Singapore Management University

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Case Collection Case Writing Initiative
10-2012
Te Oreo in China: Time to Get it Right or to Get
Out
Srinivas K. Reddy
Singapore Management University, sreddy@smu.edu.sg
Kevin W. Sproule
Singapore Management University, ksproule@smu.edu.sg
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Citation
Reddy, Srinivas K. and Sproule, Kevin W.. Te Oreo in China: Time to Get it Right or to Get Out. (2012). Case Collection.
Available at: htp://ink.library.smu.edu.sg/cases_coll_all/27




SMU-12-0020



This case was written by Professor Srinivas
The case was prepared solely to provide material for class discussion. The authors do not intend to illustrate either
effective or ineffective handling of a managerial situation. The authors may have disguised certain names and other
identifying information to protect confidentiality.

Copyright 2012, Srinivas K. Reddy and Kevin Sproule


THE OREO IN CHINA: TI
OUT

It was 25 August 2005 and Shawn Warren, head of biscuits for Asia Pacific at Kraft, was
already late for his next and arguably more important meeting.
with Carrefour at their Shanghai office, by far the largest seller of Oreos
headed back to Krafts China office he thought about how the
their concern about the slow sales of Oreos at their stores across the country. This time they had
seriously entertained pulling the product of
low point of the meeting when the Carrefour team reminded him of the chains record growth
in the emergent Chinese market and rapid expansion with new hypermarkets opening every
month. The story for Oreo w
over the last ten years and

As the taxi pulled up to Kraft Chinas headquarters in Shanghai
meeting would have a similar tone. He was to p
China. His audience would
sales for the companys marquee product. The Oreo was the largest biscuit brand worldwid
and yet shipments in China

Warren thought of the narrative, which sounded bad. The most iconic brand in the US was
stalling in the biggest potential market in the world. After all
could it really be successful elsewhere? Everyone seemed to be talking about the rising
importance of BRIC countries, but
sold in Brazil, Russia or India. Warren knew that with significant reorganiza
Krafts businesses, it was a real possibility that the company could pull the product from China.

The larger backdrop of companywide
would have little time to turn the Oreo in Chi


From a Horse Cart to the Number Two Worldwide Food Company

Kraft started from humble beginnings o
founded the company when he began to sell cheese from his horse
growing city. As his wholesale business had early success
cheese. In 1914 he opened the doors to his first cheese factory
distribution company into the beginnings of a food produ
expanded both organically and through acquisition. In 1928 Kraft made its first major
acquisition and purchased
Cheese. The company grew from there with the notable p
& Cheese in 1937.

From there Kraft grew until t
of US tobacco companies looking to diversify their product lines. Increasingly wary of rising
This case was written by Professor Srinivas K. Reddy and Kevin Sproule at the Singapore Management
was prepared solely to provide material for class discussion. The authors do not intend to illustrate either
effective or ineffective handling of a managerial situation. The authors may have disguised certain names and other
g information to protect confidentiality.
Reddy and Kevin Sproule
HE OREO IN CHINA: TIME TO GET IT RIGHT O
It was 25 August 2005 and Shawn Warren, head of biscuits for Asia Pacific at Kraft, was
already late for his next and arguably more important meeting. He had just finished meeting
with Carrefour at their Shanghai office, by far the largest seller of Oreos in China. As his taxi
headed back to Krafts China office he thought about how the Carrefour team had reiterated
their concern about the slow sales of Oreos at their stores across the country. This time they had
seriously entertained pulling the product off the shelves altogether. Warren thought about the
low point of the meeting when the Carrefour team reminded him of the chains record growth
in the emergent Chinese market and rapid expansion with new hypermarkets opening every
month. The story for Oreo was much different, with disappointing sales in the Chinese market
over the last ten years and with no growth in sight.
As the taxi pulled up to Kraft Chinas headquarters in Shanghai, Warren thought his next
meeting would have a similar tone. He was to present his plans to try and sa
China. His audience would be senior Kraft management who had flown in to address sluggish
sales for the companys marquee product. The Oreo was the largest biscuit brand worldwid
and yet shipments in China during 2005 were projected to finish the year down over 10%.
Warren thought of the narrative, which sounded bad. The most iconic brand in the US was
stalling in the biggest potential market in the world. After all, if the Oreo wasnt successful here
uld it really be successful elsewhere? Everyone seemed to be talking about the rising
ance of BRIC countries, but Oreo sales were flat in China and the biscuit
sold in Brazil, Russia or India. Warren knew that with significant reorganiza
Krafts businesses, it was a real possibility that the company could pull the product from China.
companywide revenue and profit struggles at Kraft meant that Warren
would have little time to turn the Oreo in China around and make it a success.
Horse Cart to the Number Two Worldwide Food Company
started from humble beginnings on the outskirts of Chicago. In 1903 James L. Kraft
the company when he began to sell cheese from his horse-drawn
growing city. As his wholesale business had early success, he looked towards making his own
cheese. In 1914 he opened the doors to his first cheese factory, expanding Kraft from a
distribution company into the beginnings of a food producing company. The company
expanded both organically and through acquisition. In 1928 Kraft made its first major
and purchased the Phenix Cheese Corporation, the makers of Philadelphia
heese. The company grew from there with the notable product introduction of Kraft Macaroni
From there Kraft grew until the next trend in ownership at US food companies came
tobacco companies looking to diversify their product lines. Increasingly wary of rising

