The Cheese Queen's Bid for a Bigger Slice

After years in the doldrums as part of a tobacco company, food giant Kraft is finally back out on its own. Can new CEO Irene Rosenfeld spice it up?

By Matthew Boyle

May 25 , 2007

Moments after finishing a rousing speech to thousands of employees on her return to Kraft Foods last June, Irene Rosenfeld walked upstairs from the company's sprawling Northfield, Ill. headquarters cafeteria to the wood-paneled executive suite. There the new CEO discovered that a special passkey was needed for employees to access the floor. Kraft's reenergized staffers literally couldn't follow her into battle.

So in her first official act Rosenfeld unlocked the doors, and in doing so ushered in (she hopes) a new era at a company in dire need of a shakeup. "It was a metaphor for what this company can become—and needs to become," she says.

If only it were that easy. Rosenfeld, 53, who spent 22 years at Kraft before leaving to run Frito-Lay in 2004, now has to unlock the potential of a $34 billion behemoth once the envy of the food industry for its profitable stable of beloved brands—Oscar Mayer, Jell-O, Oreo—and a management bench headhunters drooled over.

In 1988, Philip Morris bought Kraft as a hedge against a then-shrinking U.S. tobacco market; it had already acquired General Foods in 1985. When Big Mo (now called Altria) took 16% of Kraft public in 2001 to pay down debt from its acquisition of Nabisco, one analyst titled his report on Kraft "The Juggernaut" and called Kraft’s stock—which debuted at $31—a must-have.

As it turns out, investors would have been better off with an interest-bearing checking account. Kraft's stock today trades at its IPO price. The company has been lapped by smaller, nimbler rivals like Kellog, has suffered an embarrassing exodus of top talent, and has seen ballyhooed innovations like Tassimo, a pricey coffeemaker, fall flat. Rising packaging costs and private-label products have eaten at Kraft's profit margins and market share.

"The challenges they face seem gargantuan," says Wendy Liebmann, president of consultancy WSL Strategic Retail. "I'm not sure Jack Welch could turn this company around," adds a longtime industry consultant.

Rosenfeld, a onetime high school basketball player, knows that Kraft, the world's second-largest food company (Nestlé is No. 1), has no fouls left to give. But she is confident her newly independent company—Altria spun Kraft out completely to its shareholders March 30—is poised to rebound. (A standalone Kraft would have ranked No. 64 on the Fortune 500 this year, just behind rival PepsiCo.) Her plan calls for repositioning familiar products like processed-cheese slices into larger, faster-growing markets, while unclogging Kraft's notoriously sclerotic decision-making. The linchpin is fixing cheese, a crucial business for Kraft.

Dubious investors have kept the stock stagnant since the spinoff. "It's still a show-me story," says Steven Kron of Goldman Sachs. Several other Wall Street analysts panned Rosenfeld's plan as lacking in details when she presented it in February. "She's setting herself up to fail," says D.A. Davidson analyst Tim Ramey.

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