It’s difficult enough for any business to stay relevant, especially when it has brands established 100 or more years ago. Then throw in the challenge of adapting to ever-changing consumer tastes and habits, not to mention manufacturing in an era when a small carbon footprint is a measure of a corporation’s citizenship. That’s part of the landscape in the 21st century, and every business operates in it, some better than others.

One of the better players is Kraft Foods Inc., the global food and beverage company based in Northfield, Ill. Of Kraft’s $49.2 billion in annual sales in 2010, net revenues from global cheese were $7 billion, or 14% of the total. Cheese ranks fourth, behind confectionery, biscuits and beverages and ahead of convenient meals and grocery. The North American division sold $3.5 billion of cheese in 2010 and had operating income from cheese of $598 million. Kraft places fourth on Dairy Foods’ 2011 Dairy 100, the list of the largest dairy processors in North America. It is the largest cheese processor based in the United States.

The leadership in the cheese and dairy division has taken bold steps and placed big bets in recent years, including:

For these reasons, Dairy Foods names Kraft Foods North America the 2011 Processor of the Year.

George Zoghbi is president of the North American cheese and dairy division, based in Glenview, Ill., around the corner from corporate headquarters. He was named president in 2009, having joined Kraft Foods in 2007 as vice president and area director of Australia/New Zealand after a career with the global dairy giant Fonterra, where he had been global foodservices director.

He expects those who work for him to be innovators, because, he says, Kraft recruits smart and entrepreneurial men and women. Zoghbi says it is “a responsibility” and “a privilege” to lead Kraft Foods. His role as a leader is to take risks and encourage innovation, he says. His colleagues agree. Long-time Kraft employees remark that the corporate climate has changed in favor of smart risk taking.

Philadelphia Cooking Creme is one such innovation that has paid off handsomely for Kraft Foods. Zoghbi recounts the risks: a three-year investment of $100 million in market research, product development and advertising. And to underscore the gamble, he notes, it was all done on spec.  “There was no buyer who contracted for Cooking Creme,” Zoghbi says. Kraft believed in the product, but consumers would be the ultimate judge of its success or failure.

Christopher Urban, brand manager for Philadelphia Cooking Creme, and his team asked: How can we grow usage occasions of cream cheese beyond a schmear on a bagel at breakfast or making a cheesecake? Their research found that 25% of Philadelphia Cream Cheese usage was in cooking applications. On their own, and not due to any marketing initiative on Kraft Food’s behalf, Philadelphia users were adding cream cheese to potato dishes and pasta sauce.

The Philadelphia brand team had the idea to build a product that home cooks could use to create excitement in everyday dishes. “So, we gave it flavors and spices,” Urban says.

They made it easy to use, too. The product is seasoned, so home cooks don’t have to buy spices, and it is spoonable from a 10-ounce plastic, foil-sealed cup. Cooking Creme melts easily and evenly. In all, Kraft Foods developed four so-called chef-inspired flavors for the 2011 launch. In 2012, there will be three new flavors, a 15-ounce size and two reduced-fat versions.

With product development finished, the next task was to spread the word. Urban’s group partnered with the Los Angeles-based media company Eqal to tap into  the Real Women of Philadelphia, an existing online community of loyal Philly users for the prelaunch. Participants in this social media network were sent the product and encouraged by celebrity chef Paula Deen to upload cooking videos to YouTube to win cash prizes totaling $25,000. In terms of consumer engagement, it took Kraft Kitchens a decade to get 500 “paper” recipes, and Real Women of Philadelphia three months to collect 5,000 in live-action, how-to video format. And they continue to pour in.  There are now more than 45,000 registered users in the community.

Eqal, Digitas and Kraft Foods received a 2011 Gold Effie award  for the Real Women of Philadelphia campaign. Effie awards recognize effectiveness in the marketing communications industry.

In addition to the competition, Kraft Foods backed the launch with free-standing inserts, coupons, in-store demos and sampling. Commuters even received samples to take home as they disembarked trains in the evening.

Within eight weeks of launch, the product was in 76% of stores, and Cooking Creme has performed 15-20% better than expectations, Urban says. The product competes against condensed soups, sour cream and prepared pasta sauces. Sales were 80% incremental to the category and 88% incremental to the brand, which means that Philadelphia Cooking Creme was not siphoning sales away from other Kraft Foods products or brands.

