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Innovation and focus lift Kellogg above

General Mills

Cereal and snack producer Kellogg will have the edge over arch-rival General
Mills over the next few years as superior innovations in the premium health sector
and a more focused product portfolio drive the firm forward, writes Chris Mercer.
Kellogg is expected to increase its lead on General Mills over the next three years after
consistently outperforming its rival in America's two largest product segments for
breakfast cereals - adult, premium/health and kids, fun - according to a new report from
financial analysts Goldman Sachs.
Both companies spend 1.4 per cent of their sales revenue on research and development,
yet Kellogg has achieved vastly higher sales than General Mills from new cereal
products launched in the last five years, except for last year when both firms got $36
Kellogg overtook General Mills at the top of the North American ready-to-eat cereal
sector back in 2001 and now holds a 34 per cent share compared to General Mills' 32
per cent.
Goldman Sachs says Kellogg has been helped by cunning innovations in the right cereal
segments, such as expanding its strong Special K brand to include Red Berries and
Vanilla Almond varieties as well as signing lucrative promotion deals with Disney and
the Cartoon Network.
General Mills may pull some ground back in 2005 with its switch to using wholegrains
in all Big G cereals, but Kellogg's more focused product portfolio means it is still able
to spend twice as much ($18 million) as General Mills on product innovations per
Kellogg has the second most concentrated portfolio among its cereal sector rivals - sales
in its top three categories make up 66 per cent of total turnover, compared to 52 per cent
for General Mills.
And this focused strategy has also provided a good platform for growth in a demanding
retail market.
"This focus provides a competitive advantage for Kellogg in key areas such as
consumer targeting, product innovation and retail-partner relations. Focus is becoming
increasingly important due to a broadening mix of retail channels, including smallerscale formats such as convenience stores," says the report.

North American ready-to-eat cereal, although a very mature market valued at around $8
billion, supplies Kellogg with more than half of the firm's total sales, and the company
will need to use all of its leverage to profit from a steady, though modest market growth
of two or three per cent.
So far the firm's strategy has done well. Both Kellogg and General Mills have witnessed
declining cereal volumes since 1999, yet Kellogg has managed to maintain prices
whereas General Mills has not.
The Goldman report also highlighted that Kellogg has successfully adapted its cereal
brands such as Froot Loops and Special K into a new wholesome snacks portfolio,
including snack bars and fruit snacks.
Wholesome snacks is now Kellogg's most profitable business unit and Goldman
predicted it would grow by around eight per cent annually up to 2009, twice as fast as
the total forecast for Kellogg North America.
Kellogg's net earnings were up by 13 per cent to more than $890 million in 2004.
General Mills suffered a 19 per cent drop in profits after its 2005 first quarter, blamed
mainly on rising raw materials costs, yet the company later recovered to post a three per
cent rise for the first half.
Kellogg Company
Mary Maley
Global Program Director RQT
Driving Global Innovation: Kelloggs Secret Ingredient (People!)
With 2009 sales reaching nearly $13 billion, the Kellogg Company is a world-leading
producer of cereal and convenience foods. Their portfolio of products and brands can be
found just about anywhere in the world with manufacturing occurring in 18 countries
and marketing in more than 180 countries. How does Kelloggs drive successful global
With more than a century of experience developing and launching regional and global
products, the Kellogg Companys innovation engine is a well-oiled machine. Over the
years they have implemented and refined several innovation processes they consider
critical to their success: Stage-Gate, Portfolio Management, People Investment and the
Launch Program Leadership initiative.
In her presentation, Mary will discuss Kelloggs approach to global innovation and in
particular, their focus on developing the leaders that drive new products to market.
Highlights include:

An overview of Kelloggs global innovation program

Highlights of the Launch Program Leadership initiative and how it is
transforming Kelloggs performance, culture and future leaders
How Kellogg is building an accountability culture through program leadership
and teams