Reddy and Kevin Sproule at the Singapore Management University.
was prepared solely to provide material for class discussion. The authors do not intend to illustrate either
effective or ineffective handling of a managerial situation. The authors may have disguised certain names and other
Version: 2012-09-26
ME TO GET IT RIGHT OR TO GET
It was 25 August 2005 and Shawn Warren, head of biscuits for Asia Pacific at Kraft, was
He had just finished meeting
in China. As his taxi
Carrefour team had reiterated
their concern about the slow sales of Oreos at their stores across the country. This time they had
f the shelves altogether. Warren thought about the
low point of the meeting when the Carrefour team reminded him of the chains record growth
in the emergent Chinese market and rapid expansion with new hypermarkets opening every
as much different, with disappointing sales in the Chinese market
Warren thought his next
resent his plans to try and salvage the Oreo in
senior Kraft management who had flown in to address sluggish
sales for the companys marquee product. The Oreo was the largest biscuit brand worldwide
2005 were projected to finish the year down over 10%.
Warren thought of the narrative, which sounded bad. The most iconic brand in the US was
if the Oreo wasnt successful here,
uld it really be successful elsewhere? Everyone seemed to be talking about the rising
the biscuit was not even
sold in Brazil, Russia or India. Warren knew that with significant reorganization across all of
Krafts businesses, it was a real possibility that the company could pull the product from China.
revenue and profit struggles at Kraft meant that Warren
na around and make it a success.
Horse Cart to the Number Two Worldwide Food Company
n the outskirts of Chicago. In 1903 James L. Kraft
drawn carriage around the
he looked towards making his own
expanding Kraft from a
cing company. The company
expanded both organically and through acquisition. In 1928 Kraft made its first major
makers of Philadelphia Cream
roduct introduction of Kraft Macaroni
food companies came spurred by
tobacco companies looking to diversify their product lines. Increasingly wary of rising

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


2/21
regulation, large tobacco companies looked to broaden their product offerings through
acquisition. In 1985 Phillip Morris, the large US-based tobacco company, acquired General
Foods 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. In
1988 Phillip Morris purchased Kraft for US$12.9 billion. Then in 2000 Phillip Morris acquired
Nabisco 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 company
in the world. In 2000 the purchase of the National Biscuit Company (Nabisco) meant that three
companies operating in China moved under the Kraft banner and included Beijing Nabisco
Food Co. Ltd., Nabisco Food (Suzhou) Co. Ltd. and United Biscuits (China) Ltd. With these
additions Kraft became the number one biscuit company in China and had a diverse product
portfolio, and for the first time sold the famous Oreo biscuit.
1
The merged company had some
of the most recognized brands in the world, which included Philadelphia Cream Cheese, Club
Social Crackers, Kraft Macaroni & Cheese and the worlds most popular biscuit, the Oreo. In
2004 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 very
popular Barnums Animal Cookies sold in circus-themed boxes, they hoped to produce another
biscuit success story. The company thought of a cookie with two chocolate discs and a crme
filling in between. No one was quite sure what to name the new biscuit and details around
where the final name Oreo came from were not exactly clear. Some suggested it was based
on the French word for gold, or, which was a color used in early package designs. Others
suggest 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 was
short and easy to pronounce. While the exact origin of the name was debated, its first sale in the
American market was not. On 6 March 1912, S.C. Thuesen had the distinct honor of buying the
first Oreo biscuit in Hoboken, New Jersey. He could not possibly have known that the Oreo
would become one of the worlds most iconic products.

