Swot analysis of snacks industry

SWOT Analyses Kellogg (ATTN KIM WOODS)

COMPANY PROFILE

Kellogg Company

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TABLE OF CONTENTS

Company Overview..............................................................................................3

Key Facts...............................................................................................................3

SWOT Analysis.....................................................................................................4

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Kellogg Company TABLE OF CONTENTS

COMPANY OVERVIEW

Kellogg Company (Kellogg or ‘the company’) is a multinational producer of breakfast foods, snack foods, cookies and crackers. The company also manufactures and markets ready-to-eat cereals and convenience foods such as toaster pastries, cereal bars, fruit snacks, frozen waffles and veggie foods. It is headquartered in Battle Creek, Michigan and employed about 30,700 people as of December 31, 2011.

The company recorded revenues of $13,198 million in the financial year ended December 2011 (FY2011), an increase of 6.5% over FY2010.The operating profit of the company was $1,976 million in FY2011, a decrease of 0.7% over FY2010.The net profit was $1,231 million in FY2011, a decrease of 1.3% over FY2010.

KEY FACTS

Kellogg CompanyHead Office One Kellogg Square Battle Creek Michigan 49016 3599 USA

1 269 961 2000Phone

Fax

http://www.kelloggcompany.comWeb Address

13,198.0Revenue / turnover (USD Mn)

DecemberFinancial Year End

30,700Employees

KNew York Stock Exchange Ticker

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Kellogg Company Company Overview

SWOT ANALYSIS

Kellogg is a multinational producer of breakfast foods, snack foods, cookies and crackers. The company has a strong brand portfolio that helps it to increase customer loyalty and compete effectively in the marketplace. However, higher penetration of private label food sales, especially during the economic downturn, could impact the company’s sales and also potentially decrease its market share.

WeaknessesStrengths

Frequent product recalls could hamper brand image

Strong brand portfolio aided by appropriate investments on brand building

Geographic and customer concentration could impact sales during tough economic conditions

Focus on product innovation helps to retain customers and improves the product mix

ThreatsOpportunities

Increasing private label penetration could impact the company’s volume sales during economic uncertainties

Acquisition of Pringles to offer platform for product and geographic expansion Emerging health consciousness would drive the demand of the company's products Intense competition and changing global

retail scenarioLocal focus to drive sales in developing and emerging markets Declining world cereal production could

tighten raw material supplies

Strengths

Strong brand portfolio aided by appropriate investments on brand building

With sales of $13,198 million in FY2011, Kellogg is one the world's largest producers of cereals and convenience foods. Indeed, with the recent acquisition of the Pringles business, the company further strengthened its position in the global snacks market and became the second largest snacks producer in the world, as per the latest industry estimates. The company markets its products in over 180 countries through a large portfolio of well recognized brands including Kellogg's, Keebler, Special K, Pop-Tarts, Eggo, Cheez-It, Nutri-Grain, Rice Krispies, Mother's, Morningstar Farms, Murray Sugar Free, All-Bran, Frosted Mini-Wheats, Club, Kashi, Bear Naked, among others. In 2012, Kellogg was named as one of the most trusted cereal brands in Canada by a leading publishing company, and as one of the top five marketers globally by a global publishing company. The company has been recognized by several international organizations for its brand equity. In 2011, Kellogg was recognized

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Kellogg Company SWOT Analysis

as one of the leading global brands by a popular global business magazine and was also listed among the top 100 global brands for 2011 by a leading brand consultancy.

Kellogg has a strong focus on strengthening its brands through advertising and consumer promotion. The company invested $1,138 million on advertising, which is close to 9% of its net sales generated in FY2011. The company’s advertising investment of over $1 billion is more than that of any other company in its peer group.

Investment in brand building leads to increased sales, increased profits and increased margins, in a normalized inflationary environment. Furthermore, with increased sales and a strong portfolio, the company will be able to sustain its strong market position, which, in turn, provides Kellogg with significant bargaining power. The company's brand strength also supports the innovation process in launching new products and enhancing the revenue stream. Kellogg has leveraged its high brand recognition to increase customer loyalty and compete effectively with regional players in various markets.

