How Kraft Changed the Oreo and Its Global Marketing Strategy for Success in China Scott Bragg Managing Editor, Business Insights:

Global ABSTRACT This case examines marketing strategies executed by Kraft Foods Inc. to introduce its Oreo brand in China. The company was on the verge of pulling the brand after it failed to take hold, when global marketing executive Sanjay Khosla brought to Kraft a new strategy for expanding into emerging markets. This strategy, which Khosla calls "Growth through focus," uses local market research to tailor new products and marketing campaigns for iconic brands. Khosla's global marketing team has transformed the Oreo from the cookie that many Americans know and love to a completely different experience that caters to the Chinese palate and pocketbook. In fact, Oreos in China would be indistinguishable to many Americans. This case was prepared for classroom discussion rather than to illustrate either effective or ineffective handling of an administrative, ethical, or legal decision by management. Information was gathered from corporate as well as public sources. LEARNING OBJECTIVES After analyzing this case study, students should be able to do the following: Explain at least three benefits of market research in product development for international and emerging markets Identify traditional and nontraditional strategies for increasing revenue through entering new global markets Appreciate the effect of cultural norms and tastes for firms expanding to new markets Discuss how firms can focus products to local tastes while increasing brand value globally 65 (c) 2012 Cengage Learning. All Rights Reserved. INTRODUCTION One of the more popular strategies for firms to increase profits in the 21st century has been to expand to new, growing markets. China, India, and other Asian and Pacific countries have received a great deal of attention by North American and European firms attempting to tap growing levels of expendable income from the emerging middle classes in these countries. The strategy seems sound, but its execution is critical to its success or failure. Many examples exist of companies in the 1990s and the first decade of the 2000s failing to gain traction in these new markets. Firms often try to attract new customers by offering essentially the same products that have worked in other markets. They support this strategy by adding sales and marketing staff and other resources to convince potential buyers in the new market of the value of their products. Offering a standard product across markets can minimize costs and increase profit margins. However, cultural norms, tastes, and preferences vary greatly between a firm's home market and the new market it may be attempting to enter. It is often difficult for firms to gauge the right mix of standardization and localization while still making growth profitable rather than being a drag on profits. For example, Campbell Soup Co. saw an opportunity to make big profits in Russia and China with its preprepared soup products. According to The Wall Street Journal, Campbell estimated that Russians and Chinese eat soup five times per week on average. As life in China and Russia gets busier and more women enter the workplace, the company forecasted that people would have less time to prepare meals and that the demand for preprepared food would increase. However, Campbell found after years of marketing its products in these countries that its canned soup strategy did not capture the revenue it needed to be profitable. Campbell introduced and then pulled its condensed soups out of China in the 1990s, and the company announced in June 2011 that it would close its Russian operations four years after entering the market. Kraft Foods Inc. is another company that sees opportunities for new and growing profits in Asia. The company's first attempts to enter Asian markets were as unsuccessful as Campbell's initial attempts. However, Kraft decided to shift to a new marketing strategy, grounded in a different understanding of how to best expand into new markets. KRAFT FOODS AND THE OREO IN 2005: IN NEED OF A CHANGE The first Oreo cookies were produced in New York City in 1912 and registered as a Nabisco trademark one year later. Nearly a century of popular marketing campaigns made Oreos one of the best selling cookies and best-known food brands in the United States. Throughout this period of popularity, very little changed about the physical cookie: Oreos remained a sandwich cookie with CaseBase Volume 2 66 How Kraft Changed the Oreo and Its Global Marketing Strategy for Success in China (c) 2012 Cengage Learning. All Rights Reserved. chocolate ends and a cream-filled center. The design of the cookie helped initiate an eating ritual that advertisers soon appropriated to make the cookie even more popular: the "twist, lick, and dunk" method for eating the cookie has been a centerpiece of Oreo advertising for many years. By 2005, the Oreo cookie had been a mainstay in U.S. consumer culture for nearly a century. However, sales in the United States had seemed to peak, and international growth in emerging markets in Asia and elsewhere was slow if barely noticeable at all. The Oreo was