When introduced in 1912, Oreos were sold in bulk from large display tins with local grocery
stores 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. In
1921 the name had been changed from the Oreo Biscuit to the Oreo Sandwich, and the first
advertisements began to feature the twist (refer to Exhibit 1 for Oreo packaging through the
years).

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

Another major change happened in 1965 when the packaging got larger and took on a familiar
look. 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.

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


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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 crme
filling. Double Stuff Oreos (the biscuit with double the crme filling) were first launched in
1974, and Oreo ice cream was introduced in 1981. Product innovation and global expansion
were hallmarks of the biscuits drive towards becoming a billion dollar brand. In 1996 the Oreo
was first introduced to China in hopes of furthering the biscuits success with a new set of
consumers.


The Chinese Market

Macroeconomic Trends

When the decision was made by Nabisco at the time to enter the Chinese market the conditions
seemed 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 the
financial press without finding a mention of the Chinese economy. The International Monetary
Fund reported the gross domestic product (GDP) of China grew more than 10% annually in
2003 and 2004.
2
This was much higher than the average annual GDP growth in advanced
economies, which averaged 2.6% and better than the growth rate of the broader developing
Asian economies, which averaged 9%.
3
The past ten years had also ushered in a large increase
in per capita GDP in China rising from US$700 per person in 1996 to a projected US$2,100 by
the end of 2005.
4
While this increase in wealth was most pronounced at the top of the income
bracket, the three-fold increase in the last decade meant the average Chinese consumer had
significantly 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 on
the world stage fuelled by its assent as a manufacturing powerhouse. These efforts culminated
in 2001 when China was admitted into the World Trade Organization (WTO), representing a
milestone in its market-oriented reforms.
5
Several western companies saw the growing
economy, the rise of the Chinese consumer and the worlds most populous country as an
enticing business opportunity.

Consumer Trends

The consumer marketplace in China had been changing rapidly. The increasingly open
economy and upward mobility of the Chinese consumer meant that there was ample
opportunity 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 to
China, was certainly an example. Euromonitor, a market research firm, estimated that between
1999 and 2004, sales at hypermarkets grew by 147%, with new stores opening across the
country.

A similar success story was the introduction of Starbucks in China. In 1999 Starbucks opened
its first store in China and quickly became the countrys leading coffee chain, albeit with
relatively low competition. They quickly expanded on this early foothold as even the high
priced 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.pdf
3
Ibid.
4
GDP Per Capita, The Worldbank, accessed June 2012, http://data.worldbank.org/indicator/NY.GDP.PCAP.CD
5
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. The
Chinese countryside with its limited infrastructure and diffused populations, had not seen as
much growth in incomes, or market penetration of foreign firms. China became increasingly
industrialised and more people moved to urban environments. Growth in large (Tier 1) cities
alone was certainly enough to warrant attention. In 1996, when the Oreo was first introduced in
China, the World Bank estimated that roughly 32% of the population lived in cities.
7
By 2005
this number had increased to nearly 50%, meaning that an additional 150 million peoplemore
people 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 the
broader bakery category. The bakery category, which included biscuits
8
, baked goods, bread
and breakfast cereals, was growing fast. An analysis in 2005 showed that bakery products were
the number one packaged food in China. Within the bakery category, biscuits had also done
very well. Between 1999 and 2004 biscuits had grown at an annual rate of 8.4%, with sandwich
biscuits reporting a strong 7.5% growth rate (refer to Exhibit 2 for biscuit sales in China from
1999 to 2004). Over the next four years growth was expected to continue with the bakery
forecast to grow at an annual rate of 5.3% and biscuits at 4.9% (refer to Exhibit 3 for
forecasted packaged food sales growth 2004-2009).

Local artisanal producers had dominated the biscuit category in China, but national and
international biscuit brands were gaining market share. In 2004 Kraft enjoyed the overall
largest position in the biscuit category with over 10% (refer to Exhibit 4 for market share in the
biscuit 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 booming
economy would continue the trend of rising consumer spending on biscuits with many retailers
already 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. In
following 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, the
distribution was focused in the northern part of the country. The main efforts had been to take
the established brand of Oreo from the United States and make it successful in China. This
meant taking existing package sizes and selling the product throughout China. The initial sales
had picked up nicely. By 1999 Oreo had established a foothold in the Chinese market (refer to
Exhibit 5 for Oreo sales in China).

