea for a cookie. As the maker of the already verypopular Barnums Animal Cookies sold in circus-themed boxes, they hoped to produce anotherbiscuit success story. The company thought of a cookie with two chocolate discs and a crmefilling in between. No one was quite sure what to name the new biscuit and details aroundwhere the final name Oreo came from were not exactly clear. Some suggested it was basedon the French word for gold, or, which was a color used in early package designs. Otherssuggest that the name took re out of the crme sandwiched between the two Os of the

cookie itself. Still others say that the name was simply a nice combination of sounds that wasshort and easy to pronounce. While the exact origin of the name was debated, its first sale in theAmerican market was not. On 6 March 1912, S.C. Thuesen had the distinct honor of buying thefirst Oreo biscuit in Hoboken, New Jersey. He could not possibly have known that the Oreowould become one of the worlds most iconic products.

When introduced in 1912, Oreos were sold in bulk from large display tins with local grocerystores paying US$0.30 per pound. In 1920 in response to the growing popularity of the biscuits,Nabisco experimented with its first flavor variation, and it introduced lemon-flavored Oreos. In1921 the name had been changed from the Oreo Biscuit to the Oreo Sandwich, and the firstadvertisements began to feature the twist (refer to Exhibit 1for Oreo packaging through theyears).

By 1928 Nabisco began the journey towards selling the Oreo internationally when it beganexporting the popular biscuit to several Latin American countries. Twelve years later Nabiscoembarked on its first full-scale international expansion, and in 1949, launched the Oreo inCanada. As the biscuit gained in popularity Nabisco experimented with building aninternational presence and a diverse product offering. Notable country launches includedVenezuela in 1950, Mexico in 1967, and Japan in 1971, when the biscuits made their first entryinto the eastern hemisphere.

Another major change happened in 1965 when the packaging got larger and took on a familiarlook. The package moved from a single cardboard encased sleeve to three cellophane sleeves(slugs) contained in a one-pound cardboard box to meet the growing demand as US consumers

1 Bakery Products in China, Passport GMID, March 2005, Euromonitor International, accessed August 2012.


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added the Oreo to their diet in increased quantities.

The product also changed beyond just the original biscuit with two black wafers and a crmefilling. Double Stuff Oreos (the biscuit with double the crme filling) were first launched in1974, and Oreo ice cream was introduced in 1981. Product innovation and global expansionwere hallmarks of the biscuits drive towards becoming a billion dollar brand. In 1996 the Oreowas first introduced to China in hopes of furthering the biscuits success with a new set ofconsumers.

The Chinese Market

Macroeconomic Trends

When the decision was made by Nabisco at the time to enter the Chinese market the conditionsseemed right. With a keen eye to a dynamic and growing economy the company hoped to

capitalize on Chinas economic development. It was difficult to flip through the pages of thefinancial press without finding a mention of the Chinese economy. The International MonetaryFund reported the gross domestic product (GDP) of China grew more than 10% annually in2003 and 2004.2 This was much higher than the average annual GDP growth in advancedeconomies, which averaged 2.6% and better than the growth rate of the broader developingAsian economies, which averaged 9%.3 The past ten years had also ushered in a large increasein per capita GDP in China rising from US$700 per person in 1996 to a projected US$2,100 bythe end of 2005.4 While this increase in wealth was most pronounced at the top of the incomebracket, the three-fold increase in the last decade meant the average Chinese consumer hadsignificantly higher spending power.

In addition to the large increase in the economy primarily driven by export demand, there had

been liberalisation of import policy. This generally started in the 1990s as China expanded onthe world stage fuelled by its assent as a manufacturing powerhouse. These efforts culminatedin 2001 when China was admitted into the World Trade Organization (WTO), representing amilestone in its market-oriented reforms. 5 Several western companies saw the growingeconomy, the rise of the Chinese consumer and the worlds most populous country as anenticing business opportunity.

Consumer Trends

The consumer marketplace in China had been changing rapidly. The increasingly openeconomy and upward mobility of the Chinese consumer meant that there was ampleopportunity for firms that could successfully attract Chinese customers. Several foreign chains

had some early success. The presence of hypermarkets in China, first introduced in 1995 toChina, was certainly an example. Euromonitor, a market research firm, estimated that between1999 and 2004, sales at hypermarkets grew by 147%, with new stores opening across thecountry.