Focus on product innovation helps to retain customers and improves the product mix

Kellogg consistently develops products that are differentiated in the marketplace and responds to the changing tastes and lifestyle needs of consumers around the world. The company’s core philosophy of growth is to drive growth through innovation. During the year, Kellogg invested approximately 1.5% of total revenues in research and development activities, which led to the company generating more than $800 million of sales from new products introduced in 2011, including Special K Cracker Chips, Crunchy Nut cereal, and Eggo Thick & Fluffy waffles, Mini Max, All Bran Golden Crunch, and Krave cereals, among others.

In FY2011, the company’s consolidated net sales increased 6.5%, strongly supported by results from innovations across markets. Innovations and new product launches also contributed to market share gains in the core cereal business as well as several other key categories for Kellogg in FY2011. Coupled with reduced reliance on promotional spending on core brands, Kellogg’s innovations have led to increased sales during the year. Strong focus on innovation and new product launches also enables Kellogg to expand its presence and strengthen the depth of its portfolio. This will further help Kellogg achieve increased revenues and profitability.

Weaknesses

Frequent product recalls could hamper brand image

Kellogg has been registering increasing instances of product recalls. Most recently, in October 2012, Kellogg recalled certain boxes and single-serving bowls of its Mini-Wheats cereal, stating concern that they might contain metal fragments. The recall included Frosted Mini-Wheats Bite Size Original and Mini-Wheats Unfrosted Bit Size cereal. The recall could cost the company up to $30 million, as per analyst estimates. Earlier in January 2011, the company's brand Keebler recalled about 17,000

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Kellogg Company SWOT Analysis

eight-count cartons of Fudge Shoppe Jumbo Fudge Sticks sold at convenience stores. This recall was initiated because the cartons contained individually wrapped Jumbo Peanut Butter Sticks, which could cause serious or life-threatening allergic reactions. In 2010, Kellogg implemented a voluntary recall of nearly 28 million boxes of breakfast cereals, including Kellogg's Apple Jacks, Fruit Loops, Corn Pops and Honey Smacks due to an odor from waxy resins found in the package liner.

Earlier, Kellogg recalled certain Austin and Keebler branded peanut butter sandwich crackers and select snack-size packs of Famous Amos peanut butter cookies and Keebler Soft Batch Homestyle peanut butter cookies. Products were recalled due to the potential to be contaminated with salmonella, an organism which can cause serious and sometimes fatal infections in young children, frail or elderly people, and others with weakened immune systems.The company also recalled Keebler Soft Batch Homestyle Chocolate Chunk Cookies, Oatmeal Raisin Cookies and Special K Protein Meal Bar Honey Almond variety only. This voluntary recall was a part of a larger product recall by Peanut Corporation, one of Kellogg's peanut paste suppliers for crackers.

Any significant product recall due to serious quality issues or a product liability case by a consumer could affect the company’s reputation and lead to loss of consumer confidence in its food products.

Geographic and customer concentration could impact sales during tough economic conditions

The company generates majority of its revenues from the US, its largest geographic market. In FY2011, Kellogg generated $8,239 million revenues from the US, which was almost 62.4% of the company’s total revenues during the year. Additionally, the company derives majority of its revenues from Wal-Mart, its largest retail customer. For FY2011, the company generated approximately 20% of its consolidated net sales from Wal-Mart and its affiliates. Towards the end of FY2011, approximately 18% of Kellogg’s consolidated receivables balance and 28% of its US receivables balance comprised of amounts owed by Wal-Mart and its affiliates. In the year, the company’s top five customers, including Wal-Mart, accounted for almost 33% of its total net sales and almost 46% of net sales in the US.

Being overly dependent on one geographic region and on one large customer could impact the company’s sales and profit margins, especially during economic downturns.

Opportunities

Acquisition of Pringles to offer platform for product and geographic expansion

The recently-acquired Pringles business from P&G will help the company to grow its footprint in the global snacks market. With the acquisition, Kellogg achieved the number two position in the global savory snacks market and nearly tripled its international snacks business. Through the acquisition, Kellogg also gained access to the international savory snacks market spanning more than 140 countries and a portfolio of snacks with more than 80 flavors.

