A Research On Kellogg Company: Current And Future Strategies

History

Describe about A research is undertaken on Kellogg Company ?

A research is undertaken on Kellogg Company and the current and future potential of the strategies being pursued by it is studied. The methodology in the research analysis involves five main approaches (Kuada). First, a financial analysis is made on the financial reports of the firm. This analysis is made by comparing it with the performance of the previous year as well as through comparison with its immediate competitor- General Mills Inc. (Kieso, Weygandt and Warfield). Second, an external analysis is made on the firm using the PESTLE analysis and Porter’s five forces model (Weil and Francis). Third, the internal analysis of the firm is made through a value-chain analysis, resource-based analysis and SWOT analysis. Fourth, the strategies unique to Kellogg company are analyzed and recommendations given regarding future strategies that the management should take (Jiambalvo). Finally, the research is concluded with alternatives of specific strategic actions from the study undertaken

History

Kellogg’s was started by the Kellogg brothers in 1906. It became the world’s leading manufacturer in cereal breakfast. It has manufacturing plants in Asia, UK, Australia, Canada and Latin America. Their wide cereal ranges of products include Kellogg’s Corn Flakes, Special K, Rice Krispies, Fruit n’Fibre and Nutri-Grain cereal bars.

Financial ratios show comparisons between specific information from the income statement and balance sheet of the company. Comparing the financial performance of Kellogg to the previous year helps to identify problems in the firm which helps management to take strategic decisions. The percentage change is calculated by finding the difference between the current year and the previous year and dividing it by the previous year (Tracy).

Table 1 Financial Analysis over Time

Kellogg Co	Current Year 2015          (In $)	Prior Year 2014         (In $)	% Change
Income Statement
Sales	13.53B	14.58B	-7.23
Gross Profit	4.68B	5.06B	-7.5
Selling, General and Admin Expense	3.09B	1.02B	202.9
Net Income	614M	632M	-2.8
Balance Sheet
Cash	251M	443M	-43.3
Inventory	1.25B	1.28B	-2.43
Other Current Assets	391M	342M	14.38
Total Assets	15.27B	15.15B	0.79
Current Liabilities	5.74B	4.36B	31.65
Long-term Debt	5.29B	5.94B	-10.9
Total Liabilities	13.13B	12.3B	6.75
Retained Earnings	6.6B	6.69B	-1.35
Shareholders’ Equity	2.14B	2.85B	-24.9
	Liquidity Ratios
Current Ratio	0.56	0.77
Quick Ratio	0.35	0.47
Cash Ratio	4%	10%
Profitability Ratios
Gross Margin	0.35	0.35
Operating Margin	0.08	0.07
Net Profit Margin	0.06	0.06
ROE%	24.97	19.96
ROA%	4.04	4.13
EPS	1.74	1.76
Dividend per share	1.98	1.90

Source: Amigobulls (Amigiobulls)

From Table 1, we analyze the financial performance of Kellogg by comparing the present year with its previous year performance

In the income statement, the sales have decreased by 7.23% as competitors are capturing consumers of Kellogg. The selling, general and administrative expenses have doubled due to higher salary and high advertising expenses. Kellogg has to improve its sales and decrease costs, though the net income shows only a marginal decrease of 2.8% (Ireland, Hoskisson and Hitt).

In the balance sheet, cash at hand has decreased significantly by 43.3% while inventory change is mild. However the total assets have not changed much. The current liabilities have also increased significantly while shareholders’ equity has declined. The total liability has increased slightly while retaiing earnings have declined marginally(Gibson). This shows that liabilities are increasing and assets are decreasing when compared to the previous year in Kellogg

Financial Analysis to assess a company’s health

The quick ratio and the current ratio below 1 shows that the ability of the firm to meet its short term obligations is decreasing, which does not speak well of the profitability of the business(Vandyck).

The gross profit margin and the net profit margin are the same which show that there is no growth in the company and management inefficiency.

The ROE has increased over time showing that the market value of the equity share has improved showing good performance of equity capital (Beccalli and Poli)

Return on assets which show the efficiency and profitability of the business has marginally decreased. This tells that the assets available for generating income have come down to show the efficiency of management has also come down marginally(Palmer).

The Earnings per share (EPS) which helps to assess the profits available per share is also marginally down and dividend per share is also down(Murthy and Gurusamy).

