netrashetty
Netra Shetty
Kellogg Company (often referred to as Kellogg or Kellogg's in its corporate logo, or even more formally as Kellogg's of Battle Creek), with 2008 sales of nearly $13 billion, is the world's leading producer of cereal and a leading producer of convenience foods, including cookies, crackers, Toaster pastries, cereal bars, fruit-flavored snacks, frozen waffles, and vegetarian foods. The company's brands include Kellogg's, Keebler, Pop-Tarts, Eggo, Cheez-It, Nutri-Grain, Rice Krispies, BearNaked, Morningstar Farms, Famous Amos, Special K, All-Bran, Frosted Mini-Wheats, Club and Kashi. Kellogg products are manufactured in 18 countries and marketed in more than 180 countries around the world.[2] Its global headquarters are in Battle Creek, Michigan, USA. Kellogg trades under the ticker symbol NYSE: K.
The Kellogg Company holds a Royal Warrant from HM Queen Elizabeth II and the Prince of Wales.
With 2009 sales of nearly $12.6 billion, Kellogg is the world’s leading producer of cereal and one of the largest producers of convenience foods[1]. With sales 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 2009, the company generated 67% percent of its revenues in North America, 19% in Europe, 8% in Latin America, and the remainder in the Asia Pacific region.[2]
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.
In June 2010, Kellog's voluntarily recalled 28 million boxes of cereal (Apple Jacks, Corn Pops, Froot Loops, and Honey Smacks) that may have a strong "waxy" smell or taste.[3] Elevated levels of a substance in the package lining prompted the recall even though the company and outside experts have both stated that substance is not harmful.[4]
Business Overview
Contents
1 Business Overview
1.1 Quarterly Earnings
2 Segments
2.1 North America (67% of Sales, 78% of Operating Income)[34]
2.1.1 Cereals (24.5% of Sales)[36]
2.1.2 Snacks (31.9% of Sales)[39]
2.1.3 Frozen/Specialty (11.3% of Sales)[42]
2.2 International (32.3% of Sales, 30.6% of Operating Profit)[45]
2.3 Marketing and Innovation
3 Trends and Factors
3.1 U.S. Consumer Slowdown a Mixed Bag for Kellogg
3.2 Rising Food & Energy Costs Pressure Margins
3.3 Supermarket Consolidation Reduces Bargaining Power
3.4 Healthy Products Draw Newly Health Conscious Consumers
4 Competitors
5 References
Kellogg's business is separated into two operating segments: Kellogg North America and Kellogg International. Kellogg generates the majority (67%) 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 2009 total sales), snacks (32%), and frozen and specialty categories (11%).[5] Kellogg International generates the remaining 33% of sales and consists of three regional operating segments: Europe (19%), Latin America (8%) and Asia Pacific (6%).[6]
Quarterly Earnings
Q1 2009
In the first quarter of 2009, Kellogg posted revenues of $3.17 billion, a decrease of 2.7% from Q1 2008 figures; net income remained nearly unchanged at $321 million.[7] The decrease in revenues is predominantly due to unfavorable foreign exchange fluctuations which had a negative 7.7% impact on the company during the quarter. This was partially mitigated by net pricing increases which raised revenues by 4.2%.[8] The increase in net income is a result of Kellogg's ability to maintain costs and operating expenses as prices increased, contributing to a higher margin.
