Strategic Issues Essay
Kellogg’s is still the market leader in cereal-based products. However, of late its market share and branding image is slowly eroding due to the emergence of newer companies having wider product range and / or cheaper pricings. To counter this, Kellogg’s plans to increase its product R&D cost, diversify its markets and lower the production costs. These strategies are sound, but the company is facing challenges in having customers who have now wider range of selection of products, and are reluctant to spend more money just on the perception of good quality.
The company needs to address to the pricing issue very seriously to overcome the threat due to these changing environment conditions. The main focus of company’s international strategies lies in the following areas: Leadership in product innovation, to present new products to customers; Maintaining its global brand position, by marketing activities focusing on brand recognition; Offering brand-differentiated prices; & Continuing to reduce costs of production; finding newer markets for expansion, by stressing on high-quality nutritional convenience foods (Kellogg)
Major M&A Activities of Kellogg’s ? United Bakers Russia acquisition 2008 – Kellogg’s acquired The United Baker’s Group which is Russia’s leading cracker, biscuit and breakfast cereal producers. The popular brands of The United Baker’s Group are Yantar and Lyubyatovo which hold number one or two positions in their respective categories. While the financial details of the transactions were not disclosed, the net sales of The United Baker’s Group is about $ 100 million which is not expected to have much of a financial impact on Kellogg’s operating profits in the year 2008 (Flex-news, 2008).
? Zhenghang Food company asset acquisition – On 30th June 2008, Kellogg’s acquired the assets of Zhenghang Company which is the leading manufacturer of biscuits in China. The terms of the transactions were not disclosed (K-news, 2008). ? Joint venture in Turkey with Ulker Group in 2006 – Kellogg’s had a partnership with Ulker Group of Turkey in 2006 to expand its cereal operations in the country. The merger resulted in the company increasing its market share in Turkey to 22 percent from 2 percent (Dorfman, 2007).?
Acquisition of Keebler in 2001 – In October 2000, Kellogg annuced a transformational debt-financed acquisition of Keebler which was the number two player in cookies and crackers in the United States. The acquisition was completed in March 2001 and added $150 million to the annual earnings of Kellogg’s. This was the largest acquisition in the history of Kellogg ? Acquisition of Lender’s Bagel – Kellogg’s Acquired Lender’s Bagel from Kraft foods in the year 1996. This price paid was $ 466 million dollars and was considered to be one of the worst food acquisitions of the 1990s.
The problem happened because at the time of analysis it was seen that the sales of bagels had been on arise. However the problem was that while the sales of fresh bagels were on a rise, the sales of frozen bagels was on a decline. This meant Kellogg’s had yet another product on its portfolio with a sales decline. Kellogg’s was forced to sell Lender’s bagel business to Aurora Foods Inc. for a mere $ 275 million. ? Acquisition of Mrs. Smith’s Pie & Pure Packed food – Kellogg acquired Mrs. Smith Pie in 1976 and resold it to JM Smucker in 1994.
Analysts said that Smucker paid too much for the business which had the then sales of $100 million and hence was forced to resale it just after 18 months to SBI Brands Inc for $84 million (Bloomberg Business News, 1995). Kellogg’s also purchased Pure Packed Food in the same year at its purchased Mrs. Smith’s Pies. SWOT Analysis Strengths 1. One of the biggest strengths of Kellogg’s is its brand name. The company’s brand has been directly responsible for its rapid growth the immense penetration capability.
In fact Kellogg’s was the first food company to spread internationally and even though United States is still home to 70% of the sales of the company, the presence of the company spans more than 180 countries worldwide, which for just a breakfast cereal company is not a mean feat. 2. Kellogg’s controls almost 34% of the cereal market. The company has shown steady performance throughout its operating years. Even when the company has faced a loss its its leadership position it has been able to rally back in an year or two which sets a very good track record. 3.
Yet another factor which contributes to the strength of the company is the strong individual product brand recognition which the company has deliberately sought by using different characters for different products 4. The market for health conscious products is on a rise worldwide, which does even more to promote Kellogg’s company’s products since the company is one of the original health conscious food brands changing the breakfast patterns of people throughout United States. 5. Kellogg’s marketing strategies have always been one of its strengths. The strategies are tailored according to consumer behavior in different countries.
For instance in US where the brand is know Kellogg’s advertisements convince people to one of its brands rather than the competitor’s brand while in France Kellogg’s simply encourages people to eat cereal. Weakness 1. One of the biggest weaknesses of the company is its pricing strategy which is not competitive. This was responsible for the company losing its sales when in 1990s it increased prices to counter rising costs without increasing customer value. The customers shifted away from te brand towards cheaper-private label brands and even handheld breakfast foods such as bagels, muffins and breakfast bars.
2. Pricing is not competitive, narrower product range (decrease in US market share), difficulty in adapting to newer markets. 3. Yet another weakness of the company is its general failure in the M&A department for instance the acquisition of Lender’s bagel Bakery from Kraft in 1996 which was considered to be the worst food acquisition if the decade. 4. Kellogg’s product innovations have never been a sure-shot success factor which is a problem because it faces stiff competition from its nearest competitors such as General Mills and Kraft foods. 5.
Kellogg’s is in the food manufacturing industry which has shown a slump in the past five years. While the company has maintained an average rate of growth the decline part is more than obvious as can be seen in the market share. Fig – 20 Company versus the industry performance (Morningstar, 2009) Opportunities 1. Needless to say the biggest opportunity for Kellogg’s is expanding into dvloping markets. The demand in these markets is on a rise with the rising standard of living among the population. The market size is much bigger than the developed markets.
Also the developed markets have reached maturity stage with decline in growth rates. 2. Yet another opportunity for Kellogg’s might be trying for better pricing strategies by introducing low-end products with prices similar to unbranded segments and then slowing moving out the costly brands. The recession in the world is the chief reason why event he people in the developed markets would be interested in lower-priced products 3. Yet another opportunity for Kellogg’s’ is to diversify in junks food and snacks section and start from the developing markets instead of the developed markets.
The purchase of biscuits and cookies brand in China and Russia is a right step in this direction. 4. The demand from India and Latin America is on a rise and these countries have variable eating pattern which means a strategic entry into these markets is not much of a problem especially for a company that focuses on health food. Threats 1. Kellogg’s problem with releasing new products was a problem which led to the General Mills overtaking the company in 1998. The company’s lost market share after than was never regained though it did regain its leadership position.
2. Similar companies like General Mills, Quaker Oats, Kraft foods etc. are coming up with products that are competitive 3. The company has long faced threats from imitation and private-labeled brands for pricing, which has steadily eaten away the market share of the company. In the recession-market the company stands to lose even more because of this particular competitor segment. 6. The company’s debt value is high about % 5. 46 billion and shareholders’ equity stands at $ 1. 45 billion which might cause problems in obtaining additional working capital. 4.
The downward turn of the market is also a trend since it means that the company is facing two problems – a reduced demand due to decrease in purchasing power of people (more of a problem since the company has branded products) and increase in price of raw materials such as agricultural products. 5. The rising fuel costs have always been threats to all markets which have far flung operations. Fuel prices are always unpredictable and vary from country to country, which means that keeping a tab on them is difficult. (Becker et al. p. 202-205)
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University/College: University of California
Type of paper: Thesis/Dissertation Chapter
Date: 5 June 2017