By Michael J. Silverstein, Abheek Singhi, Carol Liao & David Michael
When Irene Rosenfeld became CEO of Kraft Foods in June 2006, she became the leader of a company organized in two divisions: North America and International. The international business was a low-growth and Europe-heavy counterpart of the core U.S. business. Most of the international business consisted of German coffee, European cheese, and Milka brand chocolate. In addition, there were numerous orphan businesses – small, one-off country positions. Advertising support was in the low single digits and declining. Profits were erratic, as the commodity-driven portfolio lacked pricing power. Consumer market research was a stepchild.
Rosenfeld has three particularly strong leadership skills – curiosity, energy, and instinct. She studied how other multinationals had secured major emerging-market positions, and she vowed to shift her portfolio. She knew that she needed to follow the growth and that the company needed an infusion of talent and international experience. This strategy has worked. In the five years preceding her appointment as chairman and CEO, Kraft Foods International grew at about 5 percent per year. In the five years after her arrival, the international business grew – organically and through acquisition – by 250 percent, and the developing-markets portfolio grew by a whopping 300 percent. Most of that growth was in China and India.
Kraft is now almost as international as Rosenfeld’s role model, Procter & Gamble. And it is poised for another phase of growth. In mid-2011, the company decided to create two new companies out of one company: there will be a growth-oriented company consisting of Kraft Foods’ European and developing-markets business, plus its North American snacks business; and there will be the North American grocery business – including the beverages, cheese, grocery, and convenience-meals businesses.[ppw id=”82519327″ description=”” price=”0.70″]
The pathway of the Oreo cookie in China is a big element in the story of Kraft’s transformation. One of Rosenfeld’s first moves as CEO was to recruit a tall, soft-spoken Indian named Sanjay Khosla to lead this charge. Khosla, now sixty, wears wire-frame glasses and loose-knit sweaters and laughs heartily. He has traveled his entire working life, beginning in his early days in the Hindustan Unilever sales force in India selling the full line of Unilever products. He is intensely competitive and, because of his location, works hardest before and after sunrise in the United States – doing phone calls and meetings with his remote lieutenants. He logs close to a million miles a year in travel.
Khosla has trudged into the most remote markets of Asia, hired salespeople, and invented new products and business models. He likes to tell stories about miracles happening when people focus on a brand, a market, a category. He calls it “winning through focus.” He pushed the developing markets unit at Kraft to deliver on a five-ten-ten strategy. He used the phrase to divert resources to just five markets, ten categories, and ten brands.
His philosophy of business starts with getting the gross margin right. For Khosla, that means looking at all the elements of cost as well as benchmarking local players. Only when he has the gross margin right will he make incremental marketing investments. He calls it the virtuous circle of growth. “My most important lesson is about sustainable business models,” he says. “When people in China or India tell you to wait ten years for profits, they have it wrong. You need the right cost structure, the infrastructure; you need to be able to compete head-on locally.”
Khosla, a graduate of the Indian Institute of Technology in Delhi, was living in New Zealand and working for Fonterra, a multinational dairy cooperative, when Rosenfeld called. Rosenfeld’s job offer came with assurances that she had a serious appetite for acquisitions to spur growth. Khosla came on board within five months of her appointment. He recruited many people from his network and began his Winning in Kraft International (WIKI) workshops.
He used these to gauge the talent of his local teams, tease out their views, ask about obstacles created by headquarters, and identify opportunities in the market. He vowed change – in particular, the creation of new business models. For him, a winning business model starts with understanding consumers: what they like and dislike about the product, how they consume it, who in the family eats it and how frequently, what the model of brand adoption is, what price points set the retail store on fire and why, and most specifically, what it takes to unlock a rupee or a renminbi.
Khosla looked at China and India with particular glee. Of course, he knew India intimately, but he had also developed several China joint ventures. Despite his low-key personality, Khosla is very strict about three principles: focusing on a small set of tasks, unleashing the team, and paying rigorous attention to delivering to plan. His twenty-plus quarters of sustainable growth have set the bar at Kraft.
