Kellogg in Packaged Foods

KELLOGG CO IN PACKAGED FOOD (WORLD)
November 2011
SCOPE OF THE REPORT
Scope
Packaged Food 2011 US$2,199,266 mn
Biscuits US$75,212 mn
Disclaimer Much of the information in this briefing is of a statistical nature and, while every attempt has been made to ensure accuracy and reliability, Euromonitor International cannot be held responsible for omissions or errors. Figures in tables and analyses are calculated from unrounded data and may not sum. Analyses found in the briefings may not totally reflect the companies' opinions, reader discretion is advised. Kellogg is the global leader in breakfast cereals with an enviable portfolio of brands. The company, however, has faced some challenges in 2010/2011 with a series of recalls and supply disruptions. These incidents have forced Kellogg to re-evaluate its cost-cutting strategy. The company, however, still faces rising input costs as well as a highly competitive packaged food retail channel as both producers and retailers attempt to offer cashstrapped consumers good value.
Breakfast Cereals US$29,411mn
Meal Replacement US$7,373 mn
Snack Bars US$11,013 mn
Frozen Processed Food US$111,946 mn
Euromonitor International
PACKAGED FOOD: KELLOGG CO
PASSPORT 2
STRATEGIC EVALUATION
COMPETITIVE POSITIONING MARKET ASSESSMENT BREAKFAST CEREALS SNACK BARS MEAL REPLACEMENT FROZEN PROCESSED FOOD BISCUITS BRAND STRATEGY OPERATIONS
RECOMMENDATIONS
Key company facts

Kellogg Co Kellogg Co is involved in the manufacture and distribution of a variety of packaged food focused mainly on breakfast cereals. Its iconic Kellogg's Corn Flakes was first developed in 1895 and created the breakfast cereals category. Kellogg Co sells its products in over 180 countries and manufactures in 18. Its has a strong portfolio of brands in breakfast cereals including Rice Krispies, Coco Pops, Frosted Flakes and Special K. The company has both global and regional brands and has over the years expanded some regional brands such as Tresor. Tresor was re-branded and launched in the UK market in 2010 as Krave and marketed to young adults. Kellogg has focused on building a healthy image for its products, cutting sugar and salt content in many of its cereals, targeting weight-conscious women with the Special K and Nutri-Grain brands and those concerned about artificial ingredients with the Kashi range of packaged food, which it expanded in 2011 into the frozen processed food category.
Headquarters
Regional involvement
Battle Creek, MI, USA

Global Biscuits, Breakfast Cereals, Baked Goods, Frozen Processed Food, Snack Bars, Meal Replacement 0.8%
Category involvement
World packaged food market value share 2010 World packaged food value growth 2009-2010 (US$ fixed exchange rate)
1.7%
PASSPORT 4
Hits to North American sales hurt Kellogg in 2010

Kellogg saw a decline of just over 1% in net sales. A highly competitive breakfast cereals market in North America in 2010 saw the big players introduce price cuts to gain market share and drive sales. Kellogg's North America Retail Cereal segment posted a net sales decline of 5% driven primarily by the competitive cereals environment and a recall of some breakfast cereals beginning in June 2010 impacting Apple Jacks, Honey Snacks, Froot Loops and Corn Pops. Meanwhile, supply disruptions for its Eggo waffle brand negatively impacted on sales in its North American Frozen and Specialty segment, which saw a decline of 3% in net sales. Kellogg International posted a decline of 3% on a reported basis in net sales although excluding currency impacts its net sales were flat over 2009. International sales were a mixed bag, however, with Europe leading the decline, while Asia Pacific posted growth. Kellogg Co: Net Revenue vs Net Income 2006-2010
13,000 1,400
12,500
1,200
12,000 Total revenue US$ mn
1,000 Net income US$ mn
11,500
800
11,000
600
10,500
400
10,000
200
9,500 2006 2007 2008 2009 2010
Total revenue
Net income
PASSPORT 5
Healthier biscuits offer ray of hope for Kellogg