Table 2 Financial health of Kellogg in comparison with its closest competitor- General Mills Inc. (GIS) 2015

	Case Firm Kellogg (in $)	%	Closest Competitor(s) GIS (in $)	%
Income Statement
Sales	13.53B	100%	17.63B	100%
Gross Profit	4.68B	34.58	5.95B	33.74
Selling, General and Administrative Expenses	3.59B	26.53	3.87B	21.95
Net Income	614M	4.53	1.53B	8.67
Balance Sheet
Cash	251M	1.64	334.2M	1.52
Receivables	1.34B	8.77	1.39B	6.32
Inventory	1.25B	8.19	1.54B	7.01
Total Current Assets	3.24B	21.21	3.79B	17.25
Total Assets	15.27B	100	21.96B	100
Total Current Liabilities	5.74B	43.71	4.89B	29.52
Total Liabilities	13.13B	100	16.57B	100
Retained Earnings	6.6B	308	11.99B	222
Shareholders’ Equity	2.14B	100	5.39B	100

Source: Morning Star (MorningStar)

The income statement compared to sales, shows that GIS has a bigger turnover in sales. The gross profits are almost the same, but the net income is double that of Kellogg as its expenses are less than that of Kellogg (Nasdaq).

The Balance Sheet shows that GIS has a high asset figure, though its current assets and receivables are lower than Kellogg. The current liabilities of GIS are almost half of Kellogg. This shows that Kellogg is underperforming due to consumers switching brands and purchasing from its competitors.

Table 3  Financial Ratios for Case firm and closest competitor for 2015

Ratio	Case Firm – Kellogg Co	Closest Competitor(s) GIS
Current Ratio	0.56	0.81
Quick Ratio	0.35	0.52
Debt-to-equity Ratio	6.17	1.44
Debt-to-total Assets Ratio	50.83	38.11
Inventory Turnover(TTM)	6.88	7.09
Total Asset Turnover	0.89	0.78
Gross Profit Margin	0.35	0.34
Net Profit Margin	0.45	0.50
Return on Assets	4.02	8.42
Return on Equity	28.85	34.88

Source: Market Watch (MarketWatch)

On analysis of the ratios

the profitability ratios (current and quick ratios) show better performance though both are below the required level of 1. Both firms are not able to meet financial obligations, though GIS shows better performance than Kellogg.

The debt to equity is better in GIS, while debt to assets show poor performance as debts surpass assets in both firms.

The gross profit and net profit margin are on the same footing while the return on equity is good in both firms. The return on assets is marginally better in GIS when compared to Kellogg.

The external analysis of Kellogg is studied through a general study of the environment through the PESTLE analysis and Porters Five Forces Strategies to look  into the industry dynamics.

Financial Analysis Over Time

Kellogg Company sells its products in 180 countries. As a global food company, its main objective is to nourish families with breakfast foods, snacks and frozen meals through its array of taste preference and dietary needs (Kellogg).

The PESTEL analysis helps to identify macro-environmental forces that affect the business such as Political, Economic, Social, Technological, Legal and environmental factors to identify key factors (Baxter).

Political: The U S have drawn new reforms for obese children with focus on cereal products intake(Helpisch).

Economical

The financial downturn has deteriorated the financial supply in the hands of the people thereby affecting the food market. The increasing unemployment rate, decreasing GDP, increasing inflation rate and  low rate of the dollar has decreased sales while increasing competition.

Social: With importance given to health and nutrition, intake of cereal foods is on the increase. The obesity factor -among children and adults has also improved, the demand for light food..

Technological: Increasing costs for R&D as well as advertisement has decreased the profits made by firms. Recycled packaging are more in demand with environment-friendly consumers.

Legal: The American Health Association has increased the number of health claims among the American citizens. Price war due to globalization (need for standardized food) and competition has its impact on the industry.

Environmental: Recyclable packages and ecological packagings have increased costs. Demand has increased with demand for natural and fiber foods (Taylor) (Johnson)

Michael E Porter developed a strategic approach to assess various competitive forces that affects a firm and provided a model to formulate strategies that can raise barrier forces and take advantage of these forces. He identifies these forces as (Michael):

Competition: The industry has many large competitors such as General Mills Inc., Kraft. Price competition is high and intense with each firm trying to capture the market

Substitution: The cereal industry has many substitutes due to private labels which are available at cheaper rates.

