MBA 691 Business Ethics Kraft Food's Fight against Obesity

Prof. David Horowitz John Molson School of Business Concordia University

Al Brixi - 5209064

1. Situation synopsis

Kraft Foods is #1 the US, and its the world's second largest food company. Kraft Foods has a vast product portfolio - comprising hundreds of products in various segments that could be classified as junk food Obesity is a growing problem (over 60% of adults are overweight in America) Many health organizations are starting to hold responsible food companies for this situation. A lawsuit has targeted one of Krafts most popular products Oreo cookies. Kraft is accused of using trans fatty acids - a potential health hazard in its Oreo cookies. The plaintiff would like to enforce a ban on the marketing and selling of Oreo cookies to children in California. Kraft is also blamed for not listing the amount of trans fatty acids found in Oreo cookies. Kraft said that it was waiting for the FDAs permission to revise the info on its labels. Recently Kraft announced a new set of initiatives to address the problem of obesity. Some critics argued that Kraft is taking these steps to merely avoid lawsuits. While some analysts also recognized that Kraft was the first company to come with such a comprehensive set of anti-obesity initiatives.

2. Problem statement:
How can Kraft Foods address the growing pressure from its external environment about the health impact of its product offering, while sustaining its profitable operations and its leadership position in the food industry? Alternatively how can Kraft satisfy the demands of its different stakeholders and protect itself from lawsuits and consumer backlash about the potential health and moral hazard of its product offering without jeopardizing its financial situation?

3. Industry Structure & Trends

Food industry is dominated by 2 big rivals (Kraft & Nestle) both compete globally and in the US market where it falls under the supervision of the FDA. Since mid-20th century the food industry has changed in North America - rising standard of living and increased job pressure have reduced time available for food preparation - this lead to the advent of convenience/fast/junk/snack foods. Junk food refers to food products can cause health hazard if consume in high quantity. Junk food is a recent phenomenon and as a result it was not subject to rigid regulation before 2003 FDA did not require to list trans fatty acids content Demand for junk food has surged & by 1990 every major street had access to a fast food center or a grocery center offering junk food. By late 1990 junk food was part of the American culture thanks to variety of options, affordability, easy availability and taste appeal. Increased in demand was partly fueled by advertising strategy - $1 billion was spend on junk food advertisement while roughly 80% of the ads targeted children. Food industry has paid millions of dollars to secure deals with schools to control vending machines no regulation currently exists concerning the content of vending machines. Food companies have also increased the quantity and variety of their food offering at a marginal price increase, thus luring customers to consume more junk food. Researchers are demanding an overhaul of the way junk food was marketed at children. Consumers are taking notice of the effect of junk food, thus they are spending more than

$30 billion on diet products, thus creating new opportunities for diet food products. US gov paying more than $130 billion on obesity health issues, increase demand to tax foods and impose regulations on foods that might be proven to be dangerous to health The tobacco industry had to pay $246 billion in settlement to the government, now some analyst say that food industry might be have do go down the same road. Many food companies have taken a variety of steps towards providing healthier products.

Overall: Facing very little regulation, food companies have directed their efforts at providing easy and affordable solutions for working parents by designing and marketing products that would appeal to them and their children. In recent years health awareness about the health hazards of junk food has lead advocacy group to target food companies. Today the industry is at a crossroad as it needs to address the potential future roadblocks that might impact its growth.

4. Industry Economics & Key Success Factor

High cost of advertising, distribution and R&D Food companies have contributed more than $3.3 million to political candidates in previous elections thus they believe that they can have a certain level of influence over regulations. Key Success Factors

Have a strong distribution channel; people are not willing to drive out of their way to buy food, given their busy schedule. (Schools, grocery and convenience stores, restaurants.). Have the flexibility to control & influence in-store promotion, given that most of the food purchases happen at the point of sale. Have large marketing budget to create brand equity and differentiation. Invest in R&D to create new product offering and respond to evolving taste of consumers. Have a strong public affair department to deal with various government bodies and make sure that product offering is up to standards.