North America Snacks was the only North American segment to post growth in 2010 driven by strong performances for Pop Tarts, Cheez-It and the Mother's brand of biscuits. Growing interest in healthier biscuits helped to drive growth in the category. Kellogg credited the introduction of Fiber Plus, Special K Chocolaty Pretzel and Cinnabon snack bars in the US with a stronger performance. International Snacks posted a decline in net sales of 7%. A difficult operating environment in Europe was primarily to blame. Europe made up 56% of Kellogg's international sales in 2010 and sales in this region overall for Kellogg fell by 6%. Weakness in Russian snack sales and falling prices across many food categories in Europe posed challenges for Kellogg. International Cereal's performance was stronger than International Snacks's, but even here growth was flat over 2009. Kellogg Co: Net Sales by Segment 2010
North America Frozen & Specialty International Snacks North America Retail Cereal
North America Snacks International Cereal
PASSPORT 6
Return to growth in Q3 but capital expenditure hits profits

Q3 brought some relief for Kellogg, with net sales overall growing by 5% in the quarter over the same period in 2010. On a constant currency basis, net sales increased by 3%, as the US dollar weakened over the period. Consolidated operating profit over the Q3 2010/2011 period declined, however, as Kellogg announced a significant increase in capital investment to improve its supply chain. The product recall in 2010 was the largest in Kellogg's history, with some 28 million cereal boxes removed from retail shelves in North America. This was further compounded by disruptions to its supply chain for the Eggo brand in 2010, and more recently US regulators found listeria at a Kellogg plant in Georgia in 2011 that produced Keebler and Famous Amos biscuits. The company has stated that it intends to spend US$70 million in the second half of 2011 to improve efficiency, reliability and quality in its manufacturing facilities. Kellogg Co: Net Sales by Region Q3 2010/2011
2,500
2,000
Net sales US$ mn
1,500
1,000
500
0 North America Europe Latin America Asia Pacific
Q3 2010
Q3 2011
PASSPORT 7
SWOT: Kellogg Co
STRENGTHS WEAKNESSES
Brand portfolio
Scale
Underinvestment
High debt levels
Kellogg enjoys a very The scope of Kellogg's strong brand portfolio manufacturing and particularly in breakfast distribution networks cereals but also in means that the snack bars and biscuits. company has the scale Its Kashi brand in the to quickly roll out new US market has been brands and brand built into one of its extensions. biggest brands.
OPPORTUNITIES
A period of Kellogg's debt to equity underinvestment in its ratio stood at 273% in manufacturing base has 2010. This limits the left the company with company's scope for insufficient capacity to further acquisition and meet demand for its investment in expanding products on a consistent its brand portfolio. basis.
THREATS
Emerging markets Breakfast cereals is an emerging category in markets such as China and is undergoing rapid growth. Considerable scope for growth exists here for a player of Kellogg's scale.
Health and wellness Kellogg has been trying to capitalise on the health and wellness trend in packaged food. It is very well positioned to benefit from growth in consumer interest here.
Product recalls Further product recalls or supply disruptions may jeopardise Kellogg's relationships with retailers and with consumers.
Price wars Price wars in breakfast cereals hit Kellogg in the US market in 2010. Further deflationary pressures would hurt margins and possibly market share.
PASSPORT 8
Kellogg: Investment needed to exploit opportunities

Tough times for food producers Kellogg is in a difficult position. Like many food producers the company is facing rising input costs. At the same time it is in a highly competitive market where consumers, hit by anaemic economic growth, are looking to save money where possible. In some of its key markets such as the US and the UK, the situation is made even more difficult by a highly competitive and consolidated supermarkets/hypermarkets distribution channel putting further pressure on producers to cut prices. Healthy eating here to stay The healthier eating trend is a long term one in packaged food. Kellogg, by virtue of its strength in breakfast foods for which consumers are particularly receptive to healthy eating options, has a strong opportunity to benefit from this trend. New product development and marketing programmes which highlight the nutritional value of its products will help the company to drive sales. Rebuild consumer trust Kellogg in an effort to cut costs and maintain its margin may not have invested sufficiently in its supply chain and manufacturing. The company has suffered a series of setbacks calling into question the quality and at times safety of its products. Kellogg has announced plans to step up its capital investment programme. For a trusted name such as Kellogg it is crucial that it maintains its relationship with the customer in order to defend against private label erosion of its market share. Emerging markets Kellogg has a growing presence in the emerging markets, but compared to players such as Nestl and Kraft Foods, Kellogg remains well behind. Breakfast cereal in China is an emerging trend and offers scope for growth for Kellogg. A strong push in these markets, however, will mean investments in its manufacturing and supply chain to boost regional capacity. It will also mean an increase in marketing to build a strong profile.
PASSPORT 9
RECOMMENDATIONS
COMPETITIVE POSITIONING
Kellogg struggles in 2010

