Kellogg Company

Kellogg Company is an industrial organization that deals with ‘‘manufacture and marketing of ready to eat cereal and convenience foods’’. The company specializes in the foodstuffs including veggie foods, cookies, crackers, cereal bars and fruit-flavored snacks (Forbes 2013). The multinational company in February 2012 manufactured the mentioned products across 17 countries and it sold them in more than 180 countries.

The company also sells cookies, crackers and other food products under the brands, Keebler, Murray, Famous Amos, Austin, Cheez-it and Kellogg’s in the United States of America. It also markets a wide range of its cereal products under its name (Forbes 2013). Kellogg Company also prefers direct sales to its clients as a way of generating more profits and to eliminate middlemen.

Analysis

Profitability

Kellogg Company for the past 3 years has been generating more profits on each sale. It has marked annual constant growth of 6.1 percent and the increasing input costs have also been cut tremendously into gross margins. Even so, net margins for the company have remained steady. Additionally, the company’s growth in the second quarter stagnated because of aggressive discounting strategies by market competitors such as General Mills Inc. (Forbes 2013).

The traditional cereals are also in competition with other alternatives including Greek yoghurt, smoothies and breakfast sandwiches. Therefore, the company was forced to reduce its growth forecast because of cut throat competition in the market alongside unfavorable foreign exchange rates.

Kellogg’s growth forecast initially was at 7percent but the company changed its forecast to 5 percent. The company has therefore lost majority of its long time clients who no longer opt for the products, and most of whom are young clients and lower income generation. It is also struggling to maintain its grip on wealthy clients who accounted for its profitability.

To manage the negative trend, the company has increased its advertising strategy and on creation of new products (Nathaniel, 2013). Despite the fact, the company executive look forward to an improvement since they are aware of the fact the process can be slower than expected. For the first 2013 quarter that ended on 29^th of June, the company made huge profits amounting $352 million. It was a 6 percent profit increase that was also made a year ago. Its revenue also rose to $3.71 billion and it was attributed to a sales increase of 3.3 percent in North America as well as an 11 percent increase in global sales.

The company’s earnings were also anticipated to reach 97 cents mark on $3.82 billion revenue. Even so, the shares also fell by 1.2 percent to $ 65.42. The company’s gross margin by the end of 2013 had reduced by 1.4 percentage points. The trend is not expected to change or reverse because of slow sales that have also reduced the company’s operating efficiency significantly (Forbes, 2013).

Kellogg however can still benefit by combining its operations with that of Pringles. It can also increase its profit margin by focusing beyond cereal sales. Since Kellogg is a household name, it can also invest in other competitive ventures with an aim of attracting more clients and fairly competing. Kellogg additionally has to look for a way of making its cereals more portable.

It is also expected that the company’s sales will be increased because of the launch of Kellogg’s Nutri-Grain toaster products in European market (Forbes 2013).

Below are Kellogg’s Profitability ratios

Period ending	12/29/2012	12/31/2011	1/1/2011	1/2/2010
Gross margin	75%	93%	92%	112%
Operating margin	45%	57%	58%	72%
Pre-tax margin	6%	14%	14%	15%
Profit margin	7%	7%	10%	10%
Pre-tax ROE	55%	66%	83%	74%
After tax ROE	40%	48%	60%	53%

 

1. Liquidity

The main source of liquidity for Kellogg is the operating cash flow. This is supplemented by lending that is based on major acquisitions as well as other major transactions. The strength of the company is in its cash generation ability. This ability enables the company to meet its investment needs and operations with its flexibility (Forbes, 2013). Company management also has confidence that the operating cash flows for the company as well as credit facilities are essential to meet the company’s operating expenses in the coming future.

Even so, the executives understand that they can be expectant of volatile nature of credit markets and global capital (Forbes 2013).

Below is a table that highlights the liquidity ratios of Kellogg

Period ending	12/29/2012	12/31/2011	1/1/2011	1/2/2010
Current ratio	75%	93%	92%	112%
Quick ratio	45%	57%	58%	72%
Cash ratio	6%	14%	14%	15%

 

III. Activity

Kellogg Company makes the most of its earnings from operating cash flows, cash receipts and from net earnings from sale and marketing of its products. 2012 was a highly significant year for the company because of the profits it made. The net cash in the year was $ 1.758 million, an increase of about $ 163 million compared to 2012 (James, 2012).

The increase was attributed to profits realized from acquisition of Pringles. This is because it led to working capital increment. A $ 1, 595 million net cash in 2011 operating activities was earned. This was also an increment of $ 587 million compared to the previous year.

The cash conversion cycle of the company was however relatively short. Cash conversion cycle at average was 26 days from 2010 to 2012. The core working capital was additionally averaged at 7.8 percent of net sales in 2012, compared to the year 2011 and 2010 which had 6.9 percent and 6.6 percent respectively (Forbes 2013).