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Kellogg Company SWOT Analysis

Pringles, which is the fourth-largest individual brand globally, has premium positioning and strong brand awareness across key regions. Kellogg had a snack portfolio consisting of Cheez-It, Special K, Kashi, Keebler, Townhouse and Pop-Tarts, marketed only in the US. The addition of Pringles will allow the company to bolster its international presence in the snacking business. The acquisition will allow Kellogg an entry to the growing snacks markets of Asia-Pacific and Latin America and also offers potential for increased scale in Europe. In terms of financial gains, the Pringles business will add a newer revenue stream and increase the company’s revenues to an estimated $15 billion annually. The acquisition will almost triple the company’s international snacks business. Post acquisition, the company’s snack and cereal portfolio is expected to be of a similar size, in contrast to a dominating cereal portfolio prior to the acquisition.

In essence, addition of the Pringles business will provide an increased scale and international presence to the company, in addition to increased revenues.

Emerging health consciousness would drive the demand of the company's products

Over the past few years, there has been a newfound emphasis on healthier eating. With a changing lifestyle, people are becoming more aware of the negative effects of unhealthy eating habits. This is leading to a higher demand for functional foods and whole foods (food products that are made of whole grains). Majority of the new products launched in the recent times were aimed at these health-conscious consumers. For instance, a latest study revealed that nearly 40% of all new product launches in the global snack industry in 2011 had a health-related claim, such as whole grain, organic, gluten-free, low-calorie, vitamin and mineral fortification, omega-3 fatty acids or bone health. This trend was more prevalent in the US, where almost 60% of the newly-launched products had such health-benefit claims.

Kellogg's ready-to-eat cereal brands are well positioned to meet the demands developing from the growing health and wellness trends. The company's largest brand Special K, a low-fat cereal, is the second largest ready-to-eat cereal brand in the US. In North America, the Special K brand registered increase in sales at a compounded annual growth rate of 23% over 2008–12.The company is also focusing on reformulating its products to meet the newer consumer needs of health and wellness. For instance, in the recent past, Kellogg improved several of its products globally by reducing sugar and sodium and removing trans fats. Especially in the US, the company reduced sugar in its kids' cereals by approximately 20%. In addition, more than 97% product portfolio now consists of offerings with zero grams of trans fats per serving. Also, about 90% of the cereals and 80% of all its products have no partially hydrogenated vegetable oil.

The company also has been active in responding to the most recent demand for products that do not use high-fructose corn syrup (HFCS). By the end of 2011, Kellogg reformulated its products to remove HFCS from all of its cereals sold in the US. The company also removed HFCS from Rice Krispies Treats in 2011, and also plans to reformulate the Nutri-Grain Bars with no HFCS in 2012.

As the cereal category continues to be on trend with demographic shifts around the world, Kellogg's responsiveness to the recently emerging consumer trends will help the company to sustain its market position. Furthermore, by offering foods that aid in weight management and digestive health, the

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Kellogg Company SWOT Analysis

company's portfolio of healthy cereals and snacks will help in improving its profitability and strengthen its presence in future.

Local focus to drive sales in developing and emerging markets

Having cereal for breakfast, especially the ready-to-eat variety, has traditionally been a concept unique to countries like the US, UK, Canada and Australia. Although they represent only about 6% of the world’s population, the UK, Canada, Australia and the US account for 54% of the world’s cereal consumption, according to the latest industry estimates. This implies that the rest of world, especially the developing and emerging markets like the Latin America, Middle East, Eastern Europe and the Asia-Pacific, with very low cereal consumption rates, present immense opportunity for growth for Kellogg.

Towards achieving higher penetration in these regions, Kellogg is especially focused on customizing its marketing communication and creating cereal consumption occasions within the limits of local tastes and preferences. For example, in most European nations, where cold milk is not consumed in the mornings, Kellogg is driving demand by advertising Kellogg's Extra with hot milk. In France, Kellogg formulates its products like Kellogg's Extra to go with yogurt, and in Spain, the company advertises its All-Bran Mini-Wheats food format to go with coffee. For the Indian market, all of Kellogg’s cereals, in particular corn flakes for the family, are fortified with iron to meet the local market's needs. In the near future, the company also is planning to launch a corn flakes product with a saffron flavor in India, to further localize its products and find favor with the Indian consumers.