Packaged Food vs Kellogg 2007-2010
(Retail Value, RSP, Fixed Exchange Rates US$) 8 % y-on-y growth 6 4 2 0 2007 2008 Packaged foods 2009 Kellogg 2010
B C
A: Strong market performance Kellogg sales are underpinned by a strong performance in North American breakfast cereals and the acquisition of United Bakers Group in Russia giving it the Yantar brand in biscuits.
B: Recession Kellogg's performance in the recessionary year of 2009 is underpinned by various trends, such as the 'eatin' trend, consumers' tendency to eat breakfast at home and 'downtrading' benefiting the company. Kellogg's performance is especially boosted by some emerging markets, such as Brazil, Mexico and Russia.
C: Price wars Contraction in US breakfast cereals and falling sales for Kellogg in Western Europe conspire to force the company's rate of growth below the global market for packaged food. Despite a product recall in the year Kellogg is able to marginally increase its market share of breakfast cereals in the US market.
PASSPORT 11
COMPETITIVE POSITIONING
Kellogg hit by price war but moves up rankings

Despite Kraft's acquisition of Cadbury completed in 2010, Nestl hung onto its first place ranking. Nestl in 2010 increased its investment in the emerging markets with a number of regional acquisitions and investments in increased manufacturing capacity. Kraft gained a much stronger position in the European market following the acquisition of Cadbury but in 2011 announced plans to spin off its snacks business effectively operating as two separate companies. The new snacks business is to include Cadbury's products as well as pre-existing Kraft brands such as Ritz and Oreos. Kellogg rose to seventh place off the back of the Kraft acquisition which pulled Cadbury from the seventh position it held in 2009. Kellogg posted growth of 3% in 2010, above its 2009 performance but below its 5-year growth rate as the US breakfast cereals category shrank in 2010 as a price war hit value sales.
Packaged Food: Top 10 Global Companies by Value 2006-2010 2006 2007 2008 2009 2010 1 2 3 4 5 6 7 8 9 10 Company Nestl SA Kraft Foods Inc Unilever Group PepsiCo Inc Mars Inc 2010 % share 3.3 3.2 2.0 1.8 1.4 1.4 0.8 0.6 0.6 0.5
1 2 3 4 6 5 8 9 10 19
1 2 3 4 6 5 8 9 10 19
1 2 3 4 5 6 8 9 10 18
1 2 3 4 5 6 8 9 10 11
Danone, Groupe Kellogg Co
General Mills Inc Ferrero Group Grupo Bimbo SAB de CV
PASSPORT 12
RECOMMENDATIONS
MARKET ASSESSMENT
Emerging markets engine for packaged food growth

Kellogg maintained only a marginal presence in Asia Pacific and Eastern Europe. However, growth in both regions will exceed that of its key North American and Western European markets. Both these regions will see very modest growth in CAGR terms of around 1% over the 2011-2016 period. High household debt, high unemployment and concerns over the economic direction of Europe and the US will continue to challenge what is already a very mature market. Meanwhile, changing eating patterns in markets such as China is offering opportunities for growth. Chilled processed food traditionally a Western concept is set to post a very strong CAGR of over 12% over 20112016, as busy Chinese consumers with disposable income look for convenience. An ageing population is also driving growth underpinned by a growing awareness of healthier eating. Latin America also offers strong growth potential (CAGR of 4%, 2011-2016). Kellogg is more firmly established in this region, with a 1% packaged food share. Kellogg Co: Packaged Food Presence 2010 and Growth Prospects by Region 2011-2016
% CAGR 2011-2016 6 5 4 3 2 1 0 0 100,000 200,000 300,000 400,000 500,000 Market size 2010 (US$ mn) Note: Bubble size shows Kellogg share of region in 2010. Range displayed 0.1-2.6% Australasia Eastern Europe North America Western Europe 600,000 700,000 Middle East and Africa Opportunity Zone Latin America Asia Pacific
PASSPORT 14
MARKET ASSESSMENT
Kellogg still reliant on North American market

