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Kraft CEO missing in action as company steps up its vanishing act

21 March 2011 Editorial
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Called to testify last week before a UK parliamentary committee of enquiry, Kraft CEO Irene Rosenfeld failed to appear, even declining an offer to answer questions by video hookup. “Kraft declined to comment on Rosenfeld's whereabouts”, the UK Guardian reported on March 15.

Rosenfeld failed to show for a similar hearing last year following Kraft’s abrupt turnaround on keeping open the UK Cadbury factory in Somerdale (see Kraft on a diet after the Cadbury feast). During its four-month predatory pursuit of Cadbury, Kraft had encouraged hopes that the site might continue to operate in order to win approval for the takeover. Once the deal was done, Kraft told the 400 Somerdale workers they were out of luck. The government Takeover Panel formally censured Kraft for behaving “irresponsibly” – and Rosenfeld was invited back to see how the company was doing with last year’s pledge to maintain a two-year moratorium on further redundancies.

Rosenfeld’s stand-ins refused to commit to extending the moratorium on compulsory redundancies, which expires in 2012, but disclosed that Kraft would be “harmonizing” pay and benefits at Cadbury. They did however assure MPs that this was “not a cost-cutting exercise”.

Kraft is also busy “harmonizing” Cadbury into its European tax avoidance model. Last December press reports revealed that Kraft was restructuring key parts of Cadbury by booking the profits in Switzerland, where corporate tax rates are half those in the UK. Cadbury UK operations would manufacture on contract for a newly created Swiss holding company, which would technically own the products made by Cadbury workers. If the holding company takes ownership of the brands, they would in turn charge Cadbury a royalty. Royalty fees in turn would be deducted from Kraft’s UK corporate tax bill - depriving the treasury of an even larger sum.

Of course none of this has anything to do with tax-dodging, or even “realizing tax efficiencies”. It’s about “disciplined cash management” and “capturing the synergies from the Cadbury acquisition”.

This neat accounting trick merely follows on Kraft’s ongoing restructuring of its European and other UK operations. Kraft’s 2009 UK accounts explain nicely how it’s done: "Until April 2009 the principal activity of the company was the manufacture and distribution of food products to the retail, food service and vending beverage market places ... The directors approved the sale of the assets and liabilities associated with Kraft Foods UK Ltd's service and procurement functions to the UK Branches of the Swiss entities, namely Kraft Foods Europe Procurement GmbH and Kraft Foods Europe Services GmbH ... After the completion of the restructuring Kraft Foods UK Ltd acts as a sales and distribution company selling Kraft Food products into the existing United Kingdom markets and customers."

So Kraft, the largest US food company and number two globally following the Cadbury acquisition (which last year boosted developing market revenue by over 60%), earning the elusive Irene Rosenfeld a year’s total compensation package of USD 26.3 million for the deal, no longer has as its principle activity...the manufacture and distribution of food products?

This announcement would come as no surprise to unions in North America, where much of  the company’s production has been outsourced to contract manufacturers, like the notorious union-busting Consolidated Biscuit Company (CBC) who turn out some of Kraft’s Nabisco brands. Other Kraft products are regularly contracted out on a rotating basis to other manufacturers – keeping the contract manufacturers but also workers and unions constantly guessing, constantly under pressure. This is known as “building a world-class supply chain”.

Swallowing Cadbury temporarily bumped up employment levels at Kraft, but the outsourcing of employment will gather speed as Kraft struggles to digest its acquisition. Whether they are producing for an entity controlled by a Swiss holding company, working for a contract manufacturer, or employed by a temporary agency supplying workers to a contract manufacturer, a growing number of those who produce Kraft products are no longer employed by Kraft.

The process doesn’t have to stop with moving the tax base to Switzerland. More intermediary companies can be set up to house assets and reduce payroll. Kraft can “lease” the workers making Cadbury products from a formally independent third party. Kraft calls this “increased investment in our Power Brands”.

The vanishing act doesn’t stop Kraft from making outrageous “responsibility” claims even as its payroll and its tax liabilities diminish. UK MPs might consider surprising Rosenfeld the next time she turns up somewhere to receive her next “sustainability” award. By the time Kraft finishes “making a delicious difference” out of Cadbury, there may be little left of the former company for Kraft to honor its commitments to.