Management's Discussion and Analysis of Financial Condition and Results of Operations

(Continued)

Discussion and Analysis > Operating Results by Business Segment > Food > Operating Results

		Net Revenues									Operating Companies Income
	(in millions)		2004				2003		2002			2004			2003		2002
	North
	American
	food		$22,060				$20,937		$20,489			$3,870			$4,658		$4,664
	International
	food		10,108				9,561		8,759			933			1,393		1,466
	Total food		$32,168				$30,498		$29,248			$4,803			$6,051		$6,130

2004 compared with 2003

The following discussion compares food operating results for 2004 with 2003.

North American food: Net revenues increased $1.1 billion (5.4%), due primarily to higher volume/mix ($537 million), higher net pricing ($312 million, reflecting commodity-driven price increases, partially offset by increased promotional spending), favorable currency ($164 million) and the impact of acquisitions ($117 million).

Operating companies income decreased $788 million (16.9%), due primarily to the 2004 pre-tax charges for asset impairment and exit costs ($391 million), cost increases, net of higher pricing ($356 million, including higher commodity costs and increased promotional spending), higher marketing, administration and research costs ($214 million, including higher benefit costs), and the 2004 implementation costs associated with the Kraft restructuring program ($40 million), partially offset by higher volume/mix ($197 million) and favorable currency ($29 million).

Volume increased 4.3%, of which 2.6% was due to acquisitions. In U.S. Beverages, volume increased, driven primarily by an acquisition in beverages, growth in coffee and new product introductions. Volume gains were achieved in U.S. Cheese, Canada & North America Foodservice, due primarily to promotional reinvestment spending in cheese and higher volume in Foodservice, due to the impact of an acquisition and higher shipments to national accounts. In U.S. Convenient Meals, volume increased, due primarily to higher cold cuts shipments and new product introductions in pizza, partially offset by lower shipments of meals. In U.S. Grocery, volume increased, due primarily to growth in enhancers, partially offset by declines in desserts. In U.S. Snacks & Cereals, volume increased, due primarily to higher snack nuts and biscuits shipments, partially offset by lower cereals volumes.

International food: Net revenues increased $547 million (5.7%), due primarily to favorable currency ($674 million), favorable volume/mix ($23 million) and the impact of acquisitions ($23 million), partially offset by the impact of divestitures ($126 million) and increased promotional spending, net of higher pricing ($47 million).

Operating companies income decreased $460 million (33.0%), due primarily to the pre-tax charges for asset impairment and exit costs ($206 million), cost increases and increased promotional spending, net of higher pricing ($113 million), higher marketing, administration and research costs ($92 million, including higher benefit costs and infrastructure investment in developing markets), an investment impairment charge relating to a joint venture in Turkey ($47 million), the 2004 loss and 2003 gain on sales of businesses (aggregating $34 million) and the impact of divestitures, partially offset by favorable currency ($69 million).

Volume decreased 1.1%, due primarily to the impact of the divestitures of a rice business and a branded fresh cheese business in Europe in 2003, as well as price competition and trade inventory reductions in several markets, partially offset by the impact of acquisitions.

In Europe, Middle East and Africa, volume decreased, impacted by divestitures, price competition in France and trade inventory reductions in Russia, partially offset by growth in Germany, Austria, Italy and Romania, and the impact of acquisitions. Beverages volume declined, impacted by price competition in coffee in France and lower shipments of refreshment beverages in the Middle East. In cheese, volume decreased, due primarily to the divestiture in of a branded fresh cheese business in Italy, partially offset by higher shipments of cream cheese in Germany, Italy and the United Kingdom, and higher process cheese shipments in the United Kingdom. In convenient meals, volume declined, due primarily to the divestiture of a European rice business. In grocery, volume declined across several markets, including Germany and Italy, partially offset by an acquisition in Egypt. Snacks volume increased, benefiting from acquisitions and new product introductions across the region, partially offset by trade inventory reductions in Russia.

Volume decreased in Latin America & Asia Pacific, due primarily to declines in Mexico, Peru, and Venezuela, partially offset by gains in Brazil and China. Snacks volume decreased, impacted by price competition and trade inventory reductions in Peru and Venezuela. In grocery, volume decreased across several markets, including Peru, Australia and the Philippines. In beverages, volume increased, impacted by gains in Brazil and China, partially offset by price competition in Mexico. Cheese volume increased, with gains across several markets, including Japan, Australia and the Philippines.