In packaged food, the reliance of Kellogg on the North American market is clear, with regional sales making up 59% of its global sales in 2010 although this did represent a decline from 62% in 2006. Kellogg posted a near 11% CAGR in Asia Pacific over the 2006-2010 period. However, growth here has been driven by market growth rather than growth in Kellogg's market share. This region has not been a major target for acquisitions by Kellogg, with the exception of Navigable Foods in 2008, giving it a stronger presence in biscuits in the Chinese market. Growth in Australasia has been flat over the 2006-2010 period despite the acquisition of Specialty Cereals in 2008, owner of a range of breakfast cereals marketed in the healthier foods segment. The acquisition of United Bakers, however, significantly boosted Kellogg's presence in Eastern Europe although this was limited to the Russian market. Kellogg's presence elsewhere in the region is modest and it is entirely absent from the key Polish market. Despite the strong predicted growth in Latin America, Kellogg has opted for organic growth rather than growth via acquisition. Kellogg Co: Global Packaged Food Sales by Regional Share 2006-2010
Regional share of Kellogg sales 100% 80% 60% 40% 20% 0% 2006 Asia Pacific Australasia 2007 Eastern Europe 2008 Latin America 2009 Middle East and Africa North America 2010 Western Europe
PASSPORT 15
MARKET ASSESSMENT
Acquisitions help drive growth over review period

Kellogg's key acquisitions over the 2006-2010 period include Bear Naked Inc, IndyBake Products LLC, Brownie Products Co, Mother's Cake & Cookie Co, all of which were smaller acquisitions aimed at increasing the company's presence in the better for you segment and/or bakery products. While Kraft is the leading player in packaged food in the North American market its performance over the 2006-2010 period has been poor compared to most. While the Cadbury acquisition gained it Trident, Dentyne and Halls, Kraft sold off its frozen pizza business including the DiGiorno and Tombstone brands in 2010to Nestl, as well as its Post cereals business in 2007 to Ralcorp. PepsiCo has benefited from strong growth in sweet and savoury snacks over 2006-2010 in which the category grew at a 4% CAGR. PepsiCo is the regional leader with a 43% market share. Nestl has benefited from its Gerber acquisition in baby food in 2007 which added a further US$1 billion onto its sales in that year, as well as the aforementioned acquisition from Kraft. Underlying growth excluding these acquisitions has been modest for Nestl. Mars has been the top performer over the period. Acquisition has in part fuelled this as well via the Wrigley acquisition in 2008, which gained it the Orbit and Extra chewing gum brands. North America: Top Packaged Food Players and Performance 2006-2010
Absolute value growth US$ mn 5,000 4,000 3,000 2,000 1,000 0 -1,000 Kraft Foods Inc PepsiCo Inc Nestl SA Mars Inc Kellogg Co General Mills Hershey Co, Inc The % CAGR 2006/2010 Unilever Group ConAgra Foods Inc 10 5 0 -5 % CAGR 2006-2010 15
Absolute value growth 2006-2010 US$ mn
PASSPORT 16
MARKET ASSESSMENT
Strong presence in breakfast cereals and snack bars