Velveeta moves beyond a chip dip

Finding new reasons to eat Velveeta was on the mind of senior brand manager Katie Peterson. Food snobs love to hate the iconic yellow processed cheese, but it is the central ingredient in queso dip, a favorite in the South and Midwest. The recipe for microwavable queso dip (consumed at football tailgate or viewing parties) sprang up organically, Peterson says. To one pound of cheese, a cook adds a can of Ro-Tel diced tomatoes and green chiles and microwaves until creamy. Neither Kraft Foods nor ConAgra (Ro-Tel’s owner) developed the recipe, but the two food companies have jointly promoted the recipe for seven years.

Like her colleague Urban, Peterson was looking for new occasions to use Velveeta beyond dips, macaroni and cheese, and grilled cheese sandwiches. Kraft Foods is developing recipes that show off the brand’s characteristics of “creamy, melty, cheesy,” Peterson says. Chefs in the company’s test kitchen are developing meals, including enchiladas and chicken casseroles.

Peterson’s team has created brand extensions, including a white Velveeta (called Queso Blanco). Velveeta is appearing in new products, including a prepared dip that is “a quick way to enjoy our one-of- a-kind taste,” Peterson says. The shelf-stable jarred dip is typically sold in the Mexican aisle of supermarkets.  The dips are easy to keep on hand for a quick weeknight snack or last minute get together, Peterson says.

Preparing to launch

Launching a new product at Kraft Foods requires the support of procurement, research and development, and the test kitchen. Mike McCully, director of dairy procurement, works with buyers for all the dairy raw materials, including cheese, milk, cream, milk powders and fats.

“We work with the marketing teams to support their efforts,” he says. “We have to work cross-functionally with our plants, so they have (the ingredients) when they need (them).”

For Cooking Creme, McCully had to line up sources for milk and cream and see that the ingredients were delivered on time.

It turned out that Kraft Foods needed more cream and milk than forecast because of the popularity of Cooking Creme.

“You can’t tell a customer: We don’t have enough product,” he says.

Robin Ross, the associate director of culinary in the cheese and dairy division, was involved early on in the development of the product. Ross runs the test kitchens where she and her team evaluate the performance of Kraft’s foods and those of its competitors.

Long before Ross created the first pasta recipe however, she was evaluating the aroma, taste and consistency of Cooking Creme.

“The taste from a freshly opened container is different once it combines with food and is heated,” she says.

She counseled the brand managers that the product had to be available in a sufficient quantity to cover meat, pasta and vegetables in at least a four-serving recipe. It is currently sold in 10-ounce and 15-ounce containers.

Ross says she has a two-fold responsibility: Help the home cook deal with “dinner anxiety” and acknowledge that food budgets are tight. That means simple-to-prepare and affordable meals. The pantry in the test kitchen mimics that of the average consumer. Based on surveys, Ross knows what ingredients a home pantry has on hand (there is probably chili powder, not turmeric in the spice cabinet, for example). Drawing on the contents of the pantry, Ross and her team create recipes. Her goal is to help create a meal that can be made in 30 minutes or less with minimal ingredients – five or fewer.

The eight kitchens are outfitted with all the major appliance brands and fuels (gas, electric and microwaves) and recipes are tested accordingly.

Vice president of research and development Nigel Kirtley says his role as a manager is to “put the right people and resources in place, then to just get out of the way.” He tells his staff that R&D’s role is “to do stuff that has never been done before. Re-invent the game and the rules.”

Innovation alone is not a guarantee for a successful product. The timing must be right, too, Kirtley says. Some innovation is also market positioning or re-positioning. String cheese has been traditionally a snack for children, but Kraft Foods made the product appealing to adult palates by adding a jalapeño flavor.

The R&D headquarters has a pilot plant where foods are developed. But innovation does not happen solely in the lab. He credits colleague Gary Smith for the development of Milk and Granola bars. Smith and his daughter conceived the product one day at home in their kitchen.

Milk and Granola bars are made with fresh dairy and calcium to deliver the calcium content equivalent to 8 ounces of milk. Milk helps to bind the cereals and makes the bars soft and chewy. The flavors are oatmeal raisin, strawberry, peanut butter and mixed berry. Walmart was the first retailer to carry the refrigerated bars. In 2012, Kraft will sell the product, renamed MilkBite, to other retailers.

The revised Dietary Guidelines for Americans released in January call for less consumption of sodium. That is a priority in Kirtley’s R&D lab.

“You can’t make it go away completely,” he says, because milk itself contains sodium. But “we are going to lead” in reduction efforts, Kirtley vows. He serves on a committee at the Innovation Center for U.S. Dairy, Rosemont, Ill.