His instinct told him that starting an Indian business de novo would take years, cost tens of millions of dollars to develop, and drain talent from his light bench. Likewise, his instinct said that China as structured would never turn a profit – the gross margins were too low, the fixed costs were too high, and the Chinese consumer did not have the same taste characteristics as the U.S. consumer. He did his version of the classic in-home consumer interview in Shanghai, where Kraft China had its headquarters, and he decided that a lot had to change to make the Kraft business come alive in China.
“When I got here, we had less than $100 million in business in China and we were losing money,” Khosla explains. “I was told that there was once a dream to make China a $1 billion business, to match the billion-odd people in the country. The trouble was that after five years, we only had a $100 million business. The gross margins were too low, and the cost structure was built for a different scale and a Western world.”
Khosla soon realized why: the previous managers had simply transplanted their American go-to-market model—building a large manufacturing facility with “gold plating”; serving only the small, organized trade in Beijing and Shanghai; and relying on a team of expensive, non-Chinese-speaking expats.
To address the problem, Khosla asked his Chinese team to focus on one category – not five. He decided that cookies were core and that Oreo was the key brand, even though it was “on the cusp of being delisted.”
As Khosla revamped the Oreo brand in China, Rosenfeld pursued the first major transaction of her tenure as Kraft’s CEO. Danone, the French water and yogurt company, had decided to sell its Lefèvre Utile (LU) cookie business, and Rosenfeld realized that inside LU was a China business a little bigger than Kraft’s – and much more profitable.
“The neat thing about LU is that it gave us a beachhead in a number of the developing markets where we were not particularly successful,” Rosenfeld says. “I am really proud of this fact: the legacy Kraft business, before we bought LU, was about $50 million in China. We sold $100 million there in the month of January 2011.” She adds, “It’s a real testament to the power of finding the toehold, putting the right managers in place, and then building on that infrastructure. The combination of those two moves leapfrogged us into a whole new position. And that’s one of the reasons I’m so confident that we’re on a much stronger growth trajectory today than we were a couple years ago.”
The LU acquisition also brought talent in the form of Lorna Davis – a tall, blonde South African who was placed in charge of the China business. Today, she is worldwide head of Kraft’s biscuit category and still based in Shanghai. She blossomed under Khosla’s very particular style of management, which emphasizes “freedom within a framework.” He gives his top executives what he calls “blank checks” – virtually unlimited resources within the company’s strategic framework. “When you say to someone, ‘Spend the money as you see fit within a strategic framework,’ they work hard to show results – sales growth, bottom line, cash,” he says. “We encourage disruptive new ways of working, and a process that gets to closure.”
You cannot change ‘lick, twist, and dunk’ on Oreo. You cannot change the fundamental profile of the cocoa and the ingredients. But you can connect locally.
“We gave Lorna a blank check to grow the business within our strategic framework,” says Khosla. “You cannot change ‘lick, twist, and dunk’ on Oreo. You cannot change the fundamental profile of the cocoa and the ingredients. But you can connect locally.” Davis continued the success of LU, which had cleverly customized its products for the Chinese market – to the extent that it was almost seen as a local brand – and which had hustled its products through the many small family-operated outlets and turned a profit.
The first thing that was changed was the recipe, after market testing showed that the American Oreo was too sweet for Chinese consumers. A reduced-sugar Oreo proved an instant success. The team then experimented with the look of the Oreo. No longer just selling the chocolate wafer with a vanilla center, Kraft devised a four-layered crispy wafer filled with vanilla and chocolate cream and covered with chocolate, too. Since then, the company has added other flavors – including peanut butter and green tea ice cream – as well as a hollow, tube-shaped wafer lined with cream. Chinese consumers use the wafer as a straw for drinking milk.
But changing the taste and the look of the Oreo was only one of many challenges. “The fact that it was too sweet was only the beginning,” says Khosla. “You need to make it the best. You need to make it local. We realized that we had to compete at low price points and make money immediately.”
The Oreo team changed the packaging, shrinking the number of cookies per pack and charging RMB 2 ($0.29) instead of RMB 5 ($0.72). It also made some marketing and operational changes: creating a troop of brand ambassadors to ride through the streets of Beijing on bicycles with wheel covers resembling Oreos and to hand out the cookies to more than three hundred thousand consumers; recruiting Yao Ming, the Chinese basketball star, to appear in commercials explaining the “twist, lick, and dunk” routine; and introducing a proprietary handling process so that the chocolate could arrive in the cold north or hot south and still be good for eating.
