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How Kraft Foods became a merger target

Kraft Foods Group investors are cheering its plan to merge with H.J. Heinz, but the deal followed years of sluggish growth and organizational challenges for the once-mighty food giant.

Since its spinoff from Mondelez International in 2012, Kraft has been struggling to reignite sales in a mature U.S. market. It’s also coping with a consumer shift toward more natural foods – a difficult transition for the maker of Velveeta, Jell-O and Lunchables.

“It’s clear that our world has changed and our consumers have changed, but our company has not changed enough and certainly has not kept pace,” Kraft Chief Executive Officer John Cahill said last month.

Here are four of the biggest headaches that Kraft Foods has faced in recent years:

Ingredient costs: Kraft has been hit by rising commodity prices, particularly for meat and cheese. Kraft pointed to the escalating expenses as “one of the most significant cost pressures we faced in 2014.” To adapt, it raised prices on 50 percent of its products in July, but that created one more hurdle to winning back shoppers.

Changing tastes: U.S. consumers, driven by the millennial generation, are showing a stronger preference for natural and organic ingredients. That’s left American food giants like Kraft scrambling to respond. The company has cited its P3 Protein Packs, which include nuts, meat and cheese, as the type of portable snack that young consumers crave, but a large part of its portfolio is considered unattractive to the new generation. Even its classic Mac and Cheese product faces an encroachment from organic sellers such as Annie’s, which is now part of General Mills.

Management: Kraft’s leadership has been in turmoil in recent months, with many of its top executives heading for the exits. Chief Executive Officer Tony Vernon, who took over the business after the split from Mondelez in 2012, abruptly left the company in December and was replaced by John Cahill, the board chairman. Analysts blamed poor performance for the switch. About two months later, Kraft made more changes to the C-Suite after the company’s top finance and marketing executives departed. Kraft also named a chief operating officer, a new role, in a bid to get its house in order.

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