Marketing a n d t h e Disclosure of Information 339 CASE 5. Kraft Foods Inc.: The Cost of Advertising on Children's Waistlines The room fell silent as Dr. Ellen Wartella, Dean of the College of Communications at the Univeristy of Texas at Austin, gave Kraft executives her opinions on a presentation they had just made regarding Kraft and advertising to children. Wartella characterized Kraft's online marketing as "indefensible" and concluded that Kraft's claim that it was not advertising to children under the age of six was "at best disingenuous and at worst a downright lie."1 The executives in the room were visibly shaken by her comments. In late 2003, Kraft formed the Worldwide Health & Wellness Advisory Council, comprising 10 nutritionists and media experts, including Wartella, to investigate allegations that Kraft had been knowingly advertising unhealthy foods and to help address the rise in obesity, among other health issues. The pressure for Kraft to review its advertising policies came amidst increasing criticism from congressional panels, parent groups and other concerned citizens, that food corporations, such as Kraft Foods and McDonald's Corporation, have been knowingly targeting young children (up to age 12) in their advertising campaigns. The concern surrounding childhood obesity stems from statistics showing a 200 percent increase in childhood obesity since the 1980s. Between the 1960s and the 1980s, the percentage of overweight children hovered around 6 percent, but in the last two decades, this rate has leapt to 16 percent. 3 Despite this, Kraft decided to keep marketing to children under 12. One Kraft executive admitted, "We didn't want to give up the power of marketing to kids."4 This "power" is villainizing the company, however. Currently, Kraft is a trusted brand, but that reputation is already slipping. According to the Reputation Quotient study conducted in 2005 by research firm Harris Interactive, Kraft is ranked in the 50th slot.5 While this is a small drop from the 48th spot Kraft held the previous year, it is a far distance from the 8th position occupied by competitor General Mills. This survey is based on consumer perception of various factors, including a company's quality of products and services, social responsibility, and vision and leadership. Depending on what Kraft chooses to do about its food marketing issue, the company may rise higher in subsequent Reputation Quotient studies, or it may fall further down. Kraft Foods is a company that values quality and safety in its products. One of Kraft's key strategies is to "build superior consumer brand value" through "great-tasting products, innovative packaging, consistent high quality, wide availability, helpful services and strong brand image." With products in more than 99 percent of U.S. households, Kraft certainly has earned the trust of its consumers. With the recent feedback from the Health and Wellness Advisory Council and public concerns about childhood obesity due to aggressive food marketing, however, Kraft must take action This case was prepared by Research Assistants Pauline Hwa and Timothy Housman under the direction of James S. O'Rourke, Concurrent Professor of Management, as the basis for class discussion rather than to illustrate either effective or ineffective handling of an administrative situation. Information was gathered from corporate as well as public sources. Copyright © 2006. Eugene D. Fanning Center for Business Communication. 340 Marketing and the Disclosure of Information before it loses c o n s u m e r s ' loyalty a n d trust in its products. KRAFT'S TROUBLES IN ADVERTISING KRAFT FOODS INC. T h e r e are many reasons why Kraft should be c o n c e r n e d about further criticism of its advertising practices. As a leader in the food industry, Kraft is b o t h large a n d very visible, a n d the c o m p a n y has e x p e r i e n c e d r e p e a t e d c o n t r o versy a n d criticism of its advertising campaigns over the years. A few r e c e n t issues include: Kraft Foods Inc., the largest food and beverage c o m p a n y in N o r t h America, has grown considerably from its h u m b l e beginnings in 1903. With only $65, a r e n t e d wagon, a n d a horse n a m e d Paddy, J. L. Kraft started the company by purchasing cheese from a wholesale market a n d reselling it to local m e r c h a n t s . T h e s e cheeses were packaged with Kraft's n a m e . A d e c a d e later, Kraft i m p r o v e d t h e c h e e s e by processing the product, which p r o l o n g e d its shelf life. T h e processed cheese b e c a m e such a success that a p a t e n t for the "Process of Sterilizing Cheese a n d an Improved P r o d u c t Prod u c e d by Such Process" was issued to Kraft in 1916. 