Kellogg is the global leader in snack bars and in breakfast cereals. Both categories are set to post CAGRs of 3% and 2% respectively over 2011-2016. Most of the growth in breakfast cereals will come from Latin America, which is expected to contribute US$685 million to the global US$2.6 billion in growth to take place over 2011-2016. Kellogg is the leader in Latin American breakfast cereals, with a commanding 41% market share. In snack bars, Kellogg again is the global leader with a 19% market share. Its leading brand in this category are Kellogg's and Kashi. These are to capitalise on the trend towards healthy on-the-go eating, while Rice Krispies is positioned as a snack bar treat. The Special K brand also makes an appearance in meal replacement, which is expected to grow at a 2% CAGR over 2011-2016. Kellogg's presence in frozen processed food is based primarily on the Eggo range of frozen waffles, although in 2011 the company announced plans to expand Kashi into this category Kellogg Co: Packaged Food Presence 2010 and Growth Prospects by Category 2011-2016
4 % CAGR 2011-2016 3 Meal Replacement Snack Bars Opportunity Zone
2
1 0 0 20,000 40,000 60,000 80,000 100,000 120,000 140,000 Market size 2010 (US$ mn) Frozen Processed Food Breakfast Cereals
Note: Bubble size shows Kellogg share of region in 2010. Range displayed 0.9-33.6%
PASSPORT 17
RECOMMENDATIONS
BREAKFAST CEREALS
Kellogg faces market maturity and private label threats

Kellogg's weakest categories in breakfast cereals are hot cereals and muesli. Kellogg attempted to shore up its presence in muesli in the UK with the launch of Nature's Pleasure, which was subsequently discontinued following poor sales. The company is absent from hot cereals except for the French market. Hot cereals and muesli are expected to lead breakfast cereals in CAGR terms over the 2011-2016 period. Flakes is Kellogg's traditional strong point and it maintained a 45% market share globally in 2010. This is a very mature category, however, with a 2% CAGR expected over 2011-2016. Kellogg also faces growing competition from private label in some mature markets such as the US, where its share of flakes fell from 33% in 2008 to 32% in 2010. Other RTE cereals includes all non-flake and non-muesli cereals targeted at adults, e.g. wheat biscuits, puffed wheat cereals, rice-based products etc. Kellogg's leading global brands in the category are Kellogg's All Bran and Kellogg's Mini Wheats. Kellogg maintained a 25% market share in 2010. In children's breakfast cereals, its share is 41%; this category is predicted a CAGR of only 1% over 2011-2016. Kellogg Co: Breakfast Cereals Presence 2010 and Growth Prospects by Category 2011-2016
% CAGR 2011-2016 4 Opportunity Zone 3 Muesli Hot Cereals Other RTE Cereals 1 0 0 1,000 2,000 3,000 4,000 5,000 6,000 7,000 8,000 9,000 10,000 Flakes Children's Breakfast Cereals
Market size 2010 (US$ mn) Note: Bubble size shows Kellogg share of category in 2010. Range displayed 0.1-45.3%
PASSPORT 19
BREAKFAST CEREALS
Kellogg leader in most dynamic muesli markets

Despite the disappointment of Nature's Pleasure in the UK, Kellogg has considerable scope for growth in muesli over the forecast period, owing to its strong positions in the Brazilian and US markets, which will lead growth globally. Kellogg despite is strong position in other breakfast cereal categories has struggled in Western Europe muesli. It has only a marginal presence in Germany, the UK and Norway, which will lead growth in that region. Growth in this category globally is driven by the health and wellness trend with consumers associating muesli with a healthy breakfast and good nutrition. Kellogg entered the German muesli category in 2008, but thus far has not managed to capture market share from the leading local players Oetker-Gruppe and Peter Klln. In fact there has been very little movement in brand shares in German muesli with consumers very loyal to one particular brand. A high level of new product development among the leading players ensures little migration to new products such as Kellogg's muesli. There is, however, a growing interest in organic muesli suggesting this is one area in which Kellogg may manage to capture a stronger share in this market. In Brazil, Kellogg has an overwhelming lead in the category, with a 72% market share, underpinned by its Kellogg's Mueslix brand.
Absolute value growth 2011/2016 US$ mn 80 60 40 80 60 40 % CAGR 2011-2016 and company share
Muesli: Top 10 Most Dynamic Markets 2011-2016 and Kellogg 2010 Company Share
20
0 Brazil US Germany Canada Poland Australia UK India Norway Venezuela Absolute value growth 2011-2016 US$ mn % CAGR 2011-2016 Kellogg % company share 2010
20
0
PASSPORT 20
BREAKFAST CEREALS
Kellogg missing out in hot cereals

