Comeback Road Hard for : Kraft Struggles to Rebuild the Old-Line Dairy

Outside the Knudsen ice cream factory in a South Central Los Angeles industrial district, workers load freshly made Breyers ice cream into trucks, in subtle testimony to the changes under way in the Southern California dairy industry.

Fourteen months ago, dairy products giant Kraft Inc. acquired the venerable Knudsen name and the company’s ice cream, sour cream, cottage cheese and yogurt operations in a bankruptcy sale. Now, the ice cream factory on West Slauson Avenue serves as headquarters to Kraft’s Knudsen division and launch pad for Kraft’s major push into the lucrative Southern California dairy food market.

Until its collapse, Knudsen had dominated the Southern California dairy market, taking a third of all dairy product sales. After the Los Angeles dairy failed, Knudsen’s competitors rushed to capture pieces of its milk, ice cream, cottage cheese and yogurt businesses. Now, as firms such as Carnation Corp. and Jerseymaid aggressively act to build their share of Southern California dairy sales, Kraft struggles to rebuild a much smaller Knudsen.

The Vons Cos. acquisition of the Southern California operations of Safeway Stores last week might make Kraft’s task even tougher. If the $408-million deal is approved by Vons shareholders, Vons will get not only 172 Safeway grocery stores, but Safeway’s sour cream, ice cream, yogurt and milk processing operations.

With Safeway’s dairy plants, Vons would be able to make all the sour cream it needs to supply its Southern California groceries. That would be a blow to Knudsen, since Vons is an important customer, accounting for about 15% of Southern California’s sour cream sales, according to the grocery chain. Vons currently buys all of its sour cream from Knudsen, then resells it to consumers under the Jerseymaid label.

In Southern California, Kraft finds itself in the unusual position of underdog. As the nation’s biggest manufacturer of processed cheese, Kraft enjoys an enviable position in most markets throughout the East and Midwest. From its headquarters in Glenview, Ill., the dairy giant also extends a firm hold on the nation’s ice cream market with its Breyers brand, the nation’s best-selling ice cream.

But Kraft has never had much luck in California, a marketplace long dominated by local brands. Breyers has just 5% of the ice cream market here, and Kraft is strong only in sliced cheeses, which make up a small portion of total cheese sales.

H. E. (Skip) Reinhart, a Kraft vice president who last year made his first trip to California to head the Knudsen division, says Knudsen is an important part of the company’s strategy. “In this market, the Knudsen name means more than Kraft.”

A decade ago, 68-year-old Knudsen was the leading California company in cultured dairy products, known to generations of Californians for its cottage cheese, sour cream and yogurt. In 1983, it was acquired by Winn Enterprises, a business trust controlled by three millionaire brothers from Orange County. In 1985, the brothers borrowed heavily to buy Foremost, another venerable California dairy brand, and merge it with Knudsen to form the largest dairy in the West.

But today, Knudsen is significantly smaller than the dairy giant with $1 billion in annual sales that spanned eight states and collapsed into bankruptcy under a mountain of debt in September, 1986. The old Foremost operations outside California have been sold to various buyers, while some Foremost plants in California remain idle. Under Kraft management, Knudsen’s revenue is just $200 million, and it no longer sells its best-known product, milk. The company has not yet returned to profitability.

But Reinhart believes that the Knudsen name has remained untarnished in the public eye. Kraft’s market research indicates that just two out of 10 Southern Californians are aware that Knudsen was in financial trouble, and even fewer people realize that Kraft acquired the company.

“As far as the consumer is concerned, Knudsen is the same as it always has been,” he says.

The bankruptcy proceedings provided Kraft with several advantages. It was able to buy Knudsen cheaply, paying about $6 million less than the $74.8 million that Winn Enterprises paid. It renegotiated contracts with its labor unions, saving at least $1.2 million a year, according to Teamsters lawyer Kenneth Young. Kraft was also helped when Hughes Markets and Stater Bros. grocery chains agreed to buy Knudsen’s low-profit milk business. Those supermarkets now jointly operate Knudsen’s old Los Angeles dairy and sell Knudsen-brand milk under a royalty arrangement with Kraft.

But Kraft inherited problems that overshadow these advantages. When Knudsen sought bankruptcy protection in the fall of 1986, many important Knudsen customers, such as the Albertsons, Vons and Safeway supermarket chains, switched to other suppliers.

Feeling Pressure

Though Knudsen has regained some customers and restored its position as the leading seller of cottage cheese and sour cream in the state, it faces major challenges in its traditional yogurt and ice cream businesses. The company’s newest product, Knudsen-brand block cheese, hasn’t been well-received by supermarket executives, who are more eager to promote their own house brands.

At the same time, Kraft is feeling increased competitive pressure from other Southern California dairy firms.