In 2000 when Kraft acquired Nabisco, the company combined the two product lines and
featured a greatly expanded brand offering. Adding the Oreo to a range of biscuits, such as
Chips Ahoy (a chocolate chip biscuit) in the cookie category and Ritz (a butter-flavoured
biscuit) 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, sandwich
biscuits and wafers.

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diverse offering across the biscuit category. The biscuit portfolio had some success over the
next five years, but sales generally lagged behind the broader food market in China. In 2005
when Warren surveyed the scene in China he was worried that the merger had actually diffused
the 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-complementary
sales efforts. Mary Chun, brand manager of Oreo China, had also commented on the merger
during a recent conversation with him:

One big difference was Kraft operated at a different pace versus Nabisco. At that time Kraft
had a portfolio with products like Maxwell House Coffee, Tang Powdered Beverage, and
other 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 pace
and use the Kraft pace to sell Nabisco products, it doesnt work.

Warren also worried that the large portfolio, if not branded and distributed effectively, could
actually hurt sales as the company would lack focus and spend too little on any one brand to
make 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 in
Warrens home market in North America, this was not successful when viewed against
expectations and other success stories in China. One key manager back at headquarters had
written 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 so
many 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 in
the northern Chinese market for biscuits. When Warren took on his regional role as head of
biscuits, he thought back to his conversation with Chun. She had been with the brand since it
was 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 this
brand has evolved and gradually expanded into different countries. The landmark in China
was when it was launched here in 1996. From there we set up the distribution in the north
of 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. The
growth 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. Several
of the office staff had been there before the operation was purchased by Kraft and felt they had
little say in major decisions about the Oreo. In particular, decisions about pricing and product
innovations 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 not
know 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 made
it successful in the United States. The primary sales channel was through medium-sized
grocery stores and hypermarkets such as Tesco and Carrefour. In 2005 the packaging was still
largely 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 slug
packs at 106 grams. Chun said of the choice of package sizes:

The current production is more manufacturer-driven, the plant can produce slug packs, all
the same lengths, at about 100 gram packages for Oreos, or with something like Ritz
Crackers 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 the
customer we might need to change.

Kraft would often run bonus pack promotions where they would sell the large packages with
additional Oreos added to the standard package so consumers would get more for the same
money. Well recognized as a successful strategy in the US, these promotions were intended to
draw the consumer to purchase the product by increasing the perceived value they were getting
with a single purchase. The package size helped aid in bulk purchase and consumers typically
responded 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, there
was 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 did
not have more than a 15% market share. In the east they trailed Danones nearly 32% market
share with an 8% market share. In the northeast and northwest, Kraft trailed local producer
Guangdong 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 strong
sales of competing biscuits. There were a number of brands doing well, and to make matters
worse 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 plain
crackers, like Ritz. At its launch the Oreo was considered as a good innovation as it was in
sandwich 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 example
sandwich biscuits introduced by Taiwanese companies worked well. They used some of
their mature biscuit products and introduced them in to China.

Within the sandwich biscuits category, the leader was Taiwan-based Master Kongs brand of
KSF 3+2 biscuits, which featured three cookies and two sets of filling. Overall the brand had a
national 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 layer
of filling, commanded an additional 10% market share. The brand worked well with the overall
palate of the Chinese consumer and was said to be less sweet than the current Oreo. The
product was also offered in smaller pack sizes than Oreo and was perceived by some to offer
more value with three cookies instead of two. The main brand in Shanghai was the sandwich
milk cookie offered by Danone. The product was largely successful in eastern Chinese cities in
line 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. It
was particularly interesting because a single company, Nestl, was able to dominate a striking
75% of the market with its chocolate-covered wafer. Other popular products included Jiashili
brand biscuits with their main line of Egg Crackers and Hollow Biscuits
9
(refer to Exhibit 7
for category leading products and market share data).