Q2 2009
In the second quarter of 2009, Kellogg posted revenues of $3.23 billion, a 3.5% decrease from Q2 2008 figures; net income grew 13.5% to $354 million.[9] In terms of volume, the company fared relatively well, losing only .5% across its operating divisions. A net pricing increase of 3.1%, however, was negated by a 6.4% adverse shift in foreign currency translation. Ignoring these currency fluctuations, the company's international divisions mostly grew revenue, 8% in Latin America and 3% in Asia Pacific, while Europe fell 1% due to challenging negotiations with local retailers. The increase in net income was due to lower input costs as well as a 7% decrease in Selling, General & Administrative Expenses (SG&A) as a result of the company's cost reduction initiative.[9]
% Change Q2 2009 vs. Q2 2008
Volume (.5%)
Net Pricing 3.1%
Acquisitions .4%
Foreign Currency Impact (6.4%)
[9]
Q3 2009
In the third quarter of 2009, Kellogg generated revenues of $3.277 billion, a decrease of 0.3%; net income rose 5.5% to $361 million.[10] Despite increases in the volume of products sold in both Europe and Latin America (4.2% and 6.4% respectively), double-digit currency devaluations led to revenue decreases of more than 5% in both regions. However, the effect of this decrease was buoyed by 4.2% growth in Asia and 1.5% revenue growth in North America, building on 9% growth in North America the previous year. The North America region accounts for two-thirds of the company's total revenues.[11] For the third quarter, overall worldwide volume increased 0.7%[12], while the company remains on track to reach its goal of reducing annual costs by $1 billion by the end of 2011[13] The company attributes much of their success in the quarter to their 17% increase in advertising investment compared to last year.[14]
Q4 2009
In the fourth quarter of 2009, Kellogg generated revenues of $2.9 billion, a decrease of 1%; net income decreased 1.7% to $176 million. During the quarter, operating profit increased 2% to $352 million.[15] Flooding in Atlanta and mechanical problems at a factory in Tennessee led to a major shortage of Eggo Waffles in supermarkets and production has still not fully recovered.[16] However, this shortage did not prevent the company from achieving 25% internal operating profit growth for its North America division and 13% internal operating profit increase in Europe as well. In North America, Cereal and Snacks continue to perform well, growing at 3% and 5% respectively, while Frozen and food services decreased significantly.[17] While these regions saw positive growth, Latin America saw a slight decrease and Asia Pacific's internal operating profit decreased 21% in Q4 as a result of increased investment in advertising.[18]
Q1 2010
In the first quarter of 2010, Kellogg generated revenues of $3.3 billion, an increase of nearly 5% from the previous year; net income for the quarter increased more than 30% to $418 million. During the quarter, operating profit grew 20% from Q1 2009 to $637 million.[19] Net sales and operating profits increased for every geographic region except for Latin America.[20] The company's overall volume increased 0.5%, supported by a 2% growth in cereal volume; although volume for Eggo waffles has still not returned to its previous levels and the company experienced supply disruptions in Brazil and Venezuela, peanut butter sales helped buoy volume following the peanut butter recalls in Q1 2009. The reduced Eggo volume forced the company to halt its advertising for this product, but this in turn led to a 3% decrease in advertising costs.[21] North America's operating profit increased 22% while the company continues to see many consumer taking advantage of promotions and an increase in sales at alternative stores, such as Sam's Club and Costco and dollar stores.[22] Operating profit increased 10% in Asia Pacific and 4% in Europe, reflecting increased sales and lower costs. In Latin America, which saw internal net sales growth of 1% (following 8% growth in Q1 2009), temporary closures of the company's Brazil and Venezuela facilities offset gains of nearly 10% in sales in Mexico.[23]
Q2 2010
In the second quarter of 2010, Kellogg generated revenues of $3.06 billion, a decrease of 5% from Q2 2009; net income for the quarter decreased more than 14% to $302 million. Operating profit decreased more than 12% to $483 million.[24] Volume fell by 4.5% as a result of lower cereal sales, fewer Eggo sales and the company's voluntary recall of 28 million boxes of cereal in June. In North America, industry-wide cereal sales fell by 2-3% with Kellogg's cereal sales decreasing 5%. The company's voluntary recall in June hurt sales by 4%. In total, the company's cereal sales decreased by 13% during the quarter. Still recovering from the Eggo supply disruption in 2009, frozen food sales fell by 9%. Strong sales of Pop-Tarts drove a 1% increase in snack sales during the quarter, along with growth for the company's healthy snack offerings. North America's volume fell by 5.3% during the quarter.[25] International performance was flat compared to the same quarter last year. Cereal sales in Europe decrease, as they did in China and Japan as well. Central America revenues grew by 5% following 8% growth in that market last year.[26] The cereal recall in June affected 28 million boxes of cereal and cost the company $48 million.[27]
Q3 2010
In the third quarter of 2010, Kellogg’s net sales fell by nearly 4% from the previous year to $3.16 billion; operating profit decreased 5% to $541 million.[28] Volumes fell by 4% or more in all geographies except for Asia Pacific (+11%) with an overall decrease of 3.4%. Sales in nearly every product category decreased or remained flat during the period. In North America, retail cereal sales fell by 6%. The company’s Q2 recall had a larger than expected impact on sales; the recall affected primarily kids’ brands that were supposed to be the cornerstone of back-to-school promotions. As a result of the recall and the accompanying negative effect on the quarter’s promotions, Kellogg’s competitors were able to increase their market share more than expected.[29] This was the second recall in the past two years, and coupled with the Eggo supply chain issues, these troubles have had a major negative effect on the company’s bottom line. While specific numbers are incalculable, the company estimates the total cost of these incidents to be nearly $500 million, with $200-300 million attributed to increased operating expense costs.[30] Sales of retail snacks in the US were essentially flat and frozen food sales decreased by 5%. Retailers have been slow to restock Eggo Waffles following the supply disruption and customers are not quickly returning to the brand.[31] International sales decreased by 2% where a 5% decrease in Europe overshadowed 5% and 2% growth in Latin America and Asia, respectively.[32] The company expects raw material costs to rise next year but the company has hedged 40% of its commodity needs for 2011.[33]
Segments
*Note that corporate operating expenses are not allocated to individual segments, so operating income will add to more than 100%.