Key lessons for successful global product innovation

Frozen bakery sparks General Mills

Related topics: Markets
Frozen and chilled baked goods are the leading lights among US firm General
Mills' bakery and cereal products as the company begins a tentative recovery
against high raw materials costs, writes Chris Mercer.
General Mills, which recorded a 19 per cent decline in net profit for the first quarter of
2005 due to a sharp rise in the price of raw materials such as wheat and corn, has hauled
itself back in to line in the second quarter to help the group record a three per cent profit
rise to $550 million for the first half of fiscal 2005, compared to the same period in
A main part of the comeback has been General Mills' self-proclaimed ability to more
efficiently pass on price rises to customers, but the company has also praised strong
contributions from frozen and chilled baked goods at its Pillsbury USA business and
also Betty Crocker desserts at its Baking Products division.
These two businesses increased volumes by four and eight per cent respectively and
their success reinforces a growing trend already spotted on the market in 2004.
Earlier in the year, the Canada Bread firm, also a member of the Maple Leaf Foods
company, said that competition was growing in the frozen bakery sector across North
America and: "the market continues to expand through more in-store bakeries
converting to the par-baked model, and due to the rising popularity of premium artisan
bread products as a key point of difference for retailers and restaurants".
If General Mills can consolidate in this market then it may gain more time to sort out
other areas of its bakery sector that are still struggling. For example, the company's
Bakery and Foodservice business, hampered by a seven per cent total volume decline,
suffered a drop in profits to $69 million in the first half of 2005, compared to $81
million in 2004.
Sales of General Mills' Big G breakfast cereals were also flat for the second quarter,
despite the company recently announcing its intention to make all the cereals under this
brand with wholegrains, to try and tap in to the growing healthy eating trend among
It is still too early to judge the success of that move and 2005 will undoubtedly be
crucial for the brand. But General Mills appears to be coping well in a climate where

wheat and corn prices have hit seven-year highs, and the company also plans to pay off
debts with the proceeds from a deal with PepsiCo; in which the latter will buy General
Mills out of the two's 10-year-old joint-venture, Snack Ventures Europe.

General Mills profit decline indicates

industry-wide trend
Related topics: Markets
General Mills is the latest food manufacturer to report a decline in net profit this
year, and again the blame goes on raw material price hikes and fierce competition
in the retail sector writes Anthony Fletcher.
The US-based food giant reported earnings for the first quarter of fiscal 2005 (the 13
weeks up to 29 August) of $183 million, down 19 per cent from $227 million a year
earlier. General Mills' stock fell 98 cents, or 2.1 per cent, to close at $45.35 yesterday on
the New York Stock Exchange.
According to the UK's Financial Times, analysts had been expecting a drop of 60 cents.
In this respect, General Mills' follows the pattern of other food and beverage companies
such as Coca-Cola and Unilever, all of which have warned of lower-than-expected
profits in the last few days. It would appear that the manufacturers are being squeezed
between very high raw material costs, and retailers who are reluctant to pass on price
increases due to intense competition.
In the current climate it is manufacturers that are bearing the costs, and this being
reflected in the squeeze on margins of some of the biggest companies in the industry.
Food makers and ingredients firms across the world have been affected by rising prices
for basic food commodities. In each of the last four years world grain production has
fallen short of consumption, forcing a draw-down of global stocks for wheat, rice, corn
and soybeans. Soybean prices recently hit 15-year highs and wheat and corn 7-year
As one of the largest cereal makes in the world, one of the biggest commodities used by
General Mills is wheat. The price of wheat has risen as demand for other commodities,
especially soyabeans, has soared.
Demand for soyabeans has had a knock-on effect on every other commodity. General
Mills has had to pay more for wheat to ensure that farmers don't switch to soyabeans.

The price of corn has also been affected. Refined maize products, sweeteners, starch,
and oil are abundant in processed foods such as breakfast cereals, dairy goods, and
chewing gum.
The difficulty for manufacturers such as Unilever and General Mills is that they have
been unable to pass on these higher costs, and are effectively being squeezed by an
increasingly powerful retail sector. The Wal-Mart business model in which the goal of
cutting prices relentlessly is the ultimate objective has been copied extensively in both
North America and Europe and, from a retail point of view, has been a stunning success.
According to the McKinsey Global Institute, Wal-Mart company was so efficient that
four per cent of the growth in the US economy's productivity from 1995 to 1999 was
due to Wal-Mart alone. But to achieve all this, suppliers and manufacturers have been
squeezed relentlessly to cut wholesale costs.
Both Coca-Cola, which issued a profit warning this week and Unilever, which lowered
its year profit growth expectations to under five per cent from a previous estimation of
over ten per cent, have reacted to poor financial results by promising boosting
marketing spending. This approach has been met with approval from investors.
"The encouraging news is that at least the group (Unilever) has admitted to a
requirement of higher investment behind its brands," said Goldman Sachs.
"For too long the market has been suspicious of Unilever's relatively low rate of
investment behind its brands, fearing that unrealistic margin ambitions would
jeopardise long term growth."
In the short term, General Mills plans to increase list prices on certainproduct lines and
increase merchandised price points for certain products. The company has also set a
target to capture at least $150 million in supply chain productivity during 2005.