Overall: Purchasing food is a spontaneous, convenient and affordable decision, to differentiate itself food companies have spent over a $1 billion dollar annually in advertisement and millions of dollars in securing vending machine location in schools where it can take advantage of a captive audience to sell their product in a non-regulated environment.

5. Competitive Situation Analysis

Competitive Forces

Many large players (Kellogg, Mccain, Kraft and Nestle) with deep pockets and extensive product portfolio compete for limited shelve space. Threat of new entrants is curbed by high marketing and R&D costs - established players maintain control over premium shelve space. Move toward diet products might create opportunities for smaller players if larger players fail to meet shifting consumer demands. Buyers are gaining power because consumers group have recently been successful in changing the rules of the cigarette industry. Moreover big retailers sell their own private label, thus competing vs. established players. Any claims about food safety and health hazard could have an important impact on brand equity especially since these products are often consume by young children and fall under

the regulation of the FDA. Overall the rivalry is expected to increase as the threat of new regulations and potential consumer backlash might affect operating margins

6. Industry Wide Ethical Factors Should the sale of junk food be more regulated and should a tax be imposed? Is it ethical to allow food companies to market junk food directly to children and to sell these products on school premises? Should consumer be held individually responsible for their own action? Are consumers willing to pay more money or to receive an inferior product in order to achieve a better health? If industry players adopt anti-obesity initiatives in the US should they expand their efforts to other markets? Given health hazard linked with high consumption of junk food, should size and quantity be regulated and limited? Does the marketing & promotion of food that can cause health hazard is ethical and should it be controlled? Overall: There are costs associated with the consumption of food that can cause health hazard, since food companies take a very active role in the promotion and the sales of these products should they bear part of the responsibility? INTERNAL ANALYSIS

7. Financial Analysis

Kraft is present in 150 countries and has an employee base of 109,000 In 2002 it had revenues of $29.72 billion, a 12.32% growth over the previous year Kraft Foods net income rose by 80.3% over the previous year or $3.39 billion Kraft was a leader in 21 of its 25 product categories in the US found in 99% of households. What are the long-term cost associated with selling and marketing junk food What are the long-term cost associated with adopting anti-obesity initiatives What will the impact on the future equity, the brand of the company if it does not take a more active role in fighting the obesity issue Overall: Kraft is in good financial health thus it does not need to change its business model in the short term, however if it wants to be sustainable in the long run it is the perfect time to start a reflection on its future.

8. Operations Analysis

Krafts core competency lies in its ability to manufacture, sell and market a vast portfolio of diversify food products through various points of sales at a global level. Kraft has been successful because of its ability to develop comprehensive convenient food solutions that fit the lifestyle of busy working parents and their children. Its expertise in product development, R&D as well as its economy of scales is a key capability. Kraft Foods operates two subsidiary Kraft Foods International (KFI) which managed its operations by geography and Kraft Foods North America (KFNA) which managed its operations by product category. Kraft has promoted many health initiatives since 1970 but a lot of its marketing efforts dont seem to be consistent with these initiatives. Overall: Kraft formed a global advisory council to review the company profile and set new guidelines however early in the process it closed to door to any drastic modification to their most popular products hinting that flavour will ultimately trump

nutritional efforts.

9. Marketing and Competitive Position

In the past Oreos cookies ads was criticized for showcasing sedentary youngsters. Given very low switching cost it is very easy for customers to replace Kraft product, especially if they perceive a change in taste or image of the product. Kraft is trying to avoid possible lawsuits by launching its anti-obesity initiatives. Kraft is very dependent on a variety of popular products such as Oreo, Kool-aid, Mr. Freeze, luncheable, kraft dinner and Jello that might represent some health hazard and that directly marketed and sold to kids, it thus needs to use a balance approach in evaluating the request of different advocacy groups. Overall: Kraft is behind Nestle globally but it is #1 in the US, thus it is very dependent on the North America market and thus it needs to manage carefully its goodwill in a country where 60% of the population is obese. EVALUATION OF ALTERNATIVES