9 Over the years, the company went on to create o t h e r new cheese products that are familiar to h o m e s today including Velveeta a n d Cheez Whiz, as well as expanding beyond cheese to i n t r o d u c e salad dressings, p a c k a g e d dinners, b a r b e c u e sauce, a n d o t h e r products. Tobacco giant Philip Morris acquired General Foods Corporation in 1985 a n d then Kraft three years later for $12.9 billion. 1 0 T h r o u g h the acquisition of these two major food companies, Philip Morris f o r m e d Kraft G e n e r a l Foods, which p u t p r o d u c t s s u c h as Velveeta, Post cereals, Oscar Mayer, andJell-0 p u d d i n g all u n d e r the same food division. Kraft General Foods further e x p a n d e d its h o u s e h o l d reach by a c q u i r i n g Nabisco, h o m e of well-known b r a n d s including Oreo cookies, Ritz crackers, a n d Planters nuts in 2000. T h e n e x t big step for Kraft occurred in 2001 when Philip Morris c o n d u c t e d an initial public offering of Kraft's shares (NYSE: KFT). T h e following year, Philip Morris s h a r e h o l d e r s a c c e p t e d a p r o p o s a l to c h a n g e the company's n a m e to Altria G r o u p . As of J a n u a r y 27, 2003, Altria G r o u p b e c a m e the p a r e n t c o m p a n y to Kraft Foods. • Kraft's advertisement of Post cereal in National Geographic Kids was not focused on the food but rather on the premium of Postokens instead, which is a violation of The Children's Advertising Review Unit's Self-Regulatory Guidelines for Children's Advertising.11 • Kraft had previously announced its intention to reduce portion size and then later backed out of that commitment, saying that consumers wanted to choose their portion sizes for themselves.12 • Kraft pulled an Oreo commercial directed at teenagers that promoted a "slothlike" lifestyle because the company realized that such an ad would hurt its image and instead opted for promoting "a more active lifestyle."13 OBESITY IN THE COURTS: THE McLAWSUIT T h e food industry became visibly worried about food marketing and childhood obesity in 2002. It was then that McDonald's Corporation faced a lawsuit, Pelham v. McDonald's Corporation, in which the company was charged with marketing food products that contribute to the rise of obesity in children and teenagers. Although the j u d g e threw out the class-action lawsuit against McDonald's, h e made it very clear that h e s u p ports the plaintiffs' position. H e e n c o u r a g e d them to redraft a n d refile the suit with stronger evidence, and went so far as to provide advice on what to look for. O n e of his recommendations was to show how McDonald's advertising campaigns e n c o u r a g e d overconsumption by promoting its food products for "everyday" eating. Marketing and the Disclosure of Information McDonald's Corporation still stands behind their standards in marketing to children. According to David Green, Senior Vice President of Marketing for McDonald's, even though 20 percent of McDonald's commercials are targeted at children, the company follows a strict set of guidelines. The Golden Arches Code, according to company spokesmen, "conforms with the major network Broadcasting Standards and the guidelines of the Children's Unit of the National Advertising Division Council of Better Business Bureaus Inc., as well as establishing additional standards applicable only to McDonald's advertising." 15 Green says that the Golden Arches Code "states that in our advertising we should never promote the sale of food items to children that might be too large for them to consume realistically at one sitting nor should children be depicted as coming to McDonald's on their own, as they must always be accompanied by an adult." A month prior to Pelham v. McDonald's Corporation, Sam Hirsch, the attorney who filed the suit for the overweight children and teenagers, had filed another class-action suit against McDonald's and other leading fastfood establishments. 