introduced in China in 1996, in the same form that a customer would find it in a grocery store in the United States. Sales had been flat for the first five years of the 2000s and were in decline. "In 2007, Kraft Foods China was an unprofitable, $100 million business that was not growing," noted Sanjay Khosla, Kraft Foods' president of developing markets, in an interview published by the Boston Consulting Group. Kraft was even thinking of pulling the product out of the Chinese market completely, due to poor sales. The company as a whole was performing poorly. This led to a shake-up of executive management in 2006, with Irene B. Rosenfeld installed as chief executive officer (CEO). Rosenfeld had previously worked at Kraft for 22 years before leaving in 2003 to head Frito-Lay North America. In early 2007, Rosenfeld outlined a strategy to turn the company around that included product quality, research and development (R&D), and acquisitions as critical to the future growth of the company. Rosenfeld hired cutting-edge business leaders such as Khosla to help create the strategy that would change the way Kraft Foods Inc. does business. FEWER, BUT LARGER BETS: GROWTH THROUGH FOCUS AND THE 5-10-10 STRATEGY AT KRAFT FOODS When Sanjay Khosla left Fonterra Group in 2007 to spearhead Kraft Foods' business in developing countries, he was tasked with discovering a way to realize the potential for growth in developing markets that had eluded Kraft and so many other large, successful multinational firms. That different approach eschewed the traditional idea that a company must produce more in order to sell more. In a 2011 feature on Khosla in Chicago Magazine, Khosla noted that "[c]ompanies were just planting their flags, with a one-size-fits-all attitude that didn't work. You can't just force stuff from one country to another." Instead, Kraft Foods would redesign the way it, and other firms, entered emerging markets. Khosla coauthored an article with Mohanbir Sawhney for Strategy+Business magazine, called "Growth Through Focus," in which the authors details the many changes that took place at Kraft Foods to succeed in developing markets. "A typical 'growth through more' strategy," they write, "diffuses the organization's efforts. It increases the complexity of the organization and its operations." Companies should not produce more to drive growth but should instead focus its operations and strategy to achieve growth. "The engines of growth," write Khosla and Sawhney, "are focus (fewer brands, fewer categories, CaseBase Volume 2 How Kraft Changed the Oreo and Its Global Marketing Strategy for Success in China 67 (c) 2012 Cengage Learning. All Rights Reserved. and fewer markets) and simplicity (simple vision, simplified execution, and simpler organizational designs)." Kraft Foods would choose which brands have the best chances of winning in which markets and then supply its management and employees with an abundance of resources to succeed. "We have found that seemingly mature businesses can be energized by making fewer but larger bets." The executive team at Kraft had a strategy for winning but had to ensure that its employees at all levels understood and executed the strategy, so it came up with a vision statement or "hook" that would be communicated throughout the ranks, called the "5-10-10" strategy: five categories, ten brands, and ten markets. "5-10-10" would help communicate to all employees exactly what the major priorities for the company would be, providing a sense in its culture that executive management was open and committed with its strategies and goals. After conducting several workshops with its managers and employees all over the world, where open and candid feedback was encouraged, Kraft Foods decided that its best chance at winning would be to focus on two categories: biscuits and chocolate. Although it has been successful mostly in the United States, Oreo had recently, in 2006, become the bestselling biscuit in China, due to new marketing and product development tactics implemented by a team led by Shawn Warren, vice president of Marketing at Kraft Foods International. By focusing on China with the Oreo and taking focus away from other successful brands and emerging markets, Kraft Foods Inc. was making a big bet indeed. BREAKING THE COOKIE MOLD: RECREATING THE OREO FOR THE CHINESE CONSUMER What followed was a focused, open-minded market research project to find out why the traditional Oreo was not working in China and, more importantly, to figure out the kind of biscuit (called cookie in the United States) would appeal to Chinese consumers. The findings uncovered precisely why the Oreo was not catching on with the Chinese. It may seem obvious that different cultures have different tastes and norms, but sometimes it takes a lot of investment in market research to discover exactly what those differences are and to move from anecdotal opinions to actionable empirical evidence. First, the Oreo that had appealed to millions of Americans over the course of a century was simply too sweet for the Chinese palate. Put simply, the Chinese did not particularly like the taste of the traditional Oreo. Research also found that the cookie itself was too