When it comes to crunch, Kellogg’s has a dilemma
BIGGER economies support thriving bodies of marketing analysts, who devote their every thinking moment to brands.
They look at brands every which way. Their conclusions about the company we are examining today, the food giant Kellogg’s, would cheer up any demanding CEO.
The statisticians in Britain who compiled this year’s ranking say Kellogg’s comes in at number eight among the world’s top consumer ‘Superbrands’ and ranks number 12 among the most powerful global brands in terms of awareness and brand perception.
But these days a top-rated brand is no protection from the lustful glances of the new breed of takeover specialists and notorious cost-cutters. Some analysts seem to think the buzzards are already circling over Kellogg’s.
As the marketing analysts have discovered, Kellogg’s needs little introduction to anyone. It is the world’s leading producer of cereals, and the second largest producer of cookies, crackers and savoury snacks. In addition, it is involved in cereal bars, fruit-flavoured snacks and frozen waffles.
The Michigan group has sales of $13bn, market capitalisation of $23bn, production operations in 21 countries, 37,000 employees, sales in 180 countries, and a large number of iconic breakfast cereal brands.
Set up in 1906 by William Kellogg as the Battle Creek Toasted Cornflake Company, the company prospered and by 1922 changed its name to the Kellogg Company.
It earned a good reputation during the 1930s Depression by introducing a 30-hour week which meant it could employ extra staff to cope with the economic trauma.
By the late 1970s, some observers regarded it as a ‘fine company but past its prime’. At the time, it was lagging its competitors like General Mills and Quaker Oats. Over a period, the company changed its strategy and moved away from only children’s cereals to focusing on convenience and nutritional products for the adult population with products like Special K, Nutri Grain and All Bran.
Today, Kellogg’s has operations in North and Latin America, Europe and Asia. Its North American business is subdivided into morning foods (cereal, toasted pastries), snacks (crackers, Pringles, cereal bars) and specialties (food services, vending machines).
The company is still highly dependent on the US market, which accounts for more than two thirds of its sales, way ahead of Europe. In fact, sales of US morning food and snacks both exceed European sales ($2.4bn).
However, a worry for investors is all regions are showing declining sales, and its dependence on the pricesensitive Wal Mart for over one fifth of its US sales.
The past five years has seen a decline in Kellogg’s global sales and it appears it will extend to six as sales are expected to fall this year. Volume decline and price reductions are being cited as the reasons. Last year, sales fell by almost 4pc due to declines in Europe and North America.
Europe has challenges in the cereal business and the US operations are citing competition in all categories.
It is difficult to reconcile the fall in sales with the 25pc increase in headcount over the last five years. It is in this scenario that the takeover specialists like the Brazilian group 3G relishes. 3G has links with Berkshire Hathaway and has become famous for its meticulous planning and disciplined and brutal attack on costs and jobs.
However, Kellogg’s is aware of its costs dilemma. It has initiated a global efficiency operation and is expecting $700m savings by 2019. Lower R&D spend and input costs together with a 25pc reduction in advertising spend have lifted operating profits.
Over the last five-year period, earnings per share have disappointed. While they increased by 12pc last year, they are still 60pc less than 2013 results. Investors also complain that the share price trading at $66.14 is down 24pc on the year.
Could Kellogg’s be attractive to a US active investor or even the Brazilians?
I wouldn’t be surprised but then neither would a move on Mondelez or General Mills surprise me.
Over five years, earnings per share have disappointed