16 This suit was filed not only against McDonald's Corporation, but also Burger King, Kentucky Fried Chicken, and Wendy's. Observers speculated the driving force behind these two suits was the prospect of a large financial settlement. Hirsch remained adamant about his clients' intentions, saying "we are not looking to get rich from a large money setdement. We are proposing a fund that will educate children about the nutritional facts and contents of McDonald's food." 1 ' These suits intensified fears in the food industry of a future of "tobacco-like" litigation against restaurants and food manufacturers. 18 In January 2005, the second U.S. Circuit Court of Appeals reinstated claims that McDonald's falsely advertised the health ben- 341 efits of its fast food, a violation of the New York's Consumer Protection Act. 19 Unquestionably, the plaintiffs had the full attention of quick service restaurant operators and food manufacturers worldwide. STUDIES SHOW. . . Fewer Ads In July 2005, the Federal Trade Commission (FTC) released its findings that children today watch fewer food commercials than they did almost three decades ago. Children today watch 13 food advertisements on television per day, a significant reduction from the 18 television commercials per day in 1977.20 The FTC also reported that kids today are exposed to fewer ads for cereal, candy, and toys but more ads for restaurants and fast-food chains, other television shows, movies, video games, and DVDs. Wally Snyder, president of the American Advertising Federation, believed this study was proof that food marketing is not culpable for the rise of obesity in children, which he blamed on a "lack of exercise and moderation in the diet." More Ads A year later in 2004, the Kaiser Family Foundation released a study with contrary information, claiming "the number of ads children see on TV has doubled from 20,000 to 40,000 since the 1970s, and the majority of ads targeted to kids are for candy, cereal, and fast food."21 The study suggested that this increase in food advertising was correlated to the rise in obesity in children aged 6 to 11. In 1963-1970, only 4.2 percent of children in this age group were listed as overweight compared with 1999-2000, when the number spiked to 15.3 percent. 342 Marketing and the Disclosure of Information The Tie-Breaker Perhaps because of the conflicting findings or because of rising concerns about food marketing to children and its effects, Congress requested a study of its own from the National Academy of Sciences, which was created by the federal government to advise on scientific issues. 22 In December 2005, The Institute of Medicine (IOM), a private, nongovernmental division of the National Academy of Sciences, released the latest study on the subject, Food Marketing to Children and Youth: Threat or Opportunity? Based upon individual findings, the IOM committee responsible for the study came to the following five conclusions: 23 Broad Conclusions 1. Along with many other intersecting factors, food and beverage marketing influences the diets and health prospects of children and youth. 2. Food and beverage marketing practices geared to children and youth are out of balance with healthful diets and contribute to an environment that puts their health at risk. 3. Food and beverage companies, restaurants, and marketers have underutilized potential to devote creativity and resources to develop and promote food, beverages, and meals that support healthful diets for children and youth. 4. Achieving healthful diets for children and youth will require sustained multisectoral and integrated efforts that include industry leadership and initiative. 5. Public-policy programs and incentives do not currently have the support or authority to address many of the current and emerging marketing practices that influence the diets of children and youth. The study also suggested there was "strong evidence" that food marketing influences the preferences, purchase requests, and short-term consumption of children between the ages of 2 and 11. This information combined with the fact that a "preponderance of television food and beverage advertising relevant to children and youth promotes high-calorie and lownutrient products, it can be concluded that television advertising influences children to prefer and request high-calorie and low-nutrient foods and beverages." 