North America (67% of Sales, 78% of Operating Income)[34]
Kellogg's makes the majority of its sales in North America. Within the segment, the company reports revenues from its three primary product groups.
Sales to Wal-Mart (WMT), the company's largest customer, accounted for approximately 21% of net revenues in 2009.[35]
Cereals (24.5% of Sales)[36]
Kellogg's is the number one player in the $9 billion ready-to-eat U.S. cereal market with nearly 34% market share.[37] The company markets many of the United States' most recognizable cereal brands including Apple Jacks, Cocoa Krispies, Kellogg’s Corn Flakes, Rice Krispies, Smart Start and Special K[38]. Kellogg relies on a combination of product innovation and marketing strategies to drive growth in the mature U.S. cereal market.
Snacks (31.9% of Sales)[39]
North American Retail snacks which consists of cookies, cracker, fruit-flavored snacks and toaster pastries is Kellogg's single largest product category. Kellogg's Snack category includes familiar brands like Cheez-it, All-Bran, wholesome snacks such as Nutri-Grain and Special K bar as well as Pop-Tarts toaster pastry which holds a 86% category market share. [40]. Kellogg's snack business also includes the Keebler Foods cookie line which the company acquired for $3.8B in 2000.[41] With the acquisition, Kellogg obtained Keebler's direct-store/door-delivery system (DSD) which lowers delivery costs and allows the company to target its product innovations and obtain prime shelf space. Product innovation and marketing also drive growth in Kellogg's snack category.
Frozen/Specialty (11.3% of Sales)[42]
Kellogg's frozen and specialty channels consist primarily of frozen breakfast and dinner products. The company's marquee brands in this segment are the ubiquitous Eggo Waffles- key to Kellogg's leading market share in the frozen breakfast category.
In mid-2009, Eggo waffle production was curtailed following the FDA's finding of multiple sanitation violations at Kellogg's Eggo plant in Georgia; this was followed by severe flooding, which further delayed the factory's reopening. Additionally, machine repairs at the largest Eggo plant in TN, which began renovations last year, will take significantly longer than expected and the factory will not return to full production until late 2010.[43] As a result, Eggo's have been in short supply throughout the nation, frequently missing from supermarket freezers, which has in turn hurt Kellogg's bottom line.[44]
International (32.3% of Sales, 30.6% of Operating Profit)[45]
With sales in over 180 countries around the world, Kellogg International is an important and promising segment of the company's business. Europe accounts for nearly 19% of total sales with the U.K. representing Kellogg's second largest market. Kellogg also has a relatively small presence in central and eastern Europe which presents a promising opportunity for expansion[46]. Latin America accounts for 8% of Kellogg's sales and is the company's single fastest growing regional market; Mexico is now the company's third largest market after the U.S. and the U.K. The Asia Pacific region accounts for 6% of sales and holds particular promise for Kellogg due to potentially huge consumer markets in developing countries like India and [[Rise of China's Middle Class|China].[47] Despite challenging dynamics that arise with the introduction of traditionally western cereal and snack foods in eastern markets, low per capita consumption in the Asia Pacific region presents an exciting expansion opportunity.[48]
Region Total Sales 2009 ($M) Percentage of Total Sales
Europe $2,361 18.8%
Latin America $963 7.7%
Asia Pacific $741 5.9%
[49]
Marketing and Innovation
Marketing and innovation are central to driving sales and profit growth at Kellogg. Indeed, Kellogg has had a strong commitment to advertising since 1929, when W.K. Kellogg doubled its advertising costs after the stock market crashed. Marketing innovation and product differentiation help keep consumers interested and translate directly into higher revenues. In early 2011 Kellogg announced a new international marketing effort that is meant to unify the company's message across regions while simultaneously driving higher sales.[50]
Trends and Factors
U.S. Consumer Slowdown a Mixed Bag for Kellogg
Soaring food and energy prices[51], the housing slump[52] and a weakening job market[53] 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 as 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[54], 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.[55]
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[56]. Although no other company made up more than 10 percent of sales, the company claims that its five largest customers during 2007 accounted for approximately 34% of consolidated net sales and 44% of U.S. net sales.[57]. 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 factor 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[58]. 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.
