NEW YORK (TheStreet) -- Kraft Foods Group (KRFT - Get Report), producer of such iconic kitchen staples as Jell-O, A1 Steak Sauce, Kool-Aid,and Velveeta, enjoyed higher-than-anticipated first-quarter profits this year. Indeed, Kraft did so well that The Wall Street Journal touted the company in a May 1 article, Investors Should Consider Putting Kraft on Their Plates.
Before digging in too deeply, however, potential shareholders might want to consider what's bubbling up behind the scenes at Kraft.
At a time when consumers are growingly increasingly concerned about nutrition and obesity, many of Kraft's prepackaged "convenience food" products are facing criticism and increasing competition from products that seem like fresher alternatives. Even its namesake dry macaroni and cheese mix, a staple of many American households, is being challenged by smaller companies that claim to offer products with healthier ingredients.
Krafts' efforts to update the images of some of its key products like Kool-Aid and Jell-O have met with mixed success, and CEO Tony Vernon recently admitted in a conference call that cuts to the SNAP food stamps program had negatively impacted upon the company's bottom line. Kraft's first quarter profits were boosted with cost-cutting measures - for example, the company recently announced discontinuation of its private truck fleet -- but cost-cutting alone won't keep the company's profits afloat for long.
Kraft's credibility took an additional hit recently when the company was forced to recall approximately 96,000 pounds of hot dogs. Reportedly, the company's "Classic Cheese Dogs" were mistakenly labeled as "Oscar Mayer Classic Wieners." To make matters worse, the product labels failed to disclose ingredients associated with the pasteurized cheese in the hot dogs including milk, a known allergen. Kraft was lucky; no one was injured by the mislabeled wieners. Still, the mistake calls into question the care with which Kraft oversees packaging of its products.As if its product woes weren't enough, Kraft is also facing an inquiry from the Commodity Futures Trading Commission over the trading of wheat futures contracts. The trades in question took place in December 2011 before Kraft split off from Mondelez International (MDLZ), which retained ownership of snacks like Oreos and Chips Ahoy for sale to the worldwide market. Kraft has publicly expressed its intent to work with Mondelez and the commission to resolve the inquiry prior to any formal action being taken, and asserted that Mondelez is primarily responsible for any costs or monetary penalties.
Kraft has also assured investors that it does not expect the inquiry to "have a material adverse effect on [its] financial condition or results of operations." Mislabeled hot dogs and questions about a few commodity trades may not mean much in the larger life of an enormous food manufacturer. Consumer disenchantment with Krafts' products is far more likely to give the company trouble over time. Still, it probably wouldn't be a bad idea for Kraft's management to attend more closely to its operations for a while. Small mistakes, taken together, can suggest sloppiness, and that can give potential investors serious indigestion. Follow @laurenmbloom This article represents the opinion of a contributor and not necessarily that of TheStreet or its editorial staff.
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