big and that the price of 72 cents for 14 Oreos was too high. PRODUCT DEVELOPMENT AND RECASTING THE OREO COOKIE In response to this new understanding of Chinese consumer opinions, Kraft Foods' Asia Pacific division went to work to create the kind of product that might be able to catch on in the region. The Wall Street Journal reported that 20 prototypes were developed with reduced sugar content. Kraft tested the prototypes to find a formula that Chinese consumers would find most CaseBase Volume 2 68 How Kraft Changed the Oreo and Its Global Marketing Strategy for Success in China (c) 2012 Cengage Learning. All Rights Reserved. appetizing. They did the same for packaging and pricing, settling on a package that cost 29 cents and contained fewer Oreos. Other product development innovations, based on market research insights, went further in transforming the Oreo in China. Learning that demand for wafertype biscuits was on the rise in China, Kraft introduced a wafer version of the Oreo that looked nothing like the one so well known in North America but tasted nearly the same as the cookie form, under its new Chinese balance of sweetness and chocolate. This new Oreo contained four crispy wafer layers filled with vanilla and chocolate cream, all covered in chocolate coating. Innovative product development followed to react to market research and attempt to tailor the marketing of the Oreo brand to the Chinese consumer. New filling flavors aimed specifically at the Chinese consumer were introduced, including green tea, orange, mango, and blueberry. In an interview with Retail in Asia, a web publication that covers Asia retail news, Kraft Foods Asia Pacific Sales vice president Andy Tosney described how Kraft Foods had even invested in new R&D to custom fit its Oreo brand products to suit the particular needs of the Asia Pacific consumer: [W]e discovered that biscuits and sweets snacking tends to be a 'cold weather phenomenon,' meaning that sometimes consumption tends to slow down if the temperature gets very hot. With this insight, we developed Oreo IceCream. The fillings in the biscuits have different ice-cream flavours. The advanced technology we use allows the ice-cream fillings to give out an amazing cooling sensation in the mouth as though you're eating an ice cream. The product is fantastically successful in China and Indonesia. Tosney added that Kraft had taken a further step of transforming its supplychain logistics in order to ship the ice-cream-filled cookies from the colder northern China climates to the much hotter south of China. Kraft doubled its China sales force to sell these new products, truly bringing to bear the "Focus through Growth" model that Khosla and CEO Irene Rosenfeld were now championing for the entire company. It did not take long for these changes to take effect on the marketplace. In 2006, the Oreo became the number one-selling biscuit in China. From 2008 to 2010, according to Khosla in his Boston Consulting Group interview, revenues from the Oreo brand grew by more than 30 percent per year on average, with better-than-average margins. Before Kraft Foods' big push in China, the biscuit and cookie market was not particularly profitable compared to other countries. The Wall Street Journal reported that the Chinese market for biscuits in 2007 was US$1.3 billion compared to the US$3.5 billion U.S. market. Now that Kraft Foods felt it had the products the Chinese wanted, it had to let Chinese consumers know about it. GOING "GLOCAL" WITH THE OREO BRAND AND THE MARKETING MIX Kraft Foods' innovative strategies to grow in China did not stop at new product development. To advertise the new, tailored Oreo brand, Kraft Foods CaseBase Volume 2 How Kraft Changed the Oreo and Its Global Marketing Strategy for Success in China 69 (c) 2012 Cengage Learning. All Rights Reserved. had to apply the same locally focused thinking to advertising its products. Kraft did this through what Khosla has termed a "glocal" strategy. Glocal is the idea of utilizing a firm's global financial and organizational muscle while localizing marketing leadership and tactics. The first step was to push larger marketing decision-making out of Kraft Foods' headquarters just outside of Chicago, Illinois, United States, to the regional managers. The idea is simple but often unutilized by large multinational firms: Managers who live in different markets surely know the markets better than the executives at headquarters. These local managers should be challenged to be entrepreneurial with their segment of the business and thus given control of a great deal of strategy and financial resources, resources that are typically centralized at home office. As Khosla and Sawhney write in "Growth through Focus," "decision making needs to be moved closer to customers and consumers so that the people responsible for results have the operating freedom they need." Supported with corporate resources but free to choose how to utilize those resources, local managers are able to innovate and execute quickly, instead of waiting for corporate approval to undertake initiatives. Given this freedom, local managers in the China market innovated effective new ways to get the word out