The Kellogg Company holds a Royal Warrant from HM Queen Elizabeth II and the Prince of Wales.
With 2009 sales of nearly $12.6 billion, Kellogg is the world’s leading producer of cereal and one of the largest producers of convenience foods[1]. With sales 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 2009, the company generated 67% percent of its revenues in North America, 19% in Europe, 8% in Latin America, and the remainder in the Asia Pacific region.[2]
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.
In June 2010, Kellog's voluntarily recalled 28 million boxes of cereal (Apple Jacks, Corn Pops, Froot Loops, and Honey Smacks) that may have a strong "waxy" smell or taste.[3] Elevated levels of a substance in the package lining prompted the recall even though the company and outside experts have both stated that substance is not harmful.[4]
Business Overview
Contents
1 Business Overview
1.1 Quarterly Earnings
2 Segments
2.1 North America (67% of Sales, 78% of Operating Income)[34]
2.1.1 Cereals (24.5% of Sales)[36]
2.1.2 Snacks (31.9% of Sales)[39]
2.1.3 Frozen/Specialty (11.3% of Sales)[42]
2.2 International (32.3% of Sales, 30.6% of Operating Profit)[45]
2.3 Marketing and Innovation
3 Trends and Factors
3.1 U.S. Consumer Slowdown a Mixed Bag for Kellogg
3.2 Rising Food & Energy Costs Pressure Margins
3.3 Supermarket Consolidation Reduces Bargaining Power
3.4 Healthy Products Draw Newly Health Conscious Consumers
4 Competitors
5 References
Kellogg's business is separated into two operating segments: Kellogg North America and Kellogg International. Kellogg generates the majority (67%) 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 2009 total sales), snacks (32%), and frozen and specialty categories (11%).[5] Kellogg International generates the remaining 33% of sales and consists of three regional operating segments: Europe (19%), Latin America (8%) and Asia Pacific (6%).[6]
Quarterly Earnings
Q1 2009
In the first quarter of 2009, Kellogg posted revenues of $3.17 billion, a decrease of 2.7% from Q1 2008 figures; net income remained nearly unchanged at $321 million.[7] The decrease in revenues is predominantly due to unfavorable foreign exchange fluctuations which had a negative 7.7% impact on the company during the quarter. This was partially mitigated by net pricing increases which raised revenues by 4.2%.[8] The increase in net income is a result of Kellogg's ability to maintain costs and operating expenses as prices increased, contributing to a higher margin.
Q2 2009
In the second quarter of 2009, Kellogg posted revenues of $3.23 billion, a 3.5% decrease from Q2 2008 figures; net income grew 13.5% to $354 million.[9] In terms of volume, the company fared relatively well, losing only .5% across its operating divisions. A net pricing increase of 3.1%, however, was negated by a 6.4% adverse shift in foreign currency translation. Ignoring these currency fluctuations, the company's international divisions mostly grew revenue, 8% in Latin America and 3% in Asia Pacific, while Europe fell 1% due to challenging negotiations with local retailers. The increase in net income was due to lower input costs as well as a 7% decrease in Selling, General & Administrative Expenses (SG&A) as a result of the company's cost reduction initiative.[9]
% Change Q2 2009 vs. Q2 2008
Volume (.5%)
Net Pricing 3.1%
Acquisitions .4%
Foreign Currency Impact (6.4%)
[9]
Q3 2009
In the third quarter of 2009, Kellogg generated revenues of $3.277 billion, a decrease of 0.3%; net income rose 5.5% to $361 million.[10] Despite increases in the volume of products sold in both Europe and Latin America (4.2% and 6.4% respectively), double-digit currency devaluations led to revenue decreases of more than 5% in both regions. However, the effect of this decrease was buoyed by 4.2% growth in Asia and 1.5% revenue growth in North America, building on 9% growth in North America the previous year. The North America region accounts for two-thirds of the company's total revenues.[11] For the third quarter, overall worldwide volume increased 0.7%[12], while the company remains on track to reach its goal of reducing annual costs by $1 billion by the end of 2011[13] The company attributes much of their success in the quarter to their 17% increase in advertising investment compared to last year.[14]
Q4 2009
In the fourth quarter of 2009, Kellogg generated revenues of $2.9 billion, a decrease of 1%; net income decreased 1.7% to $176 million. During the quarter, operating profit increased 2% to $352 million.[15] Flooding in Atlanta and mechanical problems at a factory in Tennessee led to a major shortage of Eggo Waffles in supermarkets and production has still not fully recovered.[16] However, this shortage did not prevent the company from achieving 25% internal operating profit growth for its North America division and 13% internal operating profit increase in Europe as well. In North America, Cereal and Snacks continue to perform well, growing at 3% and 5% respectively, while Frozen and food services decreased significantly.[17] While these regions saw positive growth, Latin America saw a slight decrease and Asia Pacific's internal operating profit decreased 21% in Q4 as a result of increased investment in advertising.[18]