A similar success story was the introduction of Starbucks in China. In 1999 Starbucks openedits first store in China and quickly became the countrys leading coffee chain, albeit withrelatively low competition. They quickly expanded on this early foothold as even the highpriced coffee sold by the chain won over a growing following, and between 2001 and 2005, the

2 World Economic Outlook 2007, International Monetary Fund, October 2007,www.imf.org/external/pubs/ft/weo/2007/02/pdf/text.pdf3 Ibid.4 GDP Per Capita, The Worldbank, accessed June 2012, http://data.worldbank.org/indicator/NY.GDP.PCAP.CD5 China Joins the WTO at Last, BBC News, December 11, 2001, http://news.bbc.co.uk/2/hi/business/1702241.stm


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chains sales in China grew more than 40% per year.6

While growth in China was impressive it was largely confined to developed urban areas. TheChinese countryside with its limited infrastructure and diffused populations, had not seen asmuch growth in incomes, or market penetration of foreign firms. China became increasinglyindustrialised and more people moved to urban environments. Growth in large (Tier 1) citiesalone was certainly enough to warrant attention. In 1996, when the Oreo was first introduced inChina, the World Bank estimated that roughly 32% of the population lived in cities.7 By 2005this number had increased to nearly 50%, meaning that an additional 150 million peoplemorepeople than in all of Russiahad moved into urban areas.

The Market for Baked Goods and Biscuits

When analysts looked at the Oreo biscuit, they generally categorized it as being part of thebroader bakery category. The bakery category, which included biscuits8, baked goods, bread

and breakfast cereals, was growing fast. An analysis in 2005 showed that bakery products werethe number one packaged food in China. Within the bakery category, biscuits had also donevery well. Between 1999 and 2004 biscuits had grown at an annual rate of 8.4%, with sandwichbiscuits reporting a strong 7.5% growth rate (refer to Exhibit 2for biscuit sales in China from1999 to 2004). Over the next four years growth was expected to continue with the bakeryforecast to grow at an annual rate of 5.3% and biscuits at 4.9% (refer to Exhibit 3 forforecasted packaged food sales growth 2004-2009).

Local artisanal producers had dominated the biscuit category in China, but national andinternational biscuit brands were gaining market share. In 2004 Kraft enjoyed the overalllargest position in the biscuit category with over 10% (refer to Exhibit 4for market share in thebiscuit market). The Oreo market was grouped with other sandwich biscuits, and that category

was expected to double in the next five years. All the news across China was that the boomingeconomy would continue the trend of rising consumer spending on biscuits with many retailersalready enjoying record sales.

Lets Start Selling Oreos in China

The Oreo was first sold in China in 1996 after several successful launches around the globe. Infollowing with previous successes the Oreo was brought to China with the classic packaging,formulation and a translated name to match the phonetic spelling of Oreo in Mandarin:

(read phonetically - o l o). When Nabisco launched the Oreo in 1996, thedistribution was focused in the northern part of the country. The main efforts had been to takethe established brand of Oreo from the United States and make it successful in China. Thismeant taking existing package sizes and selling the product throughout China. The initial saleshad picked up nicely. By 1999 Oreo had established a foothold in the Chinese market (refer toExhibit 5for Oreo sales in China).

In 2000 when Kraft acquired Nabisco, the company combined the two product lines andfeatured a greatly expanded brand offering. Adding the Oreo to a range of biscuits, such asChips Ahoy (a chocolate chip biscuit) in the cookie category and Ritz (a butter-flavouredbiscuit) in the savoury category, put Kraft at the lead position in northern China for biscuits.Subsequent expansion along each of these different products meant that Kraft had a very

6 China: Growth Market, Passport GMID, April 2005, Euromonitor International, accessed August 2012.7 Worldwide Development Indicators, The Worldbank, accessed June 2012, http://data.worldbank.org/indicator/8 The biscuit category included: savoury biscuits and crackers, sweet biscuits, cookies, filled biscuits, plain biscuits, sandwichbiscuits and wafers.