Kellogg is particularly weak in hot cereals, with only a 3% share of the French hot cereals market. This is clearly an area in which Kellogg can expand. It is the leader in breakfast cereals overall in India, which is set to see the strongest growth in hot cereals, but it is PepsiCo with its Quaker brand that leads in this category. Market growth in India is underpinned by a growing awareness of the heart health benefits of oats. Heart disease and its prevalence became a major influence on the buying habits of Indian consumers and PepsiCo undertook a very effective campaign in promoting the benefits of oats for breakfast. Kellogg is absent from the UK market for hot cereals as well. Hot oats for breakfast while a quintessentially Scottish breakfast choice still has considerable scope for growth in England where flakes and other RTE cereals are more common choices. Here too, the health benefits of oats is gaining in acceptance among consumers and here again, PepsiCo is the overwhelming leader with its Oatso Simple variant which offers pre-measured oats ready in 60 seconds using a microwave. More recently, PepsiCo has been pursuing the children's demographic, highlighting to parents the benefits of oats while offering flavours designed to appeal to kids. Kellogg should strongly consider leveraging its distribution network to launch its own hot cereal products. Hot Cereals: Top 10 Most Dynamic Markets 2011-2016
Absolute value growth 2011/2016 US$ mn % CAGR 2011-2016 150 100 50 0 India UK Australia China Venezuela Brazil Canada Ireland Russia Ukraine Absolute value growth 2011-2016 US$ mn % CAGR 2011-2016 30 20 10 0
PASSPORT 21
BREAKFAST CEREALS
Unit price growth to return in US market

Flakes is not the most dynamic of categories within breakfast cereals. Only the US will show strong growth here. In part this is due to announced price increases in 2011 by Kellogg and General Mills following a period of heavy price promotion which negatively impacted on unit prices in 2008-2010. Kellogg has pointed to rising commodity costs as the key reason behind its move to increase prices. Another driver behind the growth in flakes is a shift from other RTE and children's breakfast cereals due to a growing perception that cereals marketed at children contain high levels of sugar. In January 2011 Kellogg introduced its highly popular Kellogg's Crunchy Nut cereal into the US market. If the brand is able to replicate the success it has had in the UK market, this too will boost sales in the flakes category. Growth prospects for Kellogg in some markets such as Canada are limited to organic market growth given its already overwhelmingly dominant position. Going forward, Kellogg will need to defend its market share from private label to maintain its leading position and look to expand popular brands such as Crunchy Nut to other markets to capitalise on their success as it has done in the US. Flakes: Most Dynamic Markets 2011-2016 and Kellogg 2010 Company Share
250 Absolute value growth 2011/2016 US$ mn 200 100 80 % CAGR 2011-2016 and company share
150
100 50 0 US Mexico Spain Canada Brazil India Australia Greece Israel South Africa Absolute value growth 2011-2016 US$ mn % CAGR 2011-2016 Kellogg % company share 2010
60
40 20 0
PASSPORT 22
BREAKFAST CEREALS
Children's breakfast cereals: Opportunities in emerging markets

Birth rates have a significant impact on sales of children's breakfast cereals. Latin America and Middle East are key regions driving growth in the category. Mexico will lead, with sales set to expand by US$72 million over the 2011-2016 period. Kellogg remains notably absent from the Polish market despite having a manufacturing facility in the town of Kutno. Depressing sales of children's breakfast cereals in mature markets is also a growing concern over sugar levels in brands marketed at children. Kellogg has acted pre-emptively in some cases such as voluntarily adding vitamin D to a range of brands including Coco Pops and Honey Loops in Europe in 2011 in response to parental concerns over nutritional content. Kellogg is very sensitive to criticism of its brands. In 2011, it responded publically to unconfirmed reports that a parental lobby group in the US known as the Parents Jury was to give Coco Pops, the 'Pester Power' award, an indirect criticism of Kellogg's advertising campaigns for the brand. These criticisms may bubble under the surface in the emerging markets but they are not as vocalised and neither have government regulation or parental lobby groups become as aggressive. Children's Breakfast Cereals: Most Dynamic Markets 2011-2016 and Kellogg 2010 Company Share
60 40 20 0 Mexico Poland Spain Saudi Arabia Turkey Argentina China Indonesia Chile Brazil Absolute value growth 2011-2016 US$ mn % CAGR 2011-2016 Kellogg % company share 2010 60 40 20 0 %CAGR 2011-2016 and company share Absolute value growth 2011/2016 US$ mn 80 80
PASSPORT 23
BREAKFAST CEREALS
Breakfast cereals landscape likely to change if Post is sold