Q1 2010
In the first quarter of 2010, Kellogg generated revenues of $3.3 billion, an increase of nearly 5% from the previous year; net income for the quarter increased more than 30% to $418 million. During the quarter, operating profit grew 20% from Q1 2009 to $637 million.[19] Net sales and operating profits increased for every geographic region except for Latin America.[20] The company's overall volume increased 0.5%, supported by a 2% growth in cereal volume; although volume for Eggo waffles has still not returned to its previous levels and the company experienced supply disruptions in Brazil and Venezuela, peanut butter sales helped buoy volume following the peanut butter recalls in Q1 2009. The reduced Eggo volume forced the company to halt its advertising for this product, but this in turn led to a 3% decrease in advertising costs.[21] North America's operating profit increased 22% while the company continues to see many consumer taking advantage of promotions and an increase in sales at alternative stores, such as Sam's Club and Costco and dollar stores.[22] Operating profit increased 10% in Asia Pacific and 4% in Europe, reflecting increased sales and lower costs. In Latin America, which saw internal net sales growth of 1% (following 8% growth in Q1 2009), temporary closures of the company's Brazil and Venezuela facilities offset gains of nearly 10% in sales in Mexico.[23]
Q2 2010
In the second quarter of 2010, Kellogg generated revenues of $3.06 billion, a decrease of 5% from Q2 2009; net income for the quarter decreased more than 14% to $302 million. Operating profit decreased more than 12% to $483 million.[24] Volume fell by 4.5% as a result of lower cereal sales, fewer Eggo sales and the company's voluntary recall of 28 million boxes of cereal in June. In North America, industry-wide cereal sales fell by 2-3% with Kellogg's cereal sales decreasing 5%. The company's voluntary recall in June hurt sales by 4%. In total, the company's cereal sales decreased by 13% during the quarter. Still recovering from the Eggo supply disruption in 2009, frozen food sales fell by 9%. Strong sales of Pop-Tarts drove a 1% increase in snack sales during the quarter, along with growth for the company's healthy snack offerings. North America's volume fell by 5.3% during the quarter.[25] International performance was flat compared to the same quarter last year. Cereal sales in Europe decrease, as they did in China and Japan as well. Central America revenues grew by 5% following 8% growth in that market last year.[26] The cereal recall in June affected 28 million boxes of cereal and cost the company $48 million.[27]
Q3 2010
In the third quarter of 2010, Kellogg’s net sales fell by nearly 4% from the previous year to $3.16 billion; operating profit decreased 5% to $541 million.[28] Volumes fell by 4% or more in all geographies except for Asia Pacific (+11%) with an overall decrease of 3.4%. Sales in nearly every product category decreased or remained flat during the period. In North America, retail cereal sales fell by 6%. The company’s Q2 recall had a larger than expected impact on sales; the recall affected primarily kids’ brands that were supposed to be the cornerstone of back-to-school promotions. As a result of the recall and the accompanying negative effect on the quarter’s promotions, Kellogg’s competitors were able to increase their market share more than expected.[29] This was the second recall in the past two years, and coupled with the Eggo supply chain issues, these troubles have had a major negative effect on the company’s bottom line. While specific numbers are incalculable, the company estimates the total cost of these incidents to be nearly $500 million, with $200-300 million attributed to increased operating expense costs.[30] Sales of retail snacks in the US were essentially flat and frozen food sales decreased by 5%. Retailers have been slow to restock Eggo Waffles following the supply disruption and customers are not quickly returning to the brand.[31] International sales decreased by 2% where a 5% decrease in Europe overshadowed 5% and 2% growth in Latin America and Asia, respectively.[32] The company expects raw material costs to rise next year but the company has hedged 40% of its commodity needs for 2011.[33]
Segments
*Note that corporate operating expenses are not allocated to individual segments, so operating income will add to more than 100%.