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diverse offering across the biscuit category. The biscuit portfolio had some success over thenext five years, but sales generally lagged behind the broader food market in China. In 2005when Warren surveyed the scene in China he was worried that the merger had actually diffusedthe focus of Kraft:

The integration happened pretty quickly from Nabisco to United Biscuits to Kraft, [and]there was a fair amount of integration, which created a fairly unwieldy brand portfolio.

Warren thought that Kraft was not taking full advantage of the diverse portfolio of biscuits,with the offering in China largely being a collection of distinct brands with non-complementarysales efforts. Mary Chun, brand manager of Oreo China, had also commented on the mergerduring a recent conversation with him:

One big difference was Kraft operated at a different pace versus Nabisco. At that time Krafthad a portfolio with products like Maxwell House Coffee, Tang Powdered Beverage, andother products considered back-of-the-shelf grocery. At the time Nabisco was more of a

fast-paced distribution model, where their products shelf life was twelve months, whereas

Krafts [products] had a shelf life [of] more like two years. So once you change the paceand use the Kraft pace to sell Nabisco products, it doesnt work.

Warren also worried that the large portfolio, if not branded and distributed effectively, couldactually hurt sales as the company would lack focus and spend too little on any one brand tomake it a success. After the merger sales of Oreo had been largely flat since its initial launch,with sales growing at just over 4% annually. While this might have been considered good inWarrens home market in North America, this was not successful when viewed againstexpectations and other success stories in China. One key manager back at headquarters hadwritten in a recent email:

I am not sure why the Oreo has not been a success in China. It is only the most successful

biscuit in the world. It has gone from a regional favourite to the number one biscuit in somany markets; surely the winning combination of taste and brand will work in China if we

just give it some time.

Thoughts from the Local Office

From its local headquarters the company had set growth targets and was the largest player inthe northern Chinese market for biscuits. When Warren took on his regional role as head ofbiscuits, he thought back to his conversation with Chun. She had been with the brand since itwas launched and shared some of the background of the Oreo in China with Warren:

Really the brand has been a big hit in the US market. I think what is interesting is how thisbrand has evolved and gradually expanded into different countries. The landmark in Chinawas when it was launched here in 1996. From there we set up the distribution in the northof China and the key cities. When it was launched we used the US product, the US

formulation, and the US advertising strategy, which was very much the global practice. Thegrowth between 2000-2004 has been stagnant. Four percent is not good enough in China;anything below 10% is not growing at all.

The local office had watched the slow sales and wanted to help turn the product around. Severalof the office staff had been there before the operation was purchased by Kraft and felt they hadlittle say in major decisions about the Oreo. In particular, decisions about pricing and productinnovations were largely centralized. Promotional spend and where to deploy the advertising

budget were the two biggest components controlled by the local office who at times did notknow if their ideas were being taken into account.


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Where the Chocolate Meets the Crme

Packaging

In 1996 when the Oreo was launched in China it was with a similar strategy to what had madeit successful in the United States. The primary sales channel was through medium-sizedgrocery stores and hypermarkets such as Tesco and Carrefour. In 2005 the packaging was stilllargely based on what was used in other geographies, and looked similar to the US packaging,which contained three slugs of twelve Oreos for a package weight of 316 grams and single slugpacks at 106 grams. Chun said of the choice of package sizes:

The current production is more manufacturer-driven, the plant can produce slug packs, allthe same lengths, at about 100 gram packages for Oreos, or with something like RitzCrackers it is more around 150 grams, because it is the same cut length at the plant for the

package size. That gives you better efficiency and output. But if we need to satisfy thecustomer we might need to change.

Kraft would often run bonus pack promotions where they would sell the large packages withadditional Oreos added to the standard package so consumers would get more for the samemoney. Well recognized as a successful strategy in the US, these promotions were intended todraw the consumer to purchase the product by increasing the perceived value they were gettingwith a single purchase. The package size helped aid in bulk purchase and consumers typicallyresponded that they would purchase the packages and store them for an afternoon snack.

Competition

The competition in the biscuit market was strong. Despite Krafts number one position, therewas significant China-wide competition (refer to Exhibit 6 for largest biscuit brand shares).Krafts products were sold throughout the country, but outside of the north, the company didnot have more than a 15% market share. In the east they trailed Danones nearly 32% marketshare with an 8% market share. In the northeast and northwest, Kraft trailed local producerGuangdong Jiashili Food Group, which commanded a 15% market share in both regions.