In 2011, Ralcorp rejected a hostile takeover from ConAgra for the Post cereal business which it had originally acquired from Kraft in 2008. Ralcorp gained from the deal a range of brands in breakfast cereals including Grape Nuts and Alpha-Bits. ConAgra is active in a number of packaged food categories including sweet and savoury snacks and oils and fats. It does not, however, have a presence in breakfast cereals despite being a processor of whole grains for supply to other food producers. This particular capacity means that it could more easily address fluctuations in commodity prices than many breakfast cereals producers. For ConAgra, the other key attraction of Ralcorp is its significant presence in private label. Ralcorp chose to spin off the Post business as a second company although it is widely speculated that ConAgra may return with another offer. It has also speculated in the media that Ralcorp had approved both General Mills and Kellogg in an attempt to stave off the ConAgra bid. The difficulty for both of these players may be anti-trust laws which would make such a deal difficult to have approved. The combined market shares of Ralcorp's Post business and Kellogg would at least raise concerns in North America where Kellogg and Post are both relatively strong. Similarly in South Korea the combined market share of both brand portfolios would reach 98% of breakfast cereals making it highly unlikely to please regulators. The potential synergies are modest between the two players, but the likelihood is that Post will eventually be sold. Commodity costs as well as consolidation in packaged food retailing in its key markets is best suited to a large-scale operation unless it was to target a niche segment such as organic breakfast cereals or premium health and wellness cereals. General Mills would be a better match although thus far it has not indicated any interest publically in Ralcorp. General Mills in breakfast cereals is limited to North America. Its share in North America as well when combined with that of the Post business would also be less likely to be blocked by anti-trust regulation. General Mills would benefit from Ralcorp's Asia Pacific as well as its private label business.
PASSPORT 24
RECOMMENDATIONS
SNACK BARS
Granola/muesli to lead snack bars

Kellogg is the global leader in snack bars, with a 19% market share. Its key brands include Special K, NutriGrain and Kellogg's Rice Krispies. The company has been successful at cross-branding between breakfast cereals and snack bars, as witnessed by the success of Special K in snack bars. It has also seen strong growth with the Kashi brand in breakfast bars and granola/muesli bars although this has been limited to the North American market. Other snack bars includes types such as non-cereal bars (e.g. sesame), yoghurt bars, fibre supplements, etc. Kellogg is present in the category with Kellogg's Rice Krispies among other brands, which is the leader here with 41% of sales. Breakfast bars, led by Special K and by Nutri-Grain, will under-perform over the forecast period, while granola/muesli bars and energy and nutrition bars will lead growth in CAGR terms. Kellogg is relatively weak in both of these categories suggesting the outlook for the company in snack bars is modest unless it invests in new product development in these categories. Kellogg Co: Snack Bars Presence and Growth Prospects by Category 2011-2016
% CAGR 2011-2016 6
Other Snack Bars

4 2 Fruit Bars 0 -2 0 500 1,000
Opportunity Zone
Energy and Nutrition Bars
Granola/Muesli Bars
Breakfast Bars
1,500
2,000
2,500
3,000
3,500
4,000
4,500
Market size 2010 (US$ mn) Note: Bubble size shows Kellogg share of category in 2010. Range displayed 5.5-55.5%
PASSPORT 26
SNACK BARS
Expansion in granola/muesli bars a priority