North America (67% of Sales, 78% of Operating Income)[34]
Kellogg's makes the majority of its sales in North America. Within the segment, the company reports revenues from its three primary product groups.
Sales to Wal-Mart (WMT), the company's largest customer, accounted for approximately 21% of net revenues in 2009.[35]
Cereals (24.5% of Sales)[36]
Kellogg's is the number one player in the $9 billion ready-to-eat U.S. cereal market with nearly 34% market share.[37] The company markets many of the United States' most recognizable cereal brands including Apple Jacks, Cocoa Krispies, Kellogg’s Corn Flakes, Rice Krispies, Smart Start and Special K[38]. Kellogg relies on a combination of product innovation and marketing strategies to drive growth in the mature U.S. cereal market.
Snacks (31.9% of Sales)[39]
North American Retail snacks which consists of cookies, cracker, fruit-flavored snacks and toaster pastries is Kellogg's single largest product category. Kellogg's Snack category includes familiar brands like Cheez-it, All-Bran, wholesome snacks such as Nutri-Grain and Special K bar as well as Pop-Tarts toaster pastry which holds a 86% category market share. [40]. Kellogg's snack business also includes the Keebler Foods cookie line which the company acquired for $3.8B in 2000.[41] With the acquisition, Kellogg obtained Keebler's direct-store/door-delivery system (DSD) which lowers delivery costs and allows the company to target its product innovations and obtain prime shelf space. Product innovation and marketing also drive growth in Kellogg's snack category.
Frozen/Specialty (11.3% of Sales)[42]
Kellogg's frozen and specialty channels consist primarily of frozen breakfast and dinner products. The company's marquee brands in this segment are the ubiquitous Eggo Waffles- key to Kellogg's leading market share in the frozen breakfast category.
In mid-2009, Eggo waffle production was curtailed following the FDA's finding of multiple sanitation violations at Kellogg's Eggo plant in Georgia; this was followed by severe flooding, which further delayed the factory's reopening. Additionally, machine repairs at the largest Eggo plant in TN, which began renovations last year, will take significantly longer than expected and the factory will not return to full production until late 2010.[43] As a result, Eggo's have been in short supply throughout the nation, frequently missing from supermarket freezers, which has in turn hurt Kellogg's bottom line.[44]
International (32.3% of Sales, 30.6% of Operating Profit)[45]
With sales in over 180 countries around the world, Kellogg International is an important and promising segment of the company's business. Europe accounts for nearly 19% of total sales with the U.K. representing Kellogg's second largest market. Kellogg also has a relatively small presence in central and eastern Europe which presents a promising opportunity for expansion[46]. Latin America accounts for 8% of Kellogg's sales and is the company's single fastest growing regional market; Mexico is now the company's third largest market after the U.S. and the U.K. The Asia Pacific region accounts for 6% of sales and holds particular promise for Kellogg due to potentially huge consumer markets in developing countries like India and [[Rise of China's Middle Class|China].[47] Despite challenging dynamics that arise with the introduction of traditionally western cereal and snack foods in eastern markets, low per capita consumption in the Asia Pacific region presents an exciting expansion opportunity.[48]
Region Total Sales 2009 ($M) Percentage of Total Sales
Europe $2,361 18.8%
Latin America $963 7.7%
Asia Pacific $741 5.9%
[49]
Marketing and Innovation
Marketing and innovation are central to driving sales and profit growth at Kellogg. Indeed, Kellogg has had a strong commitment to advertising since 1929, when W.K. Kellogg doubled its advertising costs after the stock market crashed. Marketing innovation and product differentiation help keep consumers interested and translate directly into higher revenues. In early 2011 Kellogg announced a new international marketing effort that is meant to unify the company's message across regions while simultaneously driving higher sales.[50]
Trends and Factors
U.S. Consumer Slowdown a Mixed Bag for Kellogg
Soaring food and energy prices[51], the housing slump[52] and a weakening job market[53] 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 as 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[54], 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.[55]
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[56]. Although no other company made up more than 10 percent of sales, the company claims that its five largest customers during 2007 accounted for approximately 34% of consolidated net sales and 44% of U.S. net sales.[57]. 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 factor 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[58]. 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.
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