To Warren, one of the most visible reminders of the Oreos lacklustre results was the strongsales of competing biscuits. There were a number of brands doing well, and to make mattersworse the market was getting more crowded every day. Chun said:

When Oreo was first introduced the types of biscuits in the Chinese market were limited.The majority of the market was in plain crackers. Sweet plain crackers or savoury plaincrackers, like Ritz. At its launch the Oreo was considered as a good innovation as it was insandwich cookie format. But as we got into the later years we started to see all different

forms of biscuits appearing in the market. Some of the products did quite well. For examplesandwich biscuits introduced by Taiwanese companies worked well. They used some oftheir mature biscuit products and introduced them in to China.

Within the sandwich biscuits category, the leader was Taiwan-based Master Kongs brand ofKSF 3+2 biscuits, which featured three cookies and two sets of filling. Overall the brand had anational share of 22%, which was slightly higher than the Oreo, which came in at 19%.Additionally the Master Kong brand of KSF 2+1, which featured two cookies and a single layerof filling, commanded an additional 10% market share. The brand worked well with the overallpalate of the Chinese consumer and was said to be less sweet than the current Oreo. Theproduct was also offered in smaller pack sizes than Oreo and was perceived by some to offermore value with three cookies instead of two. The main brand in Shanghai was the sandwichmilk cookie offered by Danone. The product was largely successful in eastern Chinese cities inline with Danones regional dominance in the area.


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Another notable success story in China was wafers and the segment was large and growing. Itwas particularly interesting because a single company, Nestl, was able to dominate a striking75% of the market with its chocolate-covered wafer. Other popular products included Jiashilibrand biscuits with their main line of Egg Crackers and Hollow Biscuits9 (refer to Exhibit 7for category leading products and market share data).

Pricing

The Oreo pricing was largely set from direction given from global category heads located atKraft headquarters in the US. Pricing was typically set to be the same across China with bonuspack promotions at the discretion of local decision makers. Target prices and target marginswere set at similar levels as was familiar to the company within its North American businesses.

The pricing of the Oreo was premium. It was more expensive than its nearest competition by anoticeable margin. According to a 2004 study, the average price per kilogram of Oreos wasUS$3.51. The average price of its competition was about US$3.10 for KSF 2+1, or US$3.03 for

Danones Milk Biscuit (refer to Exhibit 8 for sample set pricing in China). Larger packagesizes also made the absolute price of a single Oreo purchase noticeably higher than thecompetition. The high price, which several distributors thought contributed to slow sales, wasjust one issue large grocery chains had with selling the Oreo. Premium biscuits generallycontributed a smaller share of the final sale to the distribution partner. Kraft estimated that as apercentage of the final sale of a premium biscuit, 60% would go to the distributor. This was incomparison to value biscuits where 70% of the sale price would go to the distributor. The highprice of Oreos, in part due to the high production costs, was clearly a factor in determining bothits popularity amongst consumers and distributors.

Distribution

The Oreo was primarily sold in hypermarkets, supermarkets, grocery stores and corner stores(convenience stores). Hyper/supermarkets were becoming an increasingly important componentof the distribution channel with large numbers of store openings in major cities. In 2004 thistrend had also impacted the biscuit market with over 50% of all biscuit sales and 40% of allbakery sales coming from hyper/supermarkets (refer to Exhibit 9 for sales by distributionformat). Interestingly the fastest growing sales channel for biscuits in China was the cornerstore. With growth over 30% annually over the last five years, this was a channel that hadgrown from almost zero to nearly 20% of all biscuit sales in China.

There was also a general trend of the modernisation of the channels that biscuits were sold inwith the rise of international chains in China. In particular, regulations that limited the size ofinternational chains had been relaxed, and large chains like Carrefour and Wal-Mart began to

open new outlets at an impressive rate, especially in the largest cities. These internationalchains were also very important to Krafts distribution strategy as they had an expansivenetwork of stores. Of large locally-owned supermarkets, more than 65% had only one location.By contrast 60% of foreign chains had locations in at least five cities, with 30% having morethan 16. This meant that as regulations shifted, reach expanded and more of biscuit sales camefrom the hyper/supermarkets channel, which became even more important for producers.

