QUOTE AND NEWS
Market Intelligence Center  Jul 23  Comment 
After Tuesday’s trading in Kellogg Co (K) the algorithms behind MarketIntelligenceCenter.com's Artifical Intelligence Center picked out a trade that offers a 2.73% or 6.65% (for comparison purposes only), while providing 4.53% downside...
Benzinga  Jul 21  Comment 
Diamond Foods, Inc. (Nasdaq: DMND) today announced it has appointed Dr. Celeste A. Clark, a retired senior executive with Kellogg Company (NYSE: K), to its Board of Directors. Dr. Clark will also serve on the Board's Nominating and Governance...
SeekingAlpha  Jul 18  Comment 
By Gemstone Equity Research: Kellogg Company (NYSE:K) has recently been downgraded by Goldman Sachs from neutral to sell, with a target price of $59. Goldman Sachs believes that Kellogg is about to be badly affected by the declining trend of...
Motley Fool  Jul 15  Comment 
Does this analyst make a good case? Or is it just more noise from Wall Street?
TheStreet.com  Jul 15  Comment 
NEW YORK (TheStreet) -- Kellogg Co. was downgraded to "sell" from "neutral" at Goldman Sachs on Tuesday due to the firm's belief the company's sales will continue to decline. Goldman also cited Kellogg's accelerated distribution loss as a...
Market Intelligence Center  Jul 15  Comment 
A covered call identified by MarketIntelligececenter.com's patented algorithms on Kellogg Co (K) could yield about 3.01% (6.96% annualized, for comparison purposes only) in 158 days. Pair a long position in the stock with the Dec. '14 $65.00 call...
Market Intelligence Center  Jul 14  Comment 
After closing Friday at $65.95, Kellogg Co (K) presents an attractive opportunity to get a 2.12% return in just 68 days, which is an annualized return of 11.38% (for comparison purposes only). To enter this trade, sell one Sep. '14 $65.00 call for...
SeekingAlpha  Jul 3  Comment 
By Dividends4Life: Linked here is a detailed quantitative analysis of Kellogg Company (K). Below are some highlights from the above linked analysis: Company Description: Kellogg Company is a producer of ready-to-eat cereal, and also sells snack...
Motley Fool  Jun 22  Comment 
While many investors chase high-multiple stocks in a raging bull market, Kellogg slowly plods along delivering consistent returns for investors. The big difference is that when you invest in Kellogg, you don’t have to worry as much about broader...
Market Intelligence Center  Jun 18  Comment 
Kellogg Co (K) is a good candidate for a covered call at the $65.00 level. The Sep. '14 call at that price should fetch a credit of about $3.30, which means the entire position has a net debit of about $63.40. This trade has 3.60% downside...




 


Kellogg is the world’s leading producer of cereal and one of the largest producers of convenience foods with 2010 sales of nearly $12.4 billion. With distribution in more than 180 countries, Kellogg's produces some of the world's most iconic and easily recognizable brands including: Keebler, Pop-Tarts, Eggo and Rice Krispies. As of FY 2010, the company generated 68% percent of its revenues in North America, 18% in Europe, 7% in Latin America, and the remainder in the Asia Pacific region.[1]

Today, Kellogg faces the most difficult operating environment it has experienced in many years. Prime among the challenges confronting Kellogg are rapidly rising prices for several of the key inputs for its cereal and snack foods, including corn and wheat. Rising energy prices exacerbate high input prices by increasing the cost of transportation and delivery to Kellogg's distributors. Finally, Kellogg faces intense competition from General Mills and Kraft in its core U.S. market where a slowdown in consumer spending, as a result of America's ongoing economic hardships, threatens to hurt sales.


Business Overview

Kellogg's business is separated into two operating segments: Kellogg North America and Kellogg International. Kellogg generates the majority (68%) of it's revenue in North America which consists of the United States and Canada. The company's North American division is further subdivided by product type including cereal (24% of 2010 total sales), snacks (33%), and frozen and specialty categories (11%). Kellogg International generates the remaining 32% of sales and consists of three regional operating segments: Europe (18%), Latin America (7%) and Asia Pacific (7%).[2] hh

Trends and Forces

U.S. Consumer Slowdown a Mixed Bag for Kellogg

Soaring food and energy prices[3], the housing slump[4] and a weakening job market[5] are putting a drag on consumer spending in the U.S. where Kellogg generates the bulk of its sales. As a consumer staples business, Kellogg is somewhat insulated for a slowdown in consumer spending (people continue to eat during recession) and may even benefit from the spending slowdown if more consumers opt to eat at home instead of going out to restaurants.