The rising income levels, disposable income, urbanization and the need for convenience and nutrition will help the company to strengthen its foothold in the developing and emerging markets. Additionally, by reformulating its products to coincide with the local breakfasting habits, the company is well positioned to take advantage of future growth opportunities in these regions.

Threats

Increasing private label penetration could impact the company’s volume sales during economic uncertainties

During tougher economic periods, consumers look to cut down on their grocery spending and therefore, seek lower-priced alternatives in their food and drink choices.This gave rise to the private labels in several consumer products categories, especially in food and beverage markets, where consumer engagement is low. Furthermore, according to industry sources, private label players such as Wegmans, Kroger and H-E-B have, in the recent times, started investing in various marketing efforts to draw more consumers. These players are investing on brand management, concept and new product testing, and are adopting various consumer analytics tools for assortment, pricing and promotion. According to industry sources, private labels accounted for nearly 10.5% of the US ready-to-eat breakfast cereals market in 2011. Furthermore, a new consumer survey conducted on the US grocery shoppers recently revealed that private label purchasing was the highest in categories,

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Kellogg Company SWOT Analysis

such as paper products, cereals, cleaning products and canned and frozen vegetables. In 2012, even cookies and salty snacks were one of the mostly purchased private label products. Furthermore, by 2025, private label food sales in the US are expected to achieve market penetration of between 25% and 30% from the current 20% penetration levels, according to latest industry estimates.

If the difference in quality between Kellogg’s products and private label brands narrows, then consumers may increase their private label purchases. Furthermore, during periods of economic uncertainty, consumers tend to purchase more private label or other economy brands, which implies that companies offering strong national brands like Kellogg are at a risk of losing volume sales. This could compel companies to shift its product mix from higher margin products to lower margin offerings.

Intense competition and changing global retail scenario

The US market for ready-to-eat breakfast cereals is highly concentrated with the top three players accounting for almost 77.7% of the total market share in 2011. Kellogg is one of the largest players in the US market, competing with similar companies like General Mills, Post and PepsiCo (Quaker Oats). As a result, Kellogg faces intense competition across its product lines, both in domestic and international markets. Some of its competitors like Hillshire Brands (formerly Sara Lee), Mondelez International (formerly Kraft Foods) and PepsiCo compete with the company on substantial financial, marketing and other principal factors of competition including new product introductions, product quality, taste, nutritional value, price, and promotion.

Furthermore, the company's products are sold in a marketplace which is experiencing an increased trade concentration and the growing presence of large-format retailers and discounters, especially in the emerging markets. With the growing trend toward retail trade consolidation, the company is increasingly becoming dependent on key retailers. Some of these retailers have a greater bargaining strength than Kellogg. They may use this leverage to demand higher trade discounts, allowances or slotting fees, which could lead to reduced sales or profitability. Kellogg may also be negatively affected by changes in the policies of its retail trade customers, such as inventory de-stocking, limitations on access to shelf space, delisting of products and other conditions.

Changes in the policies of its retail trade customers and increasing dependence on key retailers in developed markets may adversely affect its business. Increasing competition from multinational manufacturers and private labels on the other hand could adversely affect the company's margins.

Declining world cereal production could tighten raw material supplies

Kellogg is highly dependent on agricultural commodities including corn, wheat, soybean oil, sugar and cocoa, which are its principal raw materials. A low crop forecast in 2012 could significantly increase the company’s costs. According to the latest forecast by the US Food and Agricultural Organization (FAO), the global cereal production in 2012 is expected to slightly decline by 2.6% (over the past year) to reach 2,286 million tons. The FAO revised its estimates due to a smaller maize crop in central and southeastern parts of Europe, where prolonged dry weather is impacting the crop yield. As per the latest estimates by FAO, production of wheat is expected to witness a 5.2% decline, while coarse grains are expected to decline by 2.3% during the year. Severe droughts

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Kellogg Company SWOT Analysis

in 2012 across the high producing regions including the US and a large part of Europe and central Asia are expected to impact the crop production.With lower supplies, the price of these commodities will also rise, impacting the company’s costs. Furthermore, if the company is unable to increase the prices of its products or mitigate raw material cost increases in any other way, the company’s margins will be affected.

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Kellogg Company SWOT Analysis

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