Threat of Entry Barriers to entry is high as it involves high capital expenditure; access to distribution channels is tough and brand loyalty is high

The bargaining power of buyers: The cereal industry has a low buying power and does not influence the buying market

The bargaining power of suppliers: With private labels, products are available at cheaper rates from suppliers who are agricultural producers of cereals (Porter and Norton, Financial Accounting: The Impact on Decision Makers) .

The primary goal of managers is to identify the strength and weakness of the firm along with the external opportunities and threats. The internal analysis of Kellogg’s is done by

Financial Health in comparison with competitor

Value-chain analysis

Resource-based view on the firm

SWOT Analysis Fujii)

Value Chain Analysis:

This analysis helps to understand  the cost position and identify multiple means to facilitate implementation of a chosen business-level strategy (Porter and Norton, Using Financial Accounting Information: The Alternative to Debits and Credits) (Tybout and Calder, Kellogg on Marketing). Two activities involved are:

• Inbound Logistics

The quality of the product is maintained by having good suppliers who also deal with the manufacturing, packaging and transport of  services.

• Operations

As Kellogg has a global market, it has an office in each country in which it function which can transform its raw materials into finished products ready for sale

• Outbound Logistics

The end product has to reach the consumer, and this is done through a multi-layer channel system.

• Marketing & Sales
• Kellogg has achieved brand loyalty with consumers identifying its products

1. Steps to increase brand awareness are also taken

• Service: Providing consumer service through good products according to customers taste and environment friendly packages are services done for the consumer

Firm Infrastructure: Kellogg has satisfied its customers by providing various services that suits it customers and the organization. Services offered are quality product that cater to taste and preference of consumers, quality control measures, good internal control, etc.

Human Resource Management

Performance measures are made to develop healthy competition and bring in better staff performance

Merit rewards are awarded to motivate employees

“Kellogg Business Leaders Model” has helped in the quality of staff performance and progress of the company

Kelloggs recruits staff on an international basis giving preference to staff quality

Training for individual career performance helps in better attitude of the staff

Technology Development

With consumers becoming more health conscious, R&D expenditure on nutrition and health is high

Special cereals for men is the new product developed

Procurement

As competition is high with price-wars, costs of raw-material purchase has to be economical

The resources of Kellogg Company are tangible, intangible and capabilities.

Tangible resources are resources that are clearly visible. Kellogg has its outlets at strategic location and specifically trained employees as its strength, though workers are available at low salaries to competitors

Intangible resources are resources that are not visible, but gained through its good reputation, high brand image, quality products and value of the company. It has built a sustainable competitive advantage which would be difficult to replicate.

Capabilities such as innovative capabilities and marketing capabilities help to transform enterprises to achieve company performances.

The SWOT Analysis is a simple planning tool. If used correctly, the managers can develop a smart marketing plan that serves as a catalyst for proper planning. However, it is criticized because it does not give serious consideration to the issues and is considered as a sterile academic exercise that classifies information and data (Ferrell and Hartline) .

Strength

It is a leading fiber brand in the market

It follows a high corporate social responsibility and environment awareness

It has computerized warehousing(Baran and Galka)

Weakness

Awareness about the brand is weakening

Advertising investment is high as it has limited scale

Inner health is the new concept that consumers prefer to fiber food

Opportunities

People are interested in healthy food

There is a boom in the baby market as well as in consumers over the age of 55

Internet advertising

Threats

It faces competition from General Mills and Kraft

Consumers prefer the taste with nutrition

Private label growth(Dranove and Marciano)

Competing Firms in the Food Processing Industry

Some of the competitors of Kellogg are General Mills Inc. (GIS), Cascadian Farm’s, Kraft and store brand cereals. However, its biggest competitor is General Mills. Health consciousness, population growth rate, price of raw materials and grains, per capita disposable income

Kellogg is a leading manufacturer of ready to eat cereal as well as convenience goods. It holds 34.2% market in cereal foods in the US. It has posted consistent net profit and sales revenue .

Kraft Foods Inc. is a large beverage and food company in North America. It is also the second largest in the world. After acquiring Cadbury in 2010, Kraft has strong revenue and operating profit earnings in all snack segments.

General Mills are global food manufacturers selling consumer foods through retail stores. They supply to baking industries and food services
The mission statement is “to drive sustainable growth through the power of our people and brands by better serving the needs of our consumers, customers and communities”.

Its vision is “to be the food company of choice”. Kellogg Company is a long-time industry leader in marketing and innovation.

