Cost Savings at Kraft

Kraft Foods Inc. (KFT), a leading manufacturer and marketer of packaged food and grocery products worldwide, has outlined several cost saving strategies to position itself as a strong bidder for the possible takeover of Cadbury Inc (CBY).
 
Kraft Foods and Cadbury combined would create a company with annual revenues of $50 billion (£30 billion), beating Nestle as the world’s leading food group.

Kraft on Monday had proposed a takeover of Cadbury for $16.2 billion (£10.2 billion). However, Cadbury rejected the offer on grounds of it being significantly undervalued.

Management at Kraft is pursuing the takeover, for which it is working on an $8 billion finance program through Citigroup (C) and Deutsche Bank (DB). In addition to this, the company is focusing on procurement strategies and is in the processes of reducing its supplier base by almost 50%.

Furthermore, the company plans to cut the number of raw material specifications required for its food packaging and also reduce transportation costs through fewer distributors.

Management believes that these initiatives would help Kraft reduce cost by about $300 million. Apart from this, the company plans to expand its market base in Europe by focusing on high-margin priority brands such as Milka, Cote d’ Or chocolates, Oreos and Mikado.

Kraft is also implementing a turnaround plan, under which it intends to close 36 plants and cut 19,000 jobs. These initiatives are expected to save another $1.3 billion, which the management plans to reinvest in brand-building.

Kraft also expects to reduce its cash conversion cycle to 41 days by 2011 versus 48 days in fiscal 2008. Further, it expects to reduce its overhead expenses to 12.5% by 2011 from 14% in 2008.

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