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Kellogg Company (K)Stock (Consumer Products Industry, Food Industry, Processed & Packaged Goods Industry)
With products in over 180 countries, Kellogg (NYSE: K) is the world's leading producer of cereal. Kellogg also holds a large market share in the convenience food industry with sales of cookies, crackers, toaster pastries, snack bars, and frozen foods. Kellogg's business model emphasizes category growth (ex. increasing cereal market share), international growth, and a commitment to marketing and research. It also emphasizes "Volume to Value" which focuses on brand building for higher margin products, rather than price competition. This strategy, along with the rest of Kellogg's business plan, has resulted in strong sales growth; the company posted a 7% internal sales growth in 2006 as compared to the 3% industry average. Recently Kellogg has been faced with sharply rising prices for several of the key inputs for its cereal, including corn and wheat. In response to growing health and wellness trends, and the accompanying consumer demand for healthier products Kellogg has moved to expand its healthy cereal and snack categories. In spite of constant pricing pressure from its rivals, General Mills and Kraft, Kellogg has been able to produce strong growth and introduce many new profitable products over the last three years.
[edit] Business Drivers[edit] ProductsKellogg's main product is cereal, including Rice Krispies, Fruit Loops, and Special K, which, in 2007, held a 34% market share worldwide, making Kellogg the world's leading producer in cereal. In the US, Kellogg dominates toaster pastries, with Pop Tarts helping to bring in 86% market share. Kellogg is the leading producer of wholesome snacks in the US, which includes NutriGrain and Special K Bars, and is second in the cookie and cracker business in the US, mainly due to the Keebler brand. [edit] International GrowthKellogg is the leading cereal producer and number two cookie and cracker producer in the US, with a major presence in Latin America, Europe, and Asia Pacific as well. 33% of the company's sales came from international operations in 2006 and 13% of sales from emerging markets. Kellogg is the leading cereal producer in each of these regions. Latin America continues to grow rapidly. Although customers in Asia Pacific have been less enthusiastic in their acceptance of the cereal and convenience food industry, overall growth in the region is still expected to be high. Europe has continued to be a strong market for Kellogg.   [edit] Marketing and InnovationThe Kellogg Company has had a strong commitment to advertising since 1929, when W.K. Kellogg doubled its advertising costs after the stock market crashed. Since then Kellogg has been very successful in building several marquee brands including Tony the Tiger, the Keebler Elves, and Toucan Sam. In 2006, Kellogg spent $916 million on advertising and $191 million on R&D. Marketing innovation and product differentiation help keep consumers interested and translate directly into higher revenues. A partnership with Disney on movie promotions and the introduction of the Red Berry and Vanilla Almond varieties of Special K, are two examples of innovation that have experienced great success. Over the past three years, Kellogg's revamped R&D department has helped the company claim 50% of industry sales of new product launches in cereal. Although high marketing costs puts some pressure on the operating margins, Kellogg continues to invest in its brand through advertising. In the latest quarter, the company reaffirmed the company's commitment to advertising, announcing that advertising for new and existing brands increased at a double digit rate for the last half of FY 2007. [edit] Volume to Value This "Volume to Value" strategy means that Kellogg focuses on growth of the sales dollar and not on shipment volume. Kellogg's main concern is growth of the price margin (i.e. the difference between the cost of the product and the price you sell it at). This strategy represents a shift away from the lower-priced products, which are prone to dangerous price wars and tend to have larger volume. [edit] The Keebler AcquisitionIn 2001, Kellogg bought Keebler Foods for $3.6 billion. With this acquisition, Kellogg became the second largest cookie and cracker producer in the US and also obtained Keebler's direct-store/door-delivery system (DSD). DSD means that the middleman is cut out of the delivery process and products are delivered directly to the stores by Kellogg representatives. This system eliminates the cost of the middleman and in addition, gives Kellogg representatives the ability to obtain prime shelf space. DSD gave Kellogg an important competitive advantage. Although, by acquiring Keebler Foods, Kellogg accumulated a large debt, $5.04 billion. As a result, Kellogg has restricted flexibility to changes in the market. A large portion of their cash flow must go to repay the debt and interest, and because Kellogg is more leveraged than other companies, it is more vulnerable to interest rate changes.
[edit] Trends and Factors[edit] Super Market ConsolidationIn 2006 Wal-Mart accounted for 18% of net sales and the top five retail customers of Kellogg accounted for 33% of net sales. Retail companies continue to consolidate and in doing so increase their ability to negotiate lower prices with cereal producers. Lower prices for goods sold translate into lower margins for Kellogg. [edit] Health and WellnessThe focus on obesity and wellness has become a major factor in the food industry. Many companies have had to make major changes to their inventory in order to accommodate this growing trend. Kellogg's adult-oriented cereals are directed toward the middle aged and older demographic, in particular the aging baby boomer generation. The Smart Start line lowers blood pressure and cholesterol, All-Bran aids digestion, and Special K products focus on 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. In addition, portion control packaging on some of Kellogg's snack products, such as cookies, has put a healthy spin on some of its less healthy products. If Kellogg can continue to create a healthy image for itself, it may be able to take advantage of the growing number of healthy consumers, as well as reduce criticism of its less healthy snack section. [edit] Commodity CostsKellogg is most vulnerable to shifting commodity costs. The primary ingredients of Kellogg products are wheat and corn, representing 9.4% and 2.6% of Kellogg's sales, respectively. Rising demand for corn and the high price inflation of wheat negatively impacted Kellogg's margins in 2006 because of its heavy dependence on these commodities. Higher commodity costs continued to weigh on Kellogg's earnings throughout the third quarter of 2007, when it lowered full year earnings per share guidance based on higher wheat and corn costs. 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. [edit] CompetitorsKellogg'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.
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