Pricing

The Oreo pricing was largely set from direction given from global category heads located at
Kraft headquarters in the US. Pricing was typically set to be the same across China with bonus
pack promotions at the discretion of local decision makers. Target prices and target margins
were 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 a
noticeable margin. According to a 2004 study, the average price per kilogram of Oreos was
US$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 package
sizes also made the absolute price of a single Oreo purchase noticeably higher than the
competition. The high price, which several distributors thought contributed to slow sales, was
just one issue large grocery chains had with selling the Oreo. Premium biscuits generally
contributed a smaller share of the final sale to the distribution partner. Kraft estimated that as a
percentage of the final sale of a premium biscuit, 60% would go to the distributor. This was in
comparison to value biscuits where 70% of the sale price would go to the distributor. The high
price of Oreos, in part due to the high production costs, was clearly a factor in determining both
its 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 component
of the distribution channel with large numbers of store openings in major cities. In 2004 this
trend had also impacted the biscuit market with over 50% of all biscuit sales and 40% of all
bakery sales coming from hyper/supermarkets (refer to Exhibit 9 for sales by distribution
format). Interestingly the fastest growing sales channel for biscuits in China was the corner
store. With growth over 30% annually over the last five years, this was a channel that had
grown 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 in
with the rise of international chains in China. In particular, regulations that limited the size of
international 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 international
chains were also very important to Krafts distribution strategy as they had an expansive
network 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 more
than 16. This meant that as regulations shifted, reach expanded and more of biscuit sales came
from 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 and
hypermarkets 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 research
study that had just been completed. As part of testing a proposed Oreo line extension Kraft
China 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. The
product was called LightSweet Oreo in the test phase, and as the name implied, it was an Oreo
where 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 the
product had come from local team members who had a sense that a low-sweet variety would do
well with Chinese consumers in addition to the existing Oreo. The line extension would serve
as another variety of Oreo and was based on a well-established concept in other developed
markets of Oreo flavour variations.

The study revealed several things that were not clear when they first launched the Oreo back in
1996. The study tested the LightSweet Oreo against the regular Oreo and asked Chinese
consumers to rate both. When tested in direct comparison to the normal Oreo, respondents rated
the lightly sweet version 25% higher than the existing Oreo. It was also worth noting that both
the regular Oreo and the LightSweet Oreo scored worse than benchmark studies for the Oreo in
other markets like the U.S. In other words, Chinese consumers seemed to enjoy the LightSweet
Oreo better than the standard Oreo, but still both varieties lagged behind in consumer scores in
more developed Oreo markets. It could have been the case that the Oreo would just not be
popular 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 be
launched. This meant that while it appeared that the LightSweet Oreo would be a popular new
product, there was some uncertainty about whether it would be a success. In addition to the
aggregate 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 was
also 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 purchase
the 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 to
consumers eating more cookies in a single sitting than the existing product (refer to Exhibit 10
for 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 a
slight increase in earnings over the prior year but an unwelcome 21% drop in operating income
from 2003. Overall profit for the three largest food companies from 2001 to 2004 had increased
11% at Nestl, 6% at Danone and fallen 2% at Kraft (refer to Exhibit 11, Exhibit 12 and
Exhibit 13 for selected financial performance). In 2004 Krafts Latin American and Asia
Pacific groups fared even worse with operating income falling 34% from the prior year. When
reviewing 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 and
Africa 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

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


9/21
reported a 210% revenue increase in line with its aggressive Asian expansion efforts (refer to
Exhibit 14 and Exhibit 15 for selected financial performance).

Despite the success stories being authored in Asia, the Oreo was not one of them. There had not
been any good news for the biscuit since a modest sales increase in 2003. This was further
highlighted after a nearly 40% increase in spending on Oreo marketing and communication had
not 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 entire
Kraft line of biscuits was down over 12% from 2004 (refer to Exhibit 16 for Kraft China
product shipments). Not only had there been a decrease in the volume of Oreos shipped, but
this had led to higher than expected inventories driving up storage costs. As the flagship brand
missed forecast after forecast, some stock had to be thrown away as inventories regularly
outpaced 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 be
following that trend with only two product launches by August and only half the new biscuits
the company had hoped to ship actually sold (refer to Exhibit 17 for Kraft product launch
schedule). The competition had not seen the same problem with several successful biscuit
launches over the last 24 months (refer to Exhibit 18 for competition product launches in
China). Some product launches were planned for 2006, but even launches like LightSweet Oreo
did not meet the regular Kraft thresholds for new product launches. As Warren considered
potential new products he wondered whether they should focus on the core brands that had
been underperforming rather than spending so much time and money on launching new
flavours and varieties. He also thought about the work of the local team and how he could
advocate 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 what
we really want to achieve as the Oreo brand in China and how can we reset our strategies
to get there.