24 Wartella, who served not only on Kraft's advisory council but also as a member of the committee that produced the IOM study, said "We can't any more argue whether food advertising is related to children's diets. It is." 25 The Institute of Medicine's recommendations for the food industry included promoting and supporting healthier products and working with government, public health, and consumer goods "to establish and enforce the highest standards for the marketing" of food and beverage products to children.26 In general, many food companies had already started programs to promote healthier products. The problem was with the latter recommendation in marketing standards. IOM believed this meant licensed characters should be "used only for the promotion of foods and beverages that support healthful diets for children and youth."2 Most companies, Kraft included, were reluctant to give this up. Licensed characters were typically familiar faces to children. How does a company replace a spokesperson or promoter that already has the trust of the audience, is affordable, and will never get into any real-life trouble? THE ANNOUNCEMENT In January 2005, Kraft announced that it would stop advertising certain products to children under 12. These products include Marketing and the Disclosure of Information r e g u l a r Kool-Aid b e v e r a g e s , Oreo a n d Chips Ahoy cookies, several Post children's cereals, a n d s o m e varieties of its Lunchables l u n c h packages."" These favorites will still be found in stores, b u t Kraft said it will n o l o n g e r b e targeting children with television, radio, a n d p r i n t ads for these products. T h e initial cost of i m p l e m e n t i n g t h e s e n e w g u i d e l i n e s included an estimated $75 million in lost profits, t h o u g h this figure c o n t i n u e d to c h a n g e several times. While this estimate may seem high, Michael Mudd, a m e m b e r of Kraft's obesity strategy team said, "If the tobacco industry could go back 20 or 30 years, reform their marketing, disarm their critics, a n d sacrifice a couple of h u n d r e d million in profits, knowi n g w h a t they k n o w today, d o n ' t you t h i n k they'd take that deal in a heartbeat?" 3 0 Kraft, l e a r n i n g t h e lessons of Philip Morris, was eager for the deal. Shortly after Kraft m a d e its a n n o u n c e m e n t , however, the c o m p a n y j o i n e d competitors G e n e r a l Mills a n d Kellogg to f o r m a lobbying g r o u p to keep the government from r e g u l a t i n g food m a r k e t i n g to c h i l d r e n . T h e group's mission statement states its belief that "there is n o t a correlation between advertising trends a n d r e c e n t c h i l d h o o d obesity." 31 G e n e r a l Mills h a d always a r g u e d for this p o i n t . I n fact, i n s t e a d of s t o p p i n g ads to c h i l d r e n , T o m Forsythe, G e n e r a l Mills vice president, a n n o u n c e d that the company " l a u n c h e d a vigorous defense of cereal," to s u p p o r t its h e a l t h benefits. 3 2 T h e c o m p a n y also d e c i d e d to p r o m o t e " b a l a n c e d m o d e r ation a n d exercise," believing that such lifestyle choices affect obesity as m u c h as food selection. 3 3 T h u s , G e n e r a l Mills' participation in this g r o u p was expected, b u t for Kraft, j o i n ing this g r o u p a p p e a r e d to be a hypocritical m o v e . David S. J o h n s o n , Kraft's Chief of N o r t h America, defended the action, "We believe self-regulation of the m a r k e t i n g of food p r o d u c t s can a n d does work, a n d we are coll a b o r a t i n g with t h e i n d u s t r y to s t r e n g t h e n efforts in this area." 3 4 343 CONCLUSION Since the a n n o u n c e m e n t , Kraft has still struggled with child advertising a n d obesity issues. Margo G. Wootan, Director of Nutrition for the C e n t e r for Science in the Public Interest, has called Kraft's new marketing plan only "a really g o o d step forward." 3 5 T h e p r o b l e m is that t h e r e will always b e critics w h o will dem a n d for m o r e . For instance, although Kraft has t a k e n a h u g e leap in m i n i m i z i n g television, radio, a n d p r i n t ads, t h e c o m p a n y has yet to act o n Wartella's criticism for its online advertising. Kraft has spent a great deal of time to respond to critics and potential threats of governm e n t regulation. W h a t Kraft really n e e d s at this p o i n t is to p u t the focus back o n its cust o m e r s a n d c o m m u n i c a t e with t h e m . T h e question is how to go a b o u t d o i n g this witho u t a p p e a r i n g to go back o n its promises of not saturating the market with advertisements. Questions 1. W h a t are the critical issues of this case? W h o are the stakeholders (primary, secondary a n d indirect) ? 