about the new Oreo to Chinese consumers. Important to the glocal ethos the company had now initiated, these managers developed marketing campaigns that utilized local means to target Chinese populations, while simultaneously supporting the Oreo brand, increasing its global equity. For example, advertising focused on teaching the Chinese consumer about the "twist, lick, and dunk" technique that is so popular in the United States. The new Oreo products introduced in China were designed intentionally to share in that same experience, although in slightly different ways. Kraft launched a TV campaign where children were shown demonstrating the technique to their parents. Another TV ad featured a twist on this situation, with China-born NBA basketball star Yao Ming showing his son how to twist, lick, and, in particular, dunk an Oreo. In addition to the TV ad strategy, Kraft Foods realized that mobilizing support on the ground was just as important as spreading the word on China's airwaves. To encourage the pairing of milk with Oreo cookies, Kraft organized a grassroots campaign to get Chinese university students to do its marketing for them. Thirty Chinese universities were chosen to participate in an Oreo Aambassador program, drawing 6,000 applications from students. Three hundred of these students were chosen to become Oreo brand ambassadors, and they undertook a range of activities, including riding their bicycles around Beijing with Oreo-branded wheel covers and organizing basketball games with a marketing angle of comparing dunking a basketball with dunking an Oreo in milk. Oreo samples were handed out to more than 300,000 customers. In a Wall Street Journal article on the Oreo's success in China, Kraft Foods Inc. CEO Irene Rosenfeld called the Oreo bicycle campaign "a stroke of genius that only could have come from local managers. The more opportunity our local CaseBase Volume 2 70 How Kraft Changed the Oreo and Its Global Marketing Strategy for Success in China (c) 2012 Cengage Learning. All Rights Reserved. managers have to deal with local conditions will be a source of competitive advantage for us." The Oreo Ambassador program was so successful that it has been extended to other markets, such as India and Indonesia, and each Oreo Ambassador iteration is promoted on Facebook and other social media sites, in order to reach active college crowds in these markets. CONCLUSION In 2007, the year after Kraft introduced the new Oreo into the Chinese market, sales doubled, and the Oreo became China's number one cookie. Sales in China helped the Oreo brand to pass the US$1 billion mark in global sales. In 2009, Forbes reported that in the year ending September 2009 Kraft Foods had earned a 22.4 percent market share in the US$1.6 billion cookie market. According to Kraft's website, China is now the second-largest market for the Oreo, after the United States. Kraft Foods' glocal marketing strategy shows a new way for firms to branch out into new markets and reach the new customers that the market research promises. Kraft's strategy works because it is founded on the assumption that growing in a new, developing market is not necessarily an easy proposition and requires a deep level of understanding of the consumers in that market and a willingness to dedicate substantial resources to create products and marketing campaigns that truly serve actual consumers. This may sound like Marketing 101, but the many examples of firms that have failed to grab hold of Asia-Pacific consumers shows that Kraft Foods' execution of this strategy played a large role in the company's success in this market. In an interview with Marketinginteractive.com, Kraft Foods Asia Pacific vice president of marketing Shawn Warren nicely states the difference between those firms that succeed and those who do not: "The importance of shifting from the 'I think' culture to the 'I know' culture, that's a vital lesson we learnt in China."

QUESTIONS FOR DISCUSSION 1. What did Kraft Foods Inc. learn about the Chinese consumer through market research that it did not know before? Do you believe that the company reacted properly to the market research? How might they have reacted differently?

2. What did Kraft do differently from other firms that try to grow through entering new markets? Do you think Kraft's methods would work for all multinational firms trying to grow in new markets or regions?

3. Do you think that the Oreo brand has been strengthened, or weakened, due to Kraft Foods' actions of changing the Oreo cookie itself in other markets? Can you think of other brands that it would benefit to undergo a similar transformation? Which brands could lose value if a drastic product change were made? CaseBase Volume 2 How Kraft Changed the Oreo and Its Global Marketing Strategy for Success in China 71 (c) 2012 Cengage Learning. All Rights Reserved.

4. Think of another developing market a firm may want to enter. How do you think this market's consumers might be different from Chinese consumers? How might they be similar?

5. Could Sanjay Khosla and Mohanbir Sawhney's "Growth Through Focus" strategy can be applied to all companies? Which companies may not benefit from this growth framework?