In stores, the Oreo was given shelf space in proportion to how well it sold. Unlike in the US,where companies could pay for more favourable shelf space, most grocery stores andhypermarkets would arrange their shelves based on their own sales data. They would sell end-caps or other more prominent one-time displays, but the most desirable shelf space in the main

9 Guangdong Jiashili Food Group company website: en.gdjsl.com


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grocery aisle was saved for the best sellers. In most places this was not the Oreo.

What Does the Customer Say About All This?

As Warren thought about how to salvage the Oreo in China he considered a market researchstudy that had just been completed. As part of testing a proposed Oreo line extension KraftChina had explored launching an Oreo with reduced sweetness to appeal to the Chinese palate.The product innovation was an effort to help turn around sluggish Oreo sales in China. Theproduct was called LightSweet Oreo in the test phase, and as the name implied, it was an Oreowhere the crme filling had been made with less sugar. The study, completed in July 2005,revealed some insights that suggested the new Oreo variant might be a success. The idea for theproduct had come from local team members who had a sense that a low-sweet variety would dowell with Chinese consumers in addition to the existing Oreo. The line extension would serveas another variety of Oreo and was based on a well-established concept in other developedmarkets of Oreo flavour variations.

The study revealed several things that were not clear when they first launched the Oreo back in1996. The study tested the LightSweet Oreo against the regular Oreo and asked Chineseconsumers to rate both. When tested in direct comparison to the normal Oreo, respondents ratedthe lightly sweet version 25% higher than the existing Oreo. It was also worth noting that boththe regular Oreo and the LightSweet Oreo scored worse than benchmark studies for the Oreo inother markets like the U.S. In other words, Chinese consumers seemed to enjoy the LightSweetOreo better than the standard Oreo, but still both varieties lagged behind in consumer scores inmore developed Oreo markets. It could have been the case that the Oreo would just not bepopular in China.

Further complicating the study was that there was only a 90% confidence that the results

conclusively showed consumers liked the LightSweet version better than the standard Oreo.Usually a 95% confidence was required before a line extension or new flavour would belaunched. This meant that while it appeared that the LightSweet Oreo would be a popular newproduct, there was some uncertainty about whether it would be a success. In addition to theaggregate results comparing the two varieties, respondents also requested even less sweetness,a softer cookie and more emphasis on the idea that the Oreo was enjoyable to eat. There wasalso data that suggested there could be some cannibalization of existing Oreo sales if the Low-Sweet variety was launched. Respondents who indicated they were very likely to purchasethe LightSweet Oreo also noted that they were already frequent purchasers of the regular Oreo.The last interesting conclusion from the study was that the LightSweet Oreo could lead toconsumers eating more cookies in a single sitting than the existing product (refer to Exhibit 10for market research study).

Time to Get it Right or to Get Out

Warren was all too aware of the larger struggles at Kraft. In 2004 the company had reported aslight increase in earnings over the prior year but an unwelcome 21% drop in operating incomefrom 2003. Overall profit for the three largest food companies from 2001 to 2004 had increased11% at Nestl, 6% at Danone and fallen 2% at Kraft (refer to Exhibit 11, Exhibit 12 andExhibit 13 for selected financial performance). In 2004 Krafts Latin American and AsiaPacific groups fared even worse with operating income falling 34% from the prior year. Whenreviewing the 2004 financial results, observers noted Krafts performance could not be

attributed to a soft market, as Danone Asias profit edged up 4% and Nestl Asia, Oceania andAfrica recorded a 2% increase. Large hypermarket retails also reported strong results,especially in Asia. From 2001 to 2004, Carrefour Asia saw its revenue rise 9% and Tesco Asia


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reported a 210% revenue increase in line with its aggressive Asian expansion efforts (refer toExhibit 14 and Exhibit 15for selected financial performance).

Despite the success stories being authored in Asia, the Oreo was not one of them. There had notbeen any good news for the biscuit since a modest sales increase in 2003. This was furtherhighlighted after a nearly 40% increase in spending on Oreo marketing and communication hadnot boosted sales. It seemed like Kraft was spending and consumers were not noticing.