Higher inventory days also had a negative impact on the core working capital in 2012. For the year 2011, higher inventory days and higher days of trade receivables impacted the company’s core working capital. Higher inventory days also essential in supporting introduction of new products by the company as well as its investments in its supply chain infrastructure.

Higher day’s trade receivables were attributed to end year sales and company innovation launches in 2011. Its total pension funding plan was totaled at $643, million and $ 51million in 2010, 2011 and 2012 respectively (James 2012). The company shares in 2013 skyrocketed in the third quarter of the same year.

Investors do not attribute the higher prices to strong results. Instead, they believed that the company launched Project K thus, maintaining its shares high. The project was effective and a brilliant plan hat is expected to solve cost weaknesses and structural revenue perennial plans. Even so, financial analysts are not necessarily very optimistic on the profitability and strength of company shares despite the fact that it considered the launching of Project K.

Kellogg has since 1925 paid dividends. The dividends have been increasing for the past nine years continuously. It also managed to increase annual dividends between 1960 and 2001. Between 2002 and 2004 however, its dividend’s remained the same putting an end to trend of annual dividend increment. The company also increased its allocation of dividends in 2013 when the directors decided to implement a 4.50 percent increase to a share of 46 cents.

When the company acquired Pringles, no one actually thought that it was of any benefit to the company. The move was actually of great benefit to the company. Kellogg launched its snack market and it has now taken over other brands across the globe. Despite the fact that Pringles was acquired recently, its products are performing extremely well compared to other brands by Kellogg.

For example, in the Russian market, Pringles has a significant success. Reports also indicated that currently, Pringles is witnessing a double digits growth in the Russian market. Additionally, the performance of Pringles in Latin and North American markets is quite encouraging. This is not to mention its presence in more than 150 countries across the globe. The company therefore is highly expected to enhance the energy of Kellogg Company by growing its distribution channels and offering a human resource management team that is highly experienced.

Image is also very crucial for everyone and anyone who wishes to look and feel healthy.  This is one of the reasons as to why many companies in the industry have been focusing more on wellness and health. Kellogg Company has been observing and managing this trend for many years. The company’s informed decision to design cereals that are meant for adults, the aging and well as the middle age. In this product line, Smart Start Line has been the most successful product.

It is a product that helps to lower the level of cholesterol and blood pressure. All-Bran also helps in digestion while Special K aids helps to reduce and maintain healthy weight. Therefore, Special K is ranked top fastest growing brands across the globe because of its health benefits. Kellogg also invested in organic food industry.

The success of the company has also been invested in organic foods industry and its success has no doubt been a blessing to its largest clients, Wal-Mart Stores. Wal-Mart supermarket registered the highest consolidated net sales compared to other companies because of selling products from Kellogg.

Competitors

Kraft and General Mills are two major competitors for Kellogg Company. Kraft is a large company with branches across large cities across the globe. It is believed that the company makes a lot of profits, tripling the amount of Kellogg’s and General Mills’ profits. Additionally, Kraft makes many of its profits from snacks. General Mills and Kellogg on the other received most of its profits from cereals.

The three companies deal with snacks and cereals. The major threat to these three companies dealing with cereals is attributed to the prices of oil and plastic. Kellogg among the three companies remains to be the company with the largest market cereal market share in the US. Kellogg presently controls a third of the market, then General Mills, Quarker and General Mills.

Kellogg has also created more cereal product lines compared to General Mills in the recent past. It should however not be content with the act that it is a leading company in the U.S because it will mean nothing if it will not be able to engage in all that is there to maintain its position in the market and grow its influence over the market.

Debt

A great business is characterized with the ability to ensure flow of solid cash and does not depend on debts for its funding (Bowman, 2014). Debt records for Kellogg are worrying. It has a debt of $5.5 billion. It is trailing a year’s net income of $1.2 billion. Despite the fact that borrowing to ensure growth cannot be avoided, I believe that the company should focus on reducing its debts.

The company is also trying to get back on track following outpour of cash in the supply chain industry (Nathaniel, 2013). The company is also trying to create a balance between investments as well as development innovative and new products. Its debt equity ratio is 2.57 times and it was calculated by a total debt with total equity division. High debt to equity ratio also proves that the company has been borrowing progressively. This serves to reduce the company’s growth plan (Nathaniel 2013).

Forecast

Kellogg aims at gaining more profits from its new products which were launched to the market recently. It has also realized to generate more profits; it must invest in other products other than just cereal related products. This is based on the fact that its loyal clients are no longer buying cereals as they used to. Even so, it is very encouraging to learn that its acquisition was profitable and highly successful. Kellogg in the future should also consider acquiring more related companies to help it grow its sales. Its business is internal and therefore, it has strong foothold regions that many of its rivals shy away from investing in.