Prices for cereal-based ingredients still

under pressure
Related topics: Markets
Despite an upturn in global wheat, corn and soy production in 2004, prices for food
ingredients sourced from cereal raw materials are likely to remain under pressure,
writes Lindsey Partos.
Investment bank Goldman Sachs predicts that prices are open to upside risk, sparked by
threats to the Australian wheat harvest.

"Expectations of very low global inventories of wheat and corn over the remainder of
the 2004/05 crop year will leave the market extremely vulnerable to unexpected
disruptions," said the bank.
In particular Goldman Sachs cites stong rains and flooding last month in Australia as a
price risk factor, along with 'very low' global inventories that has left the market price
exposed to unexpected disruptions.
Wheat, along with corn and soy, are the starting point for a range of food ingredients,
from starch to gluten, used widely in food applications. But food makers and ingredients
firms across the world have been affected by rising prices for basic food commodities.
In each of the last four years world grain production has fallen short of consumption,
forcing a draw-down of global stocks for wheat, rice, corn and soybeans. Soybean
prices recently hit 15-year highs and wheat and corn seven-year highs.
But signs at the end of last year that stocks would improve on 2004 harvests brought
some relief to the food industry. Cautious optimism reflected in data from a recent
report issued by the UN-backed Food and Agriculture Organisation (FAO) predicts
world cereal production will hit a record 2.04 billion tonnes in 2004, an increase in
inventories for the first time in five years.
The FAO said world cereal stocks - wheat, maize, rice, soya - are forecast to rise to 441
million tonnes by the close of the 2004/05 season, with the bulk of the increase in corn.
Wheat reserves are forecast to augment slightly.
By contrast, the FAO report predicts rice inventories will fall again pushing firmer
prices as a result of reduced production in several major exporting countries.
But data from the US government and investment analysts suggests that wheat and corn
stocks are still exceptionally low.
In December the US department of agriculture forecast global wheat stocks-to-use ratio
would rise by just four days to 86 days of cover in 2004/05 - the second lowest global
inventory in 30 years. This figure compares to 1999/00 when cover hit 131 days.

Commodity squeeze hits food giant

Related topics: Financial & Industry
Rising commodity and ingredients prices continue to hit the global food chain with
US food giant Kraft the next in line to be hit by price pressures suggesting that
despite reasonable fourth quarter figures, the soaring costs are likely to have an
impact in the near future.
The Illinois-based maker of Ritz crackers, Bird's Custard and Philadelphia cheese
brands said its US business was also hurt by the low-carb diet craze. Kraft earned $698

million, or 41 cents per share, compared with $949 million, or 55 cents per share in the
2003 period.
" Costs for several commodities were up in the quarter, with the most significant
increase in dairy costs. Second quarter average cost for US barrel cheese was up 70
per cent versus the second quarter of last year and up 53 per cent versus the five-year
average," said the number one US food firm.
The price squeezes resulted in increased costs of about $200 million compared to the
year before.
In response to the higher costs, the company said it had increased prices on its different
varieties of US cheeses by 5 to 15 per cent.
"However, the pricing actions were not designed to fully offset the higher costs because
of the company's expectation that cheese costs would not remain at historical highs. On
the quarter, the price increases offset approximately one-half of the higher costs," added
the firm.
Kraft joins fellow US food supplier General Mills that warned earlier this month soaring
commodity prices would impact the bottom. And this despite the firm reporting a 20 per
cent rise in net profit to $278 million (228m) for the fourth quarter ended 30 May.
"Our business plan for 2005 includes commodity costs that are roughly $165 million
higher than last year's, along with increases in health-care and restricted stock
expense," said CEO Steve Sanger in the earnings report.
Commodity prices are high for cereals because the world has lost its grain - corn, wheat,
soybean - buffer zone. In each of the last four years total grain production has fallen
short of consumption, forcing a drawdown of stocks. As such, soybeans have recently
hit 15-year highs and wheat and corn 7-year highs. Wheat, rice, corn and soybeans are
all key grains used for sourcing food ingredients found extensively in food formulations
by manufacturers such as Kraft and General Mills.
These price rises are contributing to higher food prices worldwide, including in China
and the US, the largest food producers. The American Farm Bureau marketbasket
survey, which monitors US retail prices of 16 basic food products in 32 states, recently
showed a 10.5 per cent rise in food prices during the first quarter of 2004 over the same
period in 2003. Price rises range from a 2 per cent rise in the price of milk to a 29 per
cent rise for eggs.