As Warren rushed to his next meeting with Kraft management, he was thinking about how he
could turn this situation around. He was still a firm believer in the Oreo product, but sluggish
sales and a negative 15% profit margin would certainly make success an uphill battle. This was
especially true given the climate at Kraft. The company needed to improve its financial
performance. A surge in commodity prices was putting profit projections across the company
into question as it largely decided to hold shelf prices to not impact consumers. It was
becoming 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 the
Oreo a success in China. All this was at risk as grocery stores talked about pulling the product
from the shelves, and executives in the US had become restless with slow sales and
contemplated taking the Oreo out of the worlds most populous country. Warren thought back
to something one top US executive had recently said about the enduring success of the original
Oreo:

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

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


10/21
EXHIBIT 1: HISTORICAL OREO PACKAGING




































Source: Kraft Internal Information.









Oreo is launched in China Oreo packaging 1995
Oreo packaging 1951
Oreo packaging 1965
Oreo packaging 1937
Oreo packaging 1951
Oreo packaging 1923

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


11/21
EXHIBIT 2: RETAIL SALES OF BISCUITS IN CHINA: VOLUME 1999-2004 (000 TONS)



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






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



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










Biscuit: Subcategory 1999 2000 2001 2002 2003 2004
Sweet biscuits 588 634 681 726 771 813
Plain biscuits 416 448 475 502 530 556
Cookies 83 89 101 111 120 130
Sandwich biscuits 89 97 105 113 121 128
Savoury biscuits and crackers 291 322 359 405 454 500
Total Biscuits 879 957 1,040 1,131 1,225 1,313
Category
Forecast Compound
Annual Growth Rate
(2004-2009)
2004-2009
Forecast Total
Growth
Confectionery 5.5% 31.0%
Bakery products 5.3% 29.8%
Ice cream 7.8% 45.4%
Dairy products 9.2% 55.4%
Sweet and savoury snacks 6.9% 39.4%
Ready meals 8.0% 46.6%
Soup 4.4% 24.0%
Pasta 5.5% 30.5%
Noodles 8.9% 53.2%
Canned/preserved food 3.6% 19.1%
Frozen processed food 6.1% 34.6%
Dried processed food 8.9% 53.3%
Chilled processed food 6.9% 39.8%
Oils and fats 11.9% 75.3%
Sauces, dressings and condiments 4.8% 26.4%
Baby food 13.3% 86.5%
Spreads 7.3% 42.5%
Packaged food 6.8% 39.3%

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


12/21
EXHIBIT 4: BISCUIT COMPANY MARKET SHARE BY VALUE - CHINA (%)


* A Kraft Group Company
Source: Bakery Products in China, Passport GMID, March 2005, Euromonitor International, accessed
August 2012.





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


Source: Kraft Internal Information.




Company 2001 2002 2003 2004
Shanghai Danone Biscuits Foods Co Ltd 5.8 7.2 8.2 8.7
Beijing Nabisco Food Co Ltd* 2.8 3.3 3.7 3.8
Nabisco Food (Suzhou) Co Ltd* 2.6 3.9 3.8 3.8
Ting Hsin International Group 3.5 3.7 3.1 3.4
United Biscuits (China) Ltd* 3.2 3.2 3.2 3.2
Dongguan Huajia Food Co 2.1 2.1 2.2 2.2
Khong Guan Biscuit Factory (Singapore) Pte Ltd 1.7 1.7 1.7 1.6
Shanghai Glico Food Co 1.6 1.5 1.5 1.5
KelsenBisca Group 0.7 0.7 0.7 0.7
Guangzhou Jessica Food Co Ltd 0.5 0.6 0.6 0.6
Dongguan Huamel Food Co Ltd 0.5 0.5 0.5 0.5
Tianjin Tongtai Food Co 0.2 0.2 0.2 0.2
Guangdong Jiashili Group Co Ltd 0.4 0.3 0.3 0.2
Dongguan Hsu-Fu-Chi Food Co Ltd 0.1 0.1 0.1 0.1
Others 74.2 71.1 70.4 69.4

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


13/21
EXHIBIT 6: BISCUIT BRAND SHARES IN CHINA (% RETAIL SALES PRICE)


* A Kraft Group Company
Source: Bakery Products in China, Passport GMID, March 2005, Euromonitor International, accessed
August 2012.




