The value statement is “we build great brands and make the world a little happier by bringing our best to you”

It is the global leader in its production of cereals, crackers, cookies, toaster pastries, fruit-flavored snacks, veggie foods and frozen waffles. It’s brand includes Kellogg’sKeebler, Eggo, Pop-Tarts, Mini-Wheats, Nutri-Grain, Rice Krispies, Famous Amos, Austin, Sandies, Murray, Bear, Gardenburger, Monringstar Farms and Stretch Island (Johnson).

The board of directors has assistance from three committees: the Audit Committee, Compensation Committee and the Nominating Committee. Kellogg has a multi-divisional organization structure. It gives autonomy to its local units to function within the overall values and goals of the headquarters (Gupta, Gollakota and Srinivasan).

Corporate Strategies

• To have sustainable growth by introducing a nutritious product, improving brand name and packaging
• To grow its cereal market and expand in snacks
• To have realistic targets(Hitt, Ireland and Hoskisson).

Marketing Strategies

With breakfast cereal sales sliding in the US, cereal makers are using various strategies to reclaim their business. Kellogg, which is the world’s largest cereal producer is using new tactics on its old brand such as Disney Frozen-themed cereal and Special K Protein. New product lines are also introduced that includes granola and   muesli cereals. General Mills, makers of iconic cereals like Lucky Charms, Wheaties and Cheerios is taking steps to eliminate artificial color and flavor from 90% of its cereals by 2016. Products like Reese’s Puffs and Cocoa Puffs and Trix will be the first to be introduced with artificial ingredients by the end of this year- 2016. Kraft  also excludes preservatives and synthetic color from  its cheese and  macaroni (DiPierro).

Competitive Advantage

No threat of new entrants: As a well-established brand with cereal as an established product, Kellogg does not face threat from new entrants

Employees: Kellogg Company has its employees as its competitive advantage. Mr.Kellogg realized that employees were the key to his success and hence provided the right working environment for his employees. Success came with successful employees.

Farm Power: The customers of Kelloggs are wholesalers as they decide if they are going to sell Kellogg’s cereals in their stores. However, the power of Kelloggs is their contact with farmers directly which provides raw-materials from the farm to the firm (Johnson).

Website: Kellogg Company manages its website well to keep a watch over the external environement.

Kellogg owes its success to knowledge management, which involves identifying consumer preference and taste; translating these preferences into products; linking these products to its brand equity, reinvigorating its brand equity and maintains the interest of children.

Foundational functional resources and capabilities: This is founded on its link to agricultural growers and mills. By maintaining this contact, it can get its raw material (cereals) at low rates that will bring down costs. Branded servicing and operations will help to keep its competitors away. The focus can also be given to acquire organic cereals to cater to health conscious consumers and to keep up with competitors(MccGuigan, Moyer and Harris).

Creative marketing and innovative R& D have helped Kellogg to keep up its standard of new products that customers taste and prefer. Kellogg can improve its advertising campaigns through quality benchmarks- to bring familiarity to its product to its customers. It can also rely on cartoon spokespersons in its advertising campaign to capture demand for its brand(Iacobucci)

Human resources: Maintaining highly committed employees through training and development (Henry)

Supply Chain: Acquiring “diverse” and the ‘very best” in the supplier base

R&D: By following the principle of “pioneer” and not “follower”, it can lead the market

Finance: High growth with high returns should be its objective

Social Betterment: Focus on stockholder value, customer relations and work for societal betterment

Customers: Wal-Mart is one of the top five customers of Kellogg, accounting for one-fourth of its revenue. Kellogg has to strive to get new customers and also look into providing new products to its aging customers (Tybout and Calkins, Kelloggs on Branding: The Marketing Faculty of The Kellogg School of Management).

• Kellogg has acquired a name for monopolizing the market and overpricing. By restructuring its price strategy through reduced costs, it can capture a wider market.

• To increase advertisement and attract Generation Z who have more customer loyalty
• To expand its snack catalogue to all age groups, especially targeting men who are becoming more health conscious

Conclusion

The company analysis on Kellogg has been undertaken through this research study through financial analysis, internal and external analysis through individual analysis by comparison with its competitors and with previous year performance. To an investor, the stock cannot be recommended for investment currently, though it can be kept in the watch list. There are companies in the same sector that can be invested in. Though it is a great company, it is not a good stock to invest in. To investors, strategies that have to be continued and new strategies to be implemented are given.

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