Kraft 2006 Annual Report Download - page 17

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Item 1A. Risk Factors.
The following risk factors should be read carefully in connection with evaluating the Company's business and the forward-looking information contained in
this Annual Report on Form 10-K. Any of the following risks could materially adversely affect the Company's business, operating results, financial condition and
the actual outcome of matters as to which forward-looking statements are made in this Annual Report on Form 10-K. While the Company believes it has
identified and discussed below the key risk factors affecting its business, there may be additional risks and uncertainties that are not presently known or that are
not currently believed to be significant that may adversely affect the Company's business, performance or financial condition in the future.
The Company's profitability may suffer as a result of competition in its markets.
The food industry is intensely competitive. Competition in the Company's product categories is based on price, product innovation, product quality, brand
recognition and loyalty, effectiveness of marketing, promotional activity and the ability to identify and satisfy consumer preferences. From time to time, the
Company may need to reduce the prices for some of its products to respond to competitive and customer pressures and to maintain market share. Such pressures
also may restrict the Company's ability to increase prices, including in response to commodity and other cost increases. The Company's results of operations will
suffer if profit margins decrease, either as a result of a reduction in prices or increased costs, and the Company is not able to increase sales volumes to offset
those margin decreases.
In order to protect existing market share or capture increased market share in this highly competitive environment, the Company may also need to increase
its spending on marketing, advertising and new product innovation. The success of marketing, advertising and new product innovation is subject to risks,
including uncertainties about trade and consumer acceptance. As a result, increased expenditures by the Company may not maintain or enhance market share and
could result in lower profitability.
The Company must leverage its brand value propositions to compete against lower-priced private label items and offset economic downturns.
Retailers are increasingly offering private label products that compete with the Company's products. The willingness of consumers to purchase the
Company's products will depend upon the Company's ability to offer brand value propositions—products providing the right bundle of consumer benefits at the
right price. This in turn depends in part on the perception that the Company's products are of a higher quality than less expensive alternatives. If the difference in
quality between the Company's products and store brands narrows, or if there is a perception of such a narrowing, consumers may choose not to buy the
Company's products. Furthermore, in periods of economic uncertainty, consumers tend to purchase more private label or other economy brands, which could
result in a reduction in the volume of sales of the Company's higher margin products or a shift in the Company's product mix to lower margin offerings. The
Company's ability to maintain or improve its brand value propositions will impact whether these circumstances will result in decreased market share and
profitability of the Company.
The consolidation of retail customers may put pressures on the Company's operating margins and profitability.
The Company's customers such as supermarkets, warehouse clubs and food distributors, have consolidated in recent years and consolidation is expected to
continue throughout the U.S., the European Union and other major markets. These consolidations have produced large, sophisticated customers with increased
buying power who are more capable of operating with reduced inventories, resisting price increases, and demanding lower pricing, increased promotional
programs and specifically tailored products. These customers also may use shelf space currently used for the
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Source: KRAFT FOODS INC, 10-K, March 01, 2007