Brand Company 2001 2002 2003 2004
Masterkong Ting Hsin International Group 3.5 3.7 3.1 3.4
Danone Milk Crispy Shanghai Danone Biscuits Foods Co Ltd 1.9 2.4 2.8 2.8
TUC Shanghai Danone Biscuits Foods Co Ltd 1.6 2 2.3 2.5
Ritz* Beijing Nabisco Food Co Ltd 1.4 1.8 2.2 2.3
Nabisco* Nabisco Food (Suzhou) Co Ltd 1.6 2.3 2.2 2.2
Pacific* United Biscuits (China) Ltd 1.6 1.7 1.7 1.7
Chips Ahoy!* Nabisco Food (Suzhou) Co Ltd 0.9 1.6 1.6 1.6
Glico Shanghai Glico Food Co 1.6 1.5 1.5 1.5
Oreo* Beijing Nabisco Food Co Ltd 1.2 1.2 1.3 1.3
Keebler* United Biscuits (China) Ltd 1.3 1.3 1.3 1.2
Garden Dongguan Huajia Food Co 1.1 1.1 1.2 1.2
Khong Guan Khong Guan Biscuit Factory (Singapore) Pte 1.1 1.1 1.1 1.1
Prince Shanghai Danone Biscuits Foods Co Ltd 0.7 0.8 1 1
Danone Shanghai Danone Biscuits Foods Co Ltd 0.4 0.7 0.8 1
Tiki Shanghai Danone Biscuits Foods Co Ltd 0.8 0.9 0.9 0.9
Kjeldsens KelsenBisca Group 0.7 0.7 0.7 0.7
Jessica Guangzhou Jessica Food Co Ltd 0.5 0.6 0.6 0.6
Huamel Dongguan Huamel Food Co 0.5 0.5 0.5 0.5
Trakinas* Beijing Nabisco Food Co Ltd 0.3 0.3 0.3 0.3
President Tianjin Tongtai Food Co 0.2 0.2 0.2 0.2
Jiashili Guangdong Jiashili Group Co Ltd 0.4 0.3 0.3 0.2
Hsu-Fu-Chi Dongguan Hsu-Fu-Chi Food Co Ltd 0.1 0.1 0.1 0.1
McVitie's* United Biscuits (China) Ltd 0.2 0.1 0.1 0.1
Others 76.4 73.1 72.2 71.6

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


14/21
EXHIBIT 7: COMPETITIVE BISCUIT MARKET PROFILE (BEIJING AND SHANGHAI)

BISCUITS IN BEIJING























BISCUITS IN SHANGHAI
























Source: Kraft Internal Information.

Sandwich
#1: KRF 3+2
22% Market Share
(Master Kong)
#2: Oreo
19% Market Share
(Kraft)
Wafers Plain Sweet Cookies
#1: Nestl Wafers
75% Market Share
(Nestl)
#2: Other Brands
25% Market Share

#1: Marbu
30% Market Share
(Kraft)
#2: Sweet Yolk
25% Market Share

#1: Chips Ahoy
22% Market Share
(Kraft)
#2: Alliance
16% Market Share

Sandwich Wafers Plain Sweet Cookies
#1: Milk Biscuit
20% Market Share
(Danone)
#2: Oreo
17% Market Share
(Kraft)
#1: Nestl Wafers
25% Market Share
(Nestl)
#2: Bright Wafers
23% Market Share

#1: Butter Cookies
32% Market Share
(Kjeldsens)
#2: Chips Ahoy
22% Market Share
(Kraft)
#1: Milk Biscuit
40% Market Share
(Danone)
#2: Tiki
10% Market Share
(Danone)

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


15/21
EXHIBIT 8: PRICE PER KILOGRAM FOR LEADING BISCUITS IN CHINA



Source: Kraft Internal Information.






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



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



Product Parent Company Price Per Kg
Oreo Kraft 3.51 $
KSF 2+1 Ting Yuan 3.11 $
Ritz Sanwich Kraft 3.06 $
Milk Biscuit Danone 3.03 $
KSF 3+2 Ting Yuan 2.93 $
Trakinas Kraft 2.67 $
Prince Biscuit Kraft 2.54 $
Other Various 1.76 $
Percentage of Retail Sales
Distribution Format Biscuits All Bakery Biscuits All Bakery
Supermarkets/hypermarkets 20% 22% 50% 40%
Independent food stores 38% 29% 12% 10%
Convenience stores 5% 4% 23% 7%
Others 37% 46% 15% 43%
1999 2004

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


16/21
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 the
Danone Milk Biscuit

Source: Kraft Internal Information.
LightSweet Oreo Original Oreo Kraft Normal
The biscuit is fulfilling?
Agree
(27% Strongly Agree)
Agree
(22% Strongly Agree)
at least 38%
Strongly Agree
Overall 'liking' Medium Medium Medium
Biscuit 'uniqueness' Medium Medium Medium
Biscuit consumer 'relevance' Medium Medium Medium
Purchase intention High Medium High
Confidence in purchase intent above
existing product
90% n/a at least 95%

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


17/21
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.