The folks in finance had also started asking more questions. Overall shipments for the entireKraft line of biscuits was down over 12% from 2004 (refer to Exhibit 16 for Kraft Chinaproduct shipments). Not only had there been a decrease in the volume of Oreos shipped, butthis had led to higher than expected inventories driving up storage costs. As the flagship brandmissed forecast after forecast, some stock had to be thrown away as inventories regularlyoutpaced shipments.

New product development had also been stymied over the past 18 months. In 2004 several new

product launches had been cancelled, and sales fell short of forecast. 2005 seemed to befollowing that trend with only two product launches by August and only half the new biscuitsthe company had hoped to ship actually sold (refer to Exhibit 17 for Kraft product launchschedule). The competition had not seen the same problem with several successful biscuitlaunches over the last 24 months (refer to Exhibit 18 for competition product launches inChina). Some product launches were planned for 2006, but even launches like LightSweet Oreodid not meet the regular Kraft thresholds for new product launches. As Warren consideredpotential new products he wondered whether they should focus on the core brands that hadbeen underperforming rather than spending so much time and money on launching newflavours and varieties. He also thought about the work of the local team and how he couldadvocate for them and keep them involved in the process. He remembered Chun saying:

We need a mind-set shift and place a foundation for future success. We have to decide whatwe really want to achieve as the Oreo brand in China and how can we reset our strategiesto get there.

As Warren rushed to his next meeting with Kraft management, he was thinking about how hecould turn this situation around. He was still a firm believer in the Oreo product, but sluggishsales and a negative 15% profit margin would certainly make success an uphill battle. This wasespecially true given the climate at Kraft. The company needed to improve its financialperformance. A surge in commodity prices was putting profit projections across the companyinto question as it largely decided to hold shelf prices to not impact consumers. It wasbecoming clear that Kraft needed to refocus its strategy and chart a path towards overall growth.

As Warren pulled up to the Kraft China offices he got ready to set out his plans to make theOreo a success in China. All this was at risk as grocery stores talked about pulling the productfrom the shelves, and executives in the US had become restless with slow sales andcontemplated taking the Oreo out of the worlds most populous country. Warren thought backto something one top US executive had recently said about the enduring success of the originalOreo:

That is the thinking if you look at it from 1912 to 1975. We did not have a single variantextra of the Oreo, just the black and white cookie. Even in 1975 when the Double Stuffcame out the only change was the amount of crme. The next actual flavour took almost100 years and came in 2001, which was chocolate. The original Oreo is what got us here.


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EXHIBIT 1: HISTORICAL OREO PACKAGING

Source: Kraft Internal Information.


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EXHIBIT 2: RETAIL SALES OF BISCUITS IN CHINA: VOLUME 1999-2004 (000 TONS)

Source: Bakery Products in China, Passport GMID, March 2005, Euromonitor International, accessedAugust 2012.

EXHIBIT 3: CHINA FORECAST RETAIL SALES OF PACKAGED FOOD BY SECTOR: %VOLUME GROWTH 2004-2009


1 2000 2001 2002 2003 2004

588 634 681 726 771 813

416 448 475 502 530 556

C 83 89 101 111 120 130

89 97 105 113 121 128

291 322 359 405 454 500

B 879 957 1,040 1,131 1,225 1,313

(2004200)

2004200

C 5.5% 31.0%

B 5.3% 29.8%

I 7.8% 45.4%

D 9.2% 55.4%

6.9% 39.4%

8.0% 46.6% 4.4% 24.0%

5.5% 30.5%

N 8.9% 53.2%

C/ 3.6% 19.1%

F 6.1% 34.6%

D 8.9% 53.3%

C 6.9% 39.8%

O 11.9% 75.3%

, 4.8% 26.4%

B 13.3% 86.5%

7.3% 42.5%

6.8% 39.3%


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EXHIBIT 4: BISCUIT COMPANY MARKET SHARE BY VALUE - CHINA (%)

* A Kraft Group CompanySource: Bakery Products in China, Passport GMID, March 2005, Euromonitor International, accessedAugust 2012.