Kellogg has also built a very solid foundation and has projected to its present market position. This enables the company to build a good foundation and enhance its growth rate especially in developed countries while venturing into new markets where its cereal is being recognized, consumed conveniently, affordable and a cheap source of food.

In the 1990’s Kellogg managed to sell a handful of conveniences foods. Even so, by the time it was acquiring Pringles in 2012, it has established itself as a snacks leading producer. Its rich history coupled with high quality products also offers the company a cutting edge against its competitors. The international snacks market accounts to about $ 6billiion of Kellogg’s sales annual sales and even more.

The company has however frozen its food business in North America, a business that generates more than $1 billion per year. The business has also been expanding exponentially based on its introduction of innovative products that are custom made to suit client needs. Sandwiches, Special K Flatbread and Fluffy Eggo waffles are some of the products that have tremendously enhanced Kellogg’s sales.

It has a 140 percentage growth compared to that of 2001. Additionally, it has ability and skills needed to venture other new markets. Kellogg should however focus more on three regions with favorable demographics including Asia, Latin America, Eastern Europe and Middle East. The company in 2004 focused more on South Africa, Brazil and India where Special K was anticipated to sale in millions of dollars.

The CEO of Kellogg admitted that the company was fascinated by growth opportunities and potential available for the company and of the company. The CEO emphasized on the significance of cost saving to Kellogg. He was therefore of the idea that if the company managed to address cost saving opportunities effectively, it could easily and increase its investments in its major markets.

The CEO also saw a great growth potential for the company. Kellogg Company also operates on a principle of Sustainable Growth. Besides, the CEO believes that by adhering to the principle coupled with hard work, the company will grow to new profitability levels within the shortest time possible.

Because of Kellogg’s slow growth, it is more likely for the company to witness cut throat competition in the future. It controls 50percent of US market and Morning foods and Snacks are some of the bestselling products in the US market. Despite such a positive growth, the company is still likely to witness tight competition in the U.S market, which is its stronghold.

I therefore believe that weak sales growth as well as restructuring costs will affect Kellogg’s 2014 growth negatively. Additionally, the stock is trading at a discount because of its growth date. It is not likely that the first 2014, the company will gain any revenue growth. K will not experience multiple expansions and it means that the company’s price potential will be limited compared to that of its rivals thus, it will underperform.

The food market is also highly competitive. For this reason, the company has devised new approaches to remain competitive. It has also hinted on adopting a volume to value approach to focus on high margin merchandise. This approach is also expected to reduce company sales tremendously in the short run.

Even so, the company will now be in a position to concentrate more on high margin product sell as opposed to capitalizing on sales volume. It is a risk that the company is willing to take just to enhance its competitiveness.

Summary

Kellogg is a multinational cereal products company. It has potential of increasing its product sales across the globe because of its global reputation. Additionally, its acquisition of Pringles was no doubt a major boost for the company because Pringles has managed a solid client base in over 150 countries. Kellogg can also utilize this opportunity to introduce its innovative and new products to other markets.

Its management experience spanning over 3years is also a blessing for the company. It can learn from Pringles triumph and failures in global market and employ such lessons to enhance its performance in global market. Even so, the company is facing many challenges that can hinder its development plans.

Competition from rival companies is a major threat that Kellogg has to address. Furthermore, the company is losing many of its loyal clients and it has to work extra hard to ensure its lost market is back and to venture into new markets. The company also has to create a long term balance between new and innovative product developments as well as investment projects.

This significance of reducing its debts should not be ignored because Kellogg owes different banks. This will also enable the company to maintain its cash resources and profitability. Kellogg in a nutshell is a global reputable company with a promising future. It only needs to acquire a comprehensive strategy to guarantee its profitability, venture into new markets while keeping its loyal clients.

Kellogg Company as per the essay is no doubt a strong company with immense growth potential. Even so, this growth will not be achieved if the company’s CEO will not be satisfied with its recent success and sit on their honors. The CEO has to invest on programs to help the company identify its strengths and weaknesses. Surveys can be carried out online to understand clients’ opinions of company products. Similarly, Kellogg Company can engage in massive promotion campaigns to introduce its products to new markets.

 

Works Cited

Bowman, James. Kellogg Arena debt plan OK’d: Deficit disappears if three-year plan works. 2014, Retrieved January 29, 2013 from http://www.battlecreekenquirer.com

Forbes. Kellogg: Profile. Forbes, 2013, Retrieved January 29, 2014 from: http://www.forbes.com/companies/kellogg/

James, Reynold. Kellogg’s – Is Now the Time? 2012, Retrieved January 29, 2014 from: http://www.intrinsic-valuation.com/

Nathaniel, Thomas. Fitch Lifts Kellogg Outlook on Improved Results, Debt Reduction. The Wall Street Journal. 2013, Retrieved January 29, 2014 from http://online.wsj.com/article