Carnation, already an important force in ice cream and cottage cheese, is opening the world’s largest ice cream plant in Bakersfield early next year, where it already has a large plant that makes cottage cheese and other products.

The new and more efficient ice cream plant is expected to lower production costs for Carnation, which can translate into a price advantage for the firm, a unit of Nestle.

Another familiar Southern California dairy, Adohr Farms, has been put up for sale by its parent, Southland Corp. Adohr supplies many of Southland’s 7-Eleven convenience stores, but that business may be up for grabs when Adohr changes hands. In addition, last week’s agreement by Vons to buy Safeway’s Southern California stores could have far-reaching effects on the dairy business, since Vons has not only the capacity to make all the sour cream it needs, but all the yogurt it needs as well. It currently buys its private label yogurt from Favorite Foods, a unit of Carnation Corp.

On another front, Corona-based Golden California Cheese, the largest cheese processor in the state and an important supplier to the Safeway and Ralphs supermarket chains for store brand cheese, recently started marketing cheese under its own label. Jerseymaid, a unit of Vons Cos., introduced its own yogurt brand after Knudsen collapsed.

These competitive shifts have driven Kraft to spend large sums to upgrade Knudsen’s antiquated plants. The company is spending $7 million to improve its ice cream plant in South Central Los Angeles and $4 million to improve its cottage cheese plant in Visalia, in Northern California. Kraft also plans to spend $10 million to promote its Knudsen brands next year.

But food industry executives question whether Kraft’s marketing muscle can revive the Knudsen brand. Most executives are especially skeptical of Knudsen block cheese, a new product for a firm known previously only for milk, yogurt, cottage cheese and ice cream.

Success Mixed

“I always thought the Knudsen name was magic,” said Cliff Tatro, senior vice president at Everfresh Farms, an Ontario food distributor. “But I’m not so sure (with block cheese) it will mean anything to the consumer.”

Tatro says Kraft faces a difficult job getting space on supermarket shelves for the cheese, even with its considerable marketing strength. Supermarket chains find it more profitable to sell their own private label brands and already carry a few name brands, such as Dakota Farms, Golden California and even Kraft’s own Cracker Barrel brand.

Only one major chain, Lucky Stores, has agreed within the past month to carry a few varieties of the new Knudsen cheese. One reason Lucky was so receptive is that the Knudsen cheese is made for Kraft by a Tulare cooperative that is a major supplier to Lucky’s house-brand dairy products. Even so, Lucky isn’t certain that the Knudsen block cheese is a winner. “It’s just too soon to say,” says Dick Fredrickson, Lucky vice president.

Kraft’s success with Knudsen’s traditional products has been mixed. When Knudsen collapsed, much of its business went to its competitors. Vons and Safeway switched to other yogurt brands. Carnation gleefully watched its cottage cheese sales climb nearly 20%.

“Everyone got a piece of Knudsen’s business,” says Bruce Young, an executive at Favorite Foods, the food packaging unit of Carnation. Young observed that since Knudsen was so large--it controlled 35% of the dairy production in the state--no single company could absorb its business. “No one has that kind of (plant) capacity,” he says.

To be sure, under Kraft’s management Knudsen has recovered a significant portion of its sour cream and cottage cheese business. In fact, sales of those products are now as high as in the past, or about 40% of the Southern California market and 30% to 35% in the rest of the state.

‘Boring’ Yogurt

But in ice cream Knudsen faces tough competition from Carnation and Dreyer’s Grand Ice Cream, an Oakland-based ice cream company that has the largest share of the premium ice cream market in the state.

With yogurt, Knudsen has major problems. Once the most popular yogurt in the state, Knudsen’s market share has declined to 5% from 25% a decade ago. Over the years, Knudsen lost ground to General Mills’ Yoplait and the French yogurt Dannon. Knudsen failed to experiment much with its yogurt packages or formulas, making its product “kind of boring” says Charles Tomblin, a marketing executive with Altadena Dairy.

Reinhart is trying to spruce up the yogurt’s image with new flavors and advertisements that feature a yogurt container wearing sunglasses. But some in the industry aren’t sure that the Knudsen yogurt business can be revived.

The Vons chain started carrying some Knudsen yogurt flavors again this month after dropping them in 1986, but it now also carries Jerseymaid yogurt. Safeway still hasn’t reinstated Knudsen yogurt and seems happy with the success of its own store brand. It is not clear whether Vons’ acquisition of Safeway’s operations in Southern California will benefit Knudsen, since Vons now can make its own yogurt. Vons spokeswoman Suzanne Dyer said last week that although it is too early to say what Vons will do, Safeway’s dairy plants “offer certain advantages.”

“It’s very difficult, once you lose that shelf space, to regain it,” says Tomblin, who says Altadena now serves some of Knudsen’s former customers among convenience stores and small groceries. “You are competing with supermarkets, which want to sell their own private label brands.”