10. Alternatives

1. Kraft Foods could limit the scope of its initiative to its early health promotion initiatives.
Pros Not very costly ( so far $19 million committed vs. 3.39 billion net income) Very innovative and class leading vs. competitors Early initiative address a lot of different key issues that will help Kraft gain some goodwill Cons Might not be enough to avoid future lawsuits (long term cost needs to be assessed) Might not be enough given that Kraft is already on the radar and this early effort might be perceived as reactive vs. the lawsuit Kraft has not directly addressed the issue of the sales & marketing of junk food to children, which is one of the main requests of health organizations.

2. Kraft Foods could expand its early initiative by introducing healthier product offering options
and controlling the portion of its junk food product. Finally it should lobby for industry wide standards when it comes to the way junk food is marketed and sold to children. Pros Healthier products allow Kraft to tap in the $30 billion diet food market. Kraft can continue to sell its most popular products with fewer backlashes by offering smaller portions - thus generating more goodwill and reducing its operating costs. Lobbying for new standards allows Kraft to join advocacy group and work to create a level plain field. Cons Kraft might have to invest a lot of money in R&D to develop new products that are more healthy Some consumers might feel cheated and might not be happy about that. (Although they always the options of buying more products.) Taking a civil approach wont provide it with a competitive advantage.

3. Kraft could change their product offering to eliminate trans fatty acids of all its product offering. Pros Satisfy the needs of advocacy groups Avoid the cost of future lawsuits Might provide Kraft with goodwill Allows Kraft to be a first mover in its industry Cons It puts Kraft at a disadvantage vs. competitors since it might affect the taste or the price of their product Might jeopardize the sale of the most popular product such as Oreo cookies. Might damage the brand equity as current customers might not like the taste anymore Kraft might be forced to make a lot of changes to its operations and practices thus putting negative pressure on its operating margin.
Fit Utilitarian - stakeholders Total

Alternatives

Growth

Time

Risk

#1 Limit #2 Expand #3 Change

5 4 3

5 4 3

3 4 5

4 3 2

2 5 4

19 20 17

Recommendation & Ethical Justification

Commentary: Kraft is in a difficult position because its been very successful at marketing and selling its products such as the iconic Oreos product and as a result people have come to expect a certain taste & texture. While the trans-fat content may pose certain health hazard, its complete removal might not be a suitable immediate option as it might affect the essence of Krafts product. On the other hand its early anti-obesity initiatives dont go far enough to give Kraft a sustainable advantage over competition and at best it represent a drop of water in the ocean ( $20 million vs. $3.39 billion in net income) As much as advocacy group have a lot of influence, it turns out that they are not always representative of the entire population. Thus the danger is to move too quickly in a direction that will sacrifice taste at the expense of nutritional value, given that a lot of Kraft consumers might not be ready to embrace these sudden changes. The goal is thus to take gradual steps such as shifting marketing expenses towards healthier options to bring current customers up to speed with new trends, this way Kraft is able to be a market leader without jeopardizing its future financial success. Moreover Kraft should work to limit the portion of its junk food option a move that does not require reinventing the wheel and that can help them to cut costs. With the money saved Kraft could invest in developing healthy trans fatty acids substitutes. This will allow Kraft to take a managerial approach and eventually move into a strategic approach to align its R&D, sales and marketing to develop a competitive advantage in offering healthier snack and convenient food solutions. When it comes to regulation about marketing and sales to children Kraft should push for a civil approach to create an even plain field and show its commitment towards making a better future for the next generations of children.

Utilitarian theory: by adopting Option #2 Kraft could implement actions that create the greatest good for the largest number of stakeholders - namely customers (adults and children), shareholders, advocacy groups, the government, suppliers and competitors.