2003 compared with 2002

The following discussion compares food operating results for 2003 with 2002.

North American food: Net revenues increased $448 million (2.2%), due primarily to favorable currency ($162 million), higher pricing, net of increased promotional spending ($157 million) and higher volume/mix ($148 million), partially offset by the divestiture of a small confectionery business in the fourth quarter of 2002.

Operating companies income decreased $6 million (0.1%), due primarily to cost increases, net of higher pricing ($132 million, including higher commodity costs and increased promotional spending), higher fixed manufacturing costs ($82 million, including higher benefit costs) and unfavorable volume/mix ($35 million), partially offset by the 2002 pre-tax charges for asset impairment and exit costs, and integration charges (aggregating $242 million).

Volume increased 1.5%. Volume gains were achieved in U.S. Beverages, driven primarily by new product momentum in ready-to-drink beverages, partially offset by lower shipments of coffee. In U.S. Cheese, Canada & North America Foodservice, volume increased, due primarily to improved consumption and share trends in cheese from increased marketing spending, and higher shipments in Canada. Volume for the Foodservice business in the United States increased, due to higher shipments to national accounts. In U.S. Convenient Meals, volume increased, due primarily to higher shipments of cold cuts, hot dogs, bacon, soy-based meat alternatives and frozen pizza. In U.S. Grocery, volume decreased, due primarily to divestitures and lower shipments of enhancers, partially offset by higher desserts volume. Volume decreased in U.S. Snacks & Cereal, due primarily to weakness in cookies resulting from the impact of consumers’ health and wellness focus, lower contributions from new products and higher pricing, partially offset by gains in snack nuts.

International food: Net revenues increased $802 million (9.2%), due primarily to favorable currency ($564 million), higher pricing ($320 million, reflecting higher commodity and currency devaluation-driven cost increases in Latin America) and the impact of acquisitions ($57 million), partially offset by lower volume/mix ($73 million) and the impact of divestitures ($66 million).

Operating companies income decreased $73 million (5.0%), due primarily to higher marketing, administration and research costs ($90 million, including higher benefit costs and infrastructure investment in developing markets), the net impact of lower gains on sales of businesses ($41 million), lower volume/mix ($39 million) and the impact of divestitures, partially offset by favorable currency ($61 million), higher pricing, net of cost increases ($24 million, including fixed manufacturing costs), the 2002 pre-tax charges for integration costs ($17 million) and the impact of acquisitions ($7 million).

Volume decreased 1.1%, due primarily to the impact of divestitures, the adverse impact of the summer heat wave across Europe on the coffee and confectionery businesses, and price competition, partially offset by growth in developing markets and the impact of acquisitions.

In Europe, Middle East and Africa, volume increased, driven by growth in the Central and Eastern Europe, Middle East and Africa region, benefiting from the impact of acquisitions and new product introductions, partially offset by the adverse impact of the summer heat wave across Europe, price competition and the impact of divestitures. Snacks volume increased, benefiting from acquisitions, partially offset by the adverse impact of the summer heat wave on confectionery shipments and price competition. Beverages volume declined, due primarily to the summer heat wave across Europe (which had an adverse impact on coffee shipments) and price competition. These declines were partially offset by increased coffee shipments in Russia, benefiting from expanded distribution, and Poland, aided by new product introductions. In convenient meals, volume declined, due primarily to the divestiture of a European rice business, partially offset by higher shipments of canned meats in Italy. In cheese, volume decreased, due primarily to the impact of price competition in Germany and Spain, partially offset by higher shipments of cream cheese in Italy.

Volume decreased in the Latin America and Asia Pacific region, due primarily to the divestiture of a Latin American bakery ingredients business in 2002, partially offset by growth in Argentina, Brazil, Mexico, China and Australia. In grocery, volume declined in Latin America, due primarily to the divestiture of a bakery ingredients business in the fourth quarter of 2002. Snacks volume increased, due primarily to new product introductions in Brazil, Argentina, China and Australia, partially offset by lower confectionery volume due to trade inventory reductions, price competition and economic weakness in Brazil. In beverages, volume increased, driven by growth in Brazil, Venezuela, Mexico and China, aided by new product introductions. In cheese, volume increased, due primarily to higher shipments to the Philippines and Australia, partially offset by declines in the Latin American region. Convenient meals volume also grew, benefiting from gains in Argentina.