Already, Kraft has reduced sodium by 30% in its Breakstone’s cottage cheese. Yet reducing sodium is only one challenge researchers are solving. Another is developing new foods that naturally don’t require added sodium, Kirtley says.

Food safety initiatives

The revised dietary guidelines were not the only federal government initiative sending ripples throughout the food processing industry. Another was the Food Safety Modernization Act, signed into law in January.

“The law will have a significant impact on the food industry,” says Carol Kellar, senior director, North America quality, scientific and regulatory affairs. “While Kraft Foods already has robust food safety programs in place, we welcome the opportunity to make them stronger. Some changes that the industry should expect include new FDA regulations requiring all food companies to have a Food Safety Plan and a Food Defense Program and more frequent visits to manufacturing plants.”

Kellar says Kraft Foods looks at the lessons learned from its own food safety experiences and from others in the industry. “We share our learnings when we have the opportunity. After all, food safety should never be a competitive advantage.”

Safety begins with each recipe, Kellar says. “We start with the highest-quality ingredients,” which are approved through a comprehensive supplier program. “Then we bring the ingredients together in a clean environment where our employees, who are trained in food safety, take great care to make sure that they make the best possible product.”

Kellar says Kraft Foods is investing in additional resources, such as education, training and hiring new employees to manage the new Food and Drug Administration requirements.

“Our employees must understand the new requirements and what we have to do to meet them, as well as ensuring we maintain appropriate records,” she says.

Kraft Foods hired about 20 people in its manufacturing facilities to act as compliance managers.

Packaging that catches the eye

Of course, food has to taste good and perform well in recipes. But food marketers need to catch the eye of shoppers as they scan the dairy case. Kraft Foods switched to an in-mold labeling printing process for its tubs of Philadelphia cream cheese. This process is more expensive than the dry offset printing method it had been using, but the new process allows for better rendition of images and colors. Photos of strawberries and chives on the packages appear more realistic, and Philadelphia’s signature silver color appears more refined. (See “Show and Sell” in the June Dairy Foods for additional details.)

Best practices in waste reduction

Kraft Foods has 11 plants in Arkansas, California, Illinois, Minnesota, Missouri, New York, Pennsylvania and Wisconsin that process cheese, yogurt and other cultured dairy products. Milk is sourced from within a 100-mile radius. The plants are ISO 14001 certified.

Plant employees go through environmental awareness training where they are asked: What can you do in your job to reduce waste? Tom Anders, the associate director for safety and environment, says he relies on green teams (whose members are hourly employees) to hunt for savings.

“These employees are on the floor every day. They know how equipment works and where to save,” Anders says. For instance, they can reduce water use by fixing leaks and optimizing sanitation routines. Kraft Foods changed to a loop clean-in-place regimen instead of a single-pass CIP procedure. Doing so has proven to reduce energy and water use.

Over five years, the manufacturing facilities collectively reduced energy use by 10%, carbon (heat recovery, lighting) by 12%, water by 20% and landfill by 45%. Two plants (in New Ulm, Minn., and Lehigh, Pa.) are 0% landfill. These locations have an agreement with Sunoco to acquire waste (plastic trimmings and corrugate) going into and out of the plant.

In Beaver Dam, Wis., Kraft Foods sends its waste whey to an anaerobic digester that creates methane gas. (Previously, the waste was hauled away and spread on fields.) With stimulus funding from the federal government, the city built a wastewaster pre-treatment system and a digester. Methane generates enough electricity to power 800 homes, and waste heat from the generators is captured and used in the pre-treatment anaerobic process. The system went online in the spring. The U.S. Environmental Protection Agency gave its prestigious Pisces award to the new wastewater treatment facility.

What next?

In August, Kraft Foods’ board of directors announced plans to split Kraft Foods into two independent public companies: one a global snacks business and the other a North American grocery business, which would include Zoghbi’s cheese and dairy division.

Through the first nine months of 2011, cheese sales in North America were $2.6 billion, compared to $2.5 billion in the previous period. Zoghbi says his focus is to grow consumption and bring new cheese products to the world. He points out the factors in his favor.

“World consumption of dairy is increasing,” he says, and farmers are more efficient. “Retailers are devoting more shelf space to cheese. Consumers see it as a positive food,” Zoghbi says.

He’s tying that momentum to teams of motivated market researchers, brand managers and food scientists. They have already demonstrated their talents for developing new products, extending brands into new SKUs and making foods safely in an environmentally friendly manner. With bets like Philadelphia Cooking Creme paying off, expect more innovative products to come to market.  n