EXHIBIT 5: OREO REVENUE IN CHINA (INDEXED: 1995-2004)


2001 2002 2003 2004

D B F C L 5.8 7.2 8.2 8.7

* 2.8 3.3 3.7 3.8 () * 2.6 3.9 3.8 3.8

H I G 3.5 3.7 3.1 3.4

() * 3.2 3.2 3.2 3.2

D H F C 2.1 2.1 2.2 2.2

K G B F () L 1.7 1.7 1.7 1.6

G F C 1.6 1.5 1.5 1.5

KB G 0.7 0.7 0.7 0.7

G J F C L 0.5 0.6 0.6 0.6

D H F C L 0.5 0.5 0.5 0.5

F C 0.2 0.2 0.2 0.2G J G C L 0.4 0.3 0.3 0.2

D HFC F C L 0.1 0.1 0.1 0.1

O 74.2 71.1 70.4 69.4


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EXHIBIT 6: BISCUIT BRAND SHARES IN CHINA (% RETAIL SALES PRICE)

* A Kraft Group CompanySource: Bakery Products in China, Passport GMID, March 2005, Euromonitor International, accessed

August 2012.

2001 2002 2003 2004

M H I G 3.5 3.7 3.1 3.4

D M C D B F C L 1.9 2.4 2.8 2.8

C D B F C L 1.6 2 2.3 2.5* 1.4 1.8 2.2 2.3

* () 1.6 2.3 2.2 2.2

* () 1.6 1.7 1.7 1.7

!* () 0.9 1.6 1.6 1.6

G G F C 1.6 1.5 1.5 1.5

* 1.2 1.2 1.3 1.3

* () 1.3 1.3 1.3 1.2

G D H F C 1.1 1.1 1.2 1.2

K G K G B F () 1.1 1.1 1.1 1.1

D B F C L 0.7 0.8 1 1

D D B F C L 0.4 0.7 0.8 1

D B F C L 0.8 0.9 0.9 0.9

K KB G 0.7 0.7 0.7 0.7J G J F C L 0.5 0.6 0.6 0.6

H D H F C 0.5 0.5 0.5 0.5

* 0.3 0.3 0.3 0.3

F C 0.2 0.2 0.2 0.2

J G J G C L 0.4 0.3 0.3 0.2

HFC D HFC F C L 0.1 0.1 0.1 0.1

'* () 0.2 0.1 0.1 0.1

O 76.4 73.1 72.2 71.6


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EXHIBIT 7: COMPETITIVE BISCUIT MARKET PROFILE (BEIJING AND SHANGHAI)

BISCUITS IN BEIJING

BISCUITS IN SHANGHAI


#1: 3+2

22% M

(M K)

#2:

19% M

(K)

#1:

75% M

(N)

#2:

25% M

#1:

30% M

(K)

#2:

25% M

#1:

22% M

(K)

#2:

16% M

#1:

20% M

(D)

#2:

17% M

(K)

#1:

25% M

(N)

#2:

23% M

#1:

32% M

(K)

#2:

22% M

(K)

#1:

40% M

(D)

#2:

10% M

(D)


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EXHIBIT 8: PRICE PER KILOGRAM FOR LEADING BISCUITS IN CHINA


EXHIBIT 9: CATEGORY RETAIL SALES IN CHINA (% OF RETAIL SALE PRICE)


O K 3.51$

KF 2+1 3.11$

K 3.06$M B D 3.03$

KF 3+2 2.93$

K 2.67$

B K 2.54$

O 1.76$

/ 20% 22% 50% 40%

I 38% 29% 12% 10%

C 5% 4% 23% 7%

O 37% 46% 15% 43%

1999 2004


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EXHIBIT 10: LIGHTSWEET OREO CHINA MARKET RESEARCH STUDY

Respondents who reported high fulfilment with the LightSweet Oreo were also likely to buy: Original Oreo or theDanone Milk Biscuit


? A

(27% A)

A

(22% A)

38%

O '' M M

B '' M M

B '' M M

H M

C

90% / 95%


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EXHIBIT 11: SELECTED KRAFT FINANCIAL RESULTS

Source: Kraft Annual Reports 2004-2001, Kraft Investor Center, Accessed June 6, 2012,

http://www.kraftfoodscompany.com/Investor/sec-filings-annual-report/annual_reports.aspx.