2. W h a t should Kraft d o to maintain the already d e c l i n i n g trust of the consumers? 3. C a n t h e p u b l i c believe in Kraft's c o m m i t m e n t to c o n t r o l f o o d m a r k e t i n g to children? 4. W h a t are Kraft's o p t i o n s c o n c e r n i n g its marketing tactics? NOTES 1. Ellison, Sarah, "Why Kraft Banned Some Food Ads," Wall Street Journal (November 1, 2005). 2. http://164.109.46.215/newsroom/09032003. html. 3. http://www.childstats.gov/americaschildren/ index.asp. 4. Ellison, Sarah, "Why Kraft Banned Some Food Ads," Wall Street Journal (November 1, 2005). 344 Marketing and the Disclosure of Information 5. http://www.foodprocessing.com/ industrynews/2006/018.html. 6. http://kraft.com/profile/company_ strategies.html. 7. http://www.altria.com/about_altria/ 01_00_01_kraftfoods.asp. 8. http://kraft.com/profile/factsheet.html. 9. http://kraft.com/100/founders/JLKraft.html. 10. http://www.altria.com/about_altria/l_2_5_l_ altriastory.asp. 11. http://www.caru.org/news/2004/kraft.asp. 12. Callahan, Patricia, and DelroyAlexan, "As Fat Fears Grow, Oreo Tries a New Twist," Chicago Tribune (August 22, 2005). 13. Callahan, Patricia, and Delroy Alexan, "As Fat Fears Grow, Oreo Tries a New Twist," Chicago Tribune, (August 22, 2005). 14. Weiser, Benjamin, 'Your Honor, We Call Our Next Witness: McFrankenstein," New York Times (January 26, 2003). 15. "McLibel" Case—Green, David B., Witness Statement, http://www.mcspotlight.org/ people/witnesses/advertising/green.html. 16. Summons, http://news.fmdlaw.com/cnn/ docs/mcdonalds/barbermcds72302cmp.pdf. 17. Wald, Jonathan, "McDonald's Obestiy Suit Tossed," CNNmoney.com (February 17, 2003). http://money.cnn.com/2003/01/22/news/ companies/mcdonalds/. 18. Reuters article: http://onenews.nzoom.com/ onenews_detail/0,1227,218579-1-6,00.html. 19. http://www.law.com/jsp/article.jsp?id= 1106573726371. 20. Mayer, Caroline E., "TV Feeds Kids Fewer Food Ads, FTC Staff Study Finds," Washington Post (July 15, 2005). 21. "Ads Rapped in Child Obesity Fight," h t t p : / / www.cbsnews.com/stories/2004/02/24/ health/main601894.shtml. 22. http://www.iom.edu/Pid-5774. 23. Institute of Medicine, "Food Marketing to Children and Youth: Threat or Opportunity?" 2006, Box 7-1, p. 317. 24. Institute of Medicine, "Food Marketing to Children and Youth: Threat or Opportunity?" 2006, p. 322. 25. Ellison, Sarah, and Janet Adamy, "Panel Faults Food Packaging for Kid Obesity," Wall Street Journal, (December 7, 2005). 26. Institute of Medicine, "Food Marketing to Children and Youth: Threat or Opportunity?" 2006, pp. 325-26. 27. Institute of Medicine, "Food Marketing to Children and Youth: Threat or Opportunity?" 2006, p. 326. 28. "Kraft to Curb Some Snack Food Advertising," Associated Press (January 12, 2005); h t t p : / / msnbc.msn.com/id/68l7344/. 29. Ellison, Sarah, "Why Kraft Decided to Ban Some Food Ads to Children," Wall StreetJournal (November 1,2005). 30. Ellison, Sarah, "Why Kraft Decided to Ban Some Food Ads to Children," Wall StreetJournal (November 1,2005). 31. Callahan, Patricia, and Delroy Alexan, "As Fat Fears Grow, Oreo Tries a New Twist," Chicago Tribune (August 22, 2005). 32. Ellison, Sarah, and Janet Adamy, "Panel Faults Food Packaging For Kid Obesity," Wall Street Journal (December 7, 2005). 33. Ellison, Sarah, "Divided, Companies Fight for Right to Plug Kids' Food," Wall Street Journal (January 26, 2005). 34. Callahan, Patricia, and DelroyAlexan, "As Fat Fears Grow, Oreo Tries a New Twist," Chicago Tribune (August 22, 2005). 35. Mayer, Caroline E., "Kraft to Curb Snack-Food Advertising," Washington Post (January 12, 2005). CASE 6. Marketing Malt Liquor During the s u m m e r of 1991, the surgeon general of the United States a n d advocacy groups led by the Center for Science in the Public In- terest (CSPI) l a u n c h e d a campaign to remove G. H e i l e m a n Brewing Company's malt liquor PowerMaster from store shelves. T h e LaCrosse,
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