The strategy has worked. “Oreo is the number one biscuit in China, up about 60 percent in 2011,” says Khosla, “and on track to be ten times bigger than when I started with Kraft.”
This same strategy has worked in India, too. When Khosla joined Kraft, the company had little business in India. In his first year, he invited Rosenfeld to accompany him to his native country. They both had their eye on Cadbury, the venerable British firm, with its iconic brands, such as Cadbury Dairy Milk and Trident, and its strong network of distribution channels. The two imagined how they could launch cookies and powdered beverages (such as Tang) if only Kraft owned Cadbury in India.
After a tussle, Kraft eventually acquired Cadbury, and Khosla turned to his new Indian management team and said, “Grow.” He gave them virtually unlimited resources to invest in the chocolate business – but again, all within a strategic framework. “We were a $400 million business in 2009 in India,” he says. “I just said, ‘I want to make it $500 million in 2010, and I’ll give you a blank check.’ They fell off their chairs. The business proposition was two pages, and it was approved in twenty-four hours. They delivered 27 percent growth in 2010. So Cadbury Dairy Milk, which has been in India for sixty-odd years, was soon growing over 40 percent.” Some of that growth was attributable to a massive increase in demand in the Indian market, but some was due to a simple insight: the use of coolers to make the business less seasonal by keeping chocolate from melting in India’s oppressive heat.
Khosla has worked hand in hand with his team in Asia to accomplish this growth agenda. Pradeep Pant, one of Khosla’s recruits, is the fifty-seven-year-old head of Kraft’s Asian business. He joined Kraft Foods five years ago after a career working for multinationals, including Gillette and Fonterra. With a deep, husky voice and an engaging style, he makes direct eye contact and nods to secure agreement from his audience as he speaks. He is strong-willed and decisive with a take-charge attitude.
“How high is high? How big is big? That is our question,” Pant says over lunch. “The only thing that will limit our growth is our will and imagination. You need to be a leader who is fearless, willing to take chances, to make things happen. China is not complex. India is not complex. Our focus needs to be on execution.”
Pant is thoughtful on the theme of leadership. You cannot fall into the trap of being a division of a multinational waiting for approvals, he says. He likes to make lightning-fast decisions and would prefer to seek pardon if it does not work out. He also believes that many multinationals turn their leadership teams over too fast. “The organization needs to feel settled. The ‘oil’ needed for success in both India and China is emotional.” Today’s young executives are “tempted all the time by other companies seeking talent: so, to secure them, you need to earn their loyalty, and to do that you need to really know them, know their hopes, and know their families. You can’t learn that in a three-year tour.”
If nurturing local teams is essential for success in China and India, so too is creating local products. “We take global ideas from Kraft and we twist them to be local. We’ve taken the phrase ‘glocal’ and made it ‘think local, act local,’” Pant explains. “We customize to Chinese tastes. We package to Chinese consumers. We understand how you win at the shelves and how you win at home.”
“It’s not about making thirty-second commercials,” he continues. “It’s about integrated marketing. It’s about engaging the consumer wherever they are. We engage our consumers on multiple levels.”
It is these strategies that have helped transform Kraft and Oreo in the world’s biggest emerging markets. And there will likely be a second chapter to the story. Khosla believes that Oreo has the potential to eventually be bigger in China (and India) than in the originating market, the United States.
The article is an excerpt from the book: The $10 Trillion Dollar Prize: Captivating the Newly Affluent in China and India, by Michael J. Silverstein. Abheek Singhi, Carol Liao and David Michael.(Harvard Business Review Press, 2012)[/ppw]
About the Authors
Michael J. Silverstein is the author of Trading Up and one of the founders of The Boston Consulting Group’s global consumer practice.
Abheek Singhiis the leader of BCG’s India consumer practice. Carol Liao heads BCG’s China consumer practice.
David Michael leads BCG’s globalization practice.