Kraft Worldwide 2001 2002 2003 2004
Net Revenue (millions ) 28,731 $ 29,248 $ 30,498 $ 32,168 $
Operating Income (millions ) 4,717 $ 5,961 $ 5,860 $ 4,612 $
Volume Shipped (million pounds ) 17,392 18,354 18,493 19,002
Net Revenue (millions ) 2,430 $ 2,585 $ 2,547 $ 2,586 $
Operating Income (millions ) 378 $ 513 $ 391 $ 250 $
Volume Shipped (million pounds ) 2,057 2,585 2,547 2,586
Kraft Latin America & Asia Pacific
Danone Worldwide 2001 2002 2003 2004
Net Revenue (millions ) 14,470 13,555 13,131 13,700
Operating Income (millions ) 1,609 1,590 1,604 1,705
Net Revenue (millions ) 1,934 2,080 1,957 2,072
Operating Income (millions ) 231 277 279 290
Danone Asia
Nestle Worldwide 2001 2002 2003 2004
Net Revenue (millions ) CHF 84,698 CHF 89,160 CHF 87,979 CHF 86,769
EBITA (millions ) CHF 11,346 CHF 12,408 CHF 12,538 CHF 12,604
Net Revenue (millions ) CHF 15,458 CHF 14,880 CHF 14,432 CHF 14,673
EBITA (millions ) CHF 2,653 CHF 2,564 CHF 2,508 CHF 2,547
Nestle Asia, Oceania and Africa

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


18/21
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 VOLUME
2005-2004


Source: Kraft Internal Information.






Carrefour Worldwide 2001 2002 2003 2004
Net Revenue (millions ) 69,486 68,729 70,486 72,668
EBITA (millions ) 4,528 4,675 4,871 4,917
Total Hypermarkets (count) 657 704 750 794
Net Revenue (millions ) 4,567 4,639 4,637 5,101
EBITA (millions ) 315 317 313 342
Hypermarkets in China (count) 24 32 40 56
Carrefour Asia
Tesco Worldwide 2001 2002 2003 2004
Net Revenue (millions ) 20,800 23,400 26,004 30,814
Operating Profit (millions ) 1,174 1,332 1,509 1,832
Net Revenue (millions ) 860 1,398 2,031 2,669
Operating Profit (millions ) 4 29 71 122
Tesco Asia
Coffee 17.0%
Refresh. Beverages -5.9%
Biscuits -12.2%
Confectionary -25.7%

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


19/21
2006 Possible Product Launches
Oreo LightSweet
Oreo Wafer
Ritz Chips (Origonal / BBQ / Spicy Chicken)
Ritz Chips (Other flavors)
Pacific Savory Topping
Pacific Soda Wholemeal
Pacific Milk Craker
CA! Chewy
Tarkinas 3D
Coffee Mix Rich
2004 Product Development Schedule Result
Oreo DD Cancelled
Marbu Milk Tea Cancelled
Marbu Kiwi Cancelled
Digestive Sesame Cancelled
Trakinas S/W LE Cancelled
Digestive Sesame Cancelled
Ritz S/W BBQ Cancelled
Ritz Cracker Cheese Cancelled
Pacific Spinach Launched
CA! Coffee Launched
Actual New Product Shipments / Forecast 53%
2005 Product Development Schedule Result
Oreo LightSweet ?
Ritz Chips ?
Trakinas 3D ?
Ritz S/W Orange ?
Mini Ritz Cancelled
Ritz Scuba Cancelled
Oreo DD #2 Cancelled
CA! Chewy Delayed
Pacific Milk Cracker Launched
Pacific Savory Cracker Launched
Actual New Product Shipments / Forecast 51%

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





















































Source: Kraft Internal Information.









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


20/21
EXHIBIT 18: COMPETITION PRODUCT LAUNCH SCHEDULE























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a
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D
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p
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n
a
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s
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l
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2
0
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a
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W
h
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S
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n
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2
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N
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C
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(
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B
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s
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v
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2
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,

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p
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-
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b
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2
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r

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o
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S
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c
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s
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r
n
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r
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m
a
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f
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s
h

e
g
g

y
o
l
k
s
2
0
0
3

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


21/21









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