Rising Food & Energy Costs Pressure Margins

Kellogg purchases large quantities of agricultural commodities including cereal grains, corn products, wheat, cocoa and dairy products. Increases in the prices of such raw materials increases production costs and crimps margins. Kellogg is also more vulnerable to fluctuation in oil prices compared to its competitors due to its direct-store/door-delivery (DSD) system. Oil prices, along with plastic prices, affect production costs and packaging as well. Furthermore, Kellogg's competitive environment its ability to pass rising costs along to consumers. To mitigate the risk of commodity cost inflation, the company purchases commodities in advance using futures contracts and hedges the risks associated with buying commodities. Corn and Wheat prices have continued to rise throughout 2010, up 52% and 49% respectively, forcing many companies to consider raising product prices in order to offset the increased commodity cost. General Mills (GIS) and Kraft Foods (KFT) are increasing prices in early 2010[6], and Kellogg will follow suit. The company announced price increases of 3-4% across its various product lines in early 2011, in expectation of a 7% increase in supply costs.[7]

Supermarket Consolidation Reduces Bargaining Power

A steady trend toward supermarket consolidation is concentrating the buying power of Kellogg's largest customers. Kellogg's largest customer is Wal-Mart Stores. Wal-Mart made up 21 percent of consolidated net sales in 2009[8]. Although no other company made up more than 10 percent of sales, the company claims that its five largest customers during 2010 accounted for approximately 34% of consolidated net sales and 44% of U.S. net sales.[9]. Because these large customers are so important to sales, Kellogg has less bargaining power when determining wholesale prices.

Healthy Products Draw Newly Health Conscious Consumers

The focus on obesity and health & wellness has become a major force in the food industry. Kellogg has capitalized on this trend with new adult-oriented cereals, directed toward the middle aged and the aging baby boomber generation. Three particularly successful health focused products include the Smart Start line which lowers blood pressure and cholesterol, All-Bran which aids digestion, and the Special K which aid with weight reduction and maintenance weight watching. Since Special K's introduction, it has been one of the fastest growing brands in the world, showing the impact of the healthy consumer. Kellogg has also become a player in the organic food business with its very successful Kashi brand of organic foods, purchased in 2000[10]. Kellogg has also benefited from portion-control of its snack products which puts a healthy spin on some of its less healthy products offerings.

Competitors

Kellogg's primary competitors are General Mills and Kraft. Kraft generates triple the revenues that General Mills and Kellogg produce, and Kraft's leading segment is snacks which accounts for about $10 billion in revenue. Kellogg and General Mills, on the other hand, receive a large amount of their revenue from the cereal segment. Snacks and cereal are the common sectors to these three companies. In terms of risk, they are all susceptible to commodity, oil, and plastic prices.

Company Comparison
Company Net Revenue (in millions) International Rev as % of sales Gross Margin %
Kellogg $12,575 32.3% 42.9%
General Mills $14,796 18.2% 39.7%
Kraft $40,386 41.4% 36.2%

Kellogg is the leader in the U.S. cereal market. Over the last few years, despite increasing competition, Kellogg has slowly increased its market share. Kellogg now controls about one-third of the market (34%), followed by General Mills with 31 percent and Quaker (a division of PepsiCo) and Post (a division of Kraft Foods). Kellogg has also launched more cereals than General Mills recently. Kellogg controls 50% of the market for new cereals in the United States. New cereals are particularly important since manufacturers generally charge higher prices for them than for older products.



References

  1. Kellogg 2011 10K
  2. Kellogg 2011 10K
  3. The Boston Globe- Surging costs of groceries hit home
  4. Bloomberg Case-Shiller Index Falls
  5. NYTimes Unemployment Rising
  6. Food Prices Rise Sharply - And There's More to Come, Seattle PI, 12/16/2010
  7. Kellogg Plans More Aggressive Price Increase, Automatedtrader.net, 2/3/11
  8. K 2009 10-K, Note 17: Operating Segments, p. 55
  9. K 2009 10-K, Item 1: Business, p. 3
  10. Kellogg Acquires Kashi
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