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How the Salt Rules Will Impact Kraft Sales

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As salt goes, so could taste -- and customers.

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According to a study published last month in the New England Journal of Medicine, the number of new cases of stroke would decline by at least 32,000, heart attacks by 54,000, and coronary heart disease by 60,000 if Americans reduced their salt intake by three grams per day.

Yesterday, Kraft Foods Inc. (KFT) announced an initiative to reduce sodium by an average of 10% "across its North American portfolio over the next two years."

Rhonda Jordan, president of Kraft's Health & Wellness division, stated that "A growing number of consumers are concerned about their sodium intake and we want to help them translate their intentions into actions."

In reality, Kraft -- and other major food processors like ConAgra (CAG) and Sara Lee (SLE) -- are feeling pressure from the government, which is expected to lower the recommended daily allowance of sodium when it releases its 2010 guidelines later this year.

Krista Faron, an analyst at research firm Mintel International, said, "If they can control sodium on their own terms now, that's preferable to being forced to change down the road."

But Kraft has been quietly reducing sodium levels in its products for quite a while -- it just hasn't been telling you about it.

Since 2008, the salt content in Oscar Mayer brand white turkey deli meat has been reduced by 15%, salt in Original and Reduced Fat Wheat Thins has gone down 10%, and two of Kraft's Light Dressings have had 30% of the salt cut in their recipes.

Tulin Tuzel, vice president of research and development at Sara Lee, told a reporter that they reduce salt gradually over a period of time "so that consumers don't notice."

Why the secrecy?

The answer is quite simple: Lower salt equals lower sales.

While there's a small market for low-sodium foods, Mintel's Faron says "Companies are scared of making low-sodium claims" because "a low-sodium message leaves a perception of inferior taste."

This theory actually isn't a theory at all. In 2007, Unilever ran a study in Holland, using two formulations of its Lipton Cup-a-Soup, with identical salt levels. Participants were told that one had 25% less sodium, and that the other contained the amount of salt they were accustomed to.

It should come as no surprise that the group found the taste of the "low-salt" soup less appealing.

Kraft will also have to contend with increased ingredient costs, as chemical salt replacements are more expensive than salt itself, plus they tend to have other flavors (bitter, metallic) that need to be masked by yet more chemicals.

Most manufacturers simply absorb these costs -- which don't tend to be extravagant, but do exist -- rather than passing them on to consumers.

Morgan Stanley analyst Vincent Andrews, who has a $32 price target on Kraft, prefers other stocks in the sector as long-term investments, including HJ Heinz Co. (HNZ), General Mills Inc. (GIS), and Kellogg Co. (K).

Whether or not Kraft's salt-reduction plan will result in a real-world sales decrease remains to be seen. It's unclear if the company plans to raise prices to offset any lower sales.

The good news for salt lovers is, you've got until 2012 to start hoarding bologna.
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No positions in stocks mentioned.
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