EXHIBIT 12: SELECTED DANONE FINANCIAL RESULTS

Source: Danone Annual Reports 2004-2001, Danone Financial Information, Accessed June 6, 2012,http://finance.danone.com/phoenix.zhtml?c=95168&p=irol-reportsannual.

EXHIBIT 13: SELECTED NESTL FINANCIAL RESULTS

Source: Nestl Annual Reports 2004-2001, Nestl Reports and Downloads, Accessed June 6, 2012,http://www.nestle.com/investors/reports/pages/reports.aspx.

2001 2002 2003 2004

N ( ) 28,731$ 29,248$ 30,498$ 32,168$

O I ( ) 4,717$ 5,961$ 5,860$ 4,612$ ( ) 17,392 18,354 18,493 19,002

N ( ) 2,430$ 2,585$ 2,547$ 2,586$

O I ( ) 378$ 513$ 391$ 250$

( ) 2,057 2,585 2,547 2,586

&

2001 2002 2003 2004

N ( ) 14,470 13,555 13,131 13,700

O I ( ) 1,609 1,590 1,604 1,705

N ( ) 1,934 2,080 1,957 2,072

O I ( ) 231 277 279 290

2001 2002 2003 2004

N ( ) CHF 84,698 CHF 89,160 CHF 87,979 CHF 86,769

EBIA ( ) CHF 11,346 CHF 12,408 CHF 12,538 CHF 12,604

N ( ) CHF 15,458 CHF 14,880 CHF 14,432 CHF 14,673

EBIA ( ) CHF 2,653 CHF 2,564 CHF 2,508 CHF 2,547

,


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EXHIBIT 14: SELECTED CARREFOUR FINANCIAL RESULTS

Source: Carrefour Annual Reports 2004-2001, Carrefour Annual Reports, Accessed June 6, 2012,

http://www.carrefour.com/cdc/finance/publications-and-presentations/annual-reports/.

EXHIBIT 15: SELECTED TESCO FINANCIAL RESULTS

Source: Tesco Annual Reports 2004-2001, Tesco Reports, Accessed June 6, 2012,http://www.tescoplc.com/index.asp?pageid=166.

EXHIBIT 16: KRAFT CHINA PRODUCT SHIPMENTS PERCENT CHANGE IN VOLUME2005-2004


2001 2002 2003 2004

N ( ) 69,486 68,729 70,486 72,668

EBIA ( ) 4,528 4,675 4,871 4,917 H () 657 704 750 794

N ( ) 4,567 4,639 4,637 5,101

EBIA ( ) 315 317 313 342

H C () 24 32 40 56

2001 2002 2003 2004

N ( ) 20,800 23,400 26,004 30,814

O ( ) 1,174 1,332 1,509 1,832

N ( ) 860 1,398 2,031 2,669

O ( ) 4 29 71 122

C 17.0%

. B 5.9%

B 12.2%

C 25.7%


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2006

O L

O

C (O / BB / C)

C (O )

M C

CA! C 3D

C M

2004

O DD CM M C

M K C

D C

/ LE C

D C

/ BB C

C C C

L

CA! C L

A N / F 53%

2005

3

/

M C

C

O DD #2 C

CA! C D

M C L

C L

A N / F 51%

EXHIBIT 17: KRAFT CHINA NEW PRODUCT DEVELOPMENT PIPELINE 2004-2006



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EXHIBIT 18: COMPETITION PRODUCT LAUNCH SCHEDULE

D

MJ

DBFCL

L,

2005

D

MJ

DBFCL

L

2005

KC

FCL

C

2004

CC

J

G

BC,B,B2

2004

CM

FCL

B,

2004

CB

FCL

B

2004

D

DBFCL

2004

C

F

GFC

N

2004

MC

AF

GCL

,

2003

HLC

B

DFCL

I

2003

G

D

HFCL

,

2003

NC

N

(C)L

E

2003

IO

CCL

H,

2003

D

BB

DBFCL

F

2003

N

JNFCL

I,

2003

MKB

HIG

F

2003


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Source: Bakery Products in China, Passport GMID, March 2005, Euromonitor International.

Documents

The Oreo in China_ Time to Get It Right or to Get Out