With the exception of the US market, Kellogg is not active in granola/muesli bars among the top 10 bestperforming markets. In the US, its key brand is Kashi. Kellogg acquired Kashi in 2000 and has built the brand into one of its key strategy US interests. It has expanded it into a number categories including frozen processed food; however, it has not expanded it beyond the US market and appears too reluctant to do so owing to the highly competitive market for snack bars in international markets. A recent focus for new product development for the Kashi range has been healthy treats incorporating mocha almond and dark chocolate variants into its TLC Chewy Granola Bar range. Such moves encourage wider interest in granola bars and capture those who are initially put off by the image of granola bars. Given Kellogg's strong position in markets such as Brazil, Canada and the UK in breakfast cereals its absence from granola/muesli bars is unfortunate. The company should look to either expand Kashi or to launch new products in this category in these markets and leverage its distribution network and growing strength in healthy eating. Granola/Muesli Bars: Most Dynamic Markets 2011-2016 and Kellogg 2010 Company Share
350 300 250 200 150 100 50 0 US Argentina Brazil Canada UK India Australia Israel Netherlands New Zealand 35 30 25 20 15 10 5 0 % CAGR 2011-2016 and company share Absolute value growth 2011/2016 US$ mn
% CAGR 2011-2016
Kellogg % company share 2010
PASSPORT 27
SNACK BARS
Follow Clif Bar example in energy and nutrition bars

Kellogg continues to draw most of its snack bar sales from the US, again maintaining only a significant presence in energy and nutrition bars in this market. It captured 8% of energy and nutrition bar sales in the US in 2010. Globally, this category is led by Nestl with its Power Bar brand. Energy and nutrition bars were once the domain of athletes and committed gym attendees but have since expanded beyond this niche to include consumers looking for a healthy alternative to confectionery for on-the-go snacking. Product development by brands such as Clif from Clif Bar in the US market target younger, more affluent consumers. The Clif brand in the US has seen strong growth over the review period as it appeals to a wider audience than Power Bar which remains strongly associated with bodybuilding. Meanwhile, Kellogg with its Special K brand remains overly reliant on weight-conscious women limiting its appeal to men and families. Energy and nutrition bars in Europe and the emerging markets remains a niche category. However, there is scope to launch a product which like Clif appeals to consumers looking for healthy alternatives. Given the strong interest in organic food in the European market any new launch by Kellogg should identify itself this way. A faster route would be to acquire a smaller producer with an existing high potential brand and leverage the Kellogg distribution network to expand sales in and outside of the US.
% CAGR 2011-2016 and company share Absolute value growth 2011/2016 US$ mn
Energy and Nutrition Bars: Most Dynamic Markets 2011-2016 and Kellogg 2010 Company Share
600 400 200 0 US Japan Canada UK Argentina Norway Brazil Indonesia Australia Netherlands Absolute value growth 2011-2016 US$ mn % CAGR 2011-2016 Kellogg % company share 2010 15 10 5 0
PASSPORT 28
SNACK BARS
Criticism of nutritional content hits fruit bars

With the US remaining Kellogg's key market for snack bars, the modest growth set to take place in breakfast bars and in other snack bars as well as contraction in fruit bars is of some concern. Kellogg will need to reallocate its new product development investment over the forecast period into the more dynamic energy and nutrition bars and granola/muesli bars categories. Fruit bars sales in the US are set to contract by US$39 million over the forecast period. Kellogg has a range of brands in this category; Kellogg's Fruit Twistables, Kellogg's Yogos and Fruit Streamers are its key brands all targeted at children. The category, however, came under fire from parents for their high sugar content and the use of partially hydrogenated oils. Bad press will continue to stymie growth for the category. Welch Foods has capitalised on these concerns for its Welch's Fruit Snacks with its 'We put fruit in our fruit snacks' strapline. Market share for the brand grew, while it fell for Twistables and Yogos. Other snack bars for Kellogg is effectively Rice Krispies, which made up 65% of total category sales in 2010. Kellogg remains overly reliant on one single brand here and will need to work to maintain customer interest where other categories could potentially cannibalise sales.
800 600 400 200 0 -200 Energy and Nutrition Bars Granola/Muesli Bars Breakfast Bars % CAGR 2011-2016 Other Snack Bars Fruit Bars
80 60 40 20 0 -20
Kellogg % company share 2010
PASSPORT 29
% CAGR 2011-2016 and company share
US Snack Bars: Growth Prospects 2011-2016 and Kellogg 2010 Company Share by Category
Absolute value growth 2011/2016 US$ mn
RECOMMENDATIONS
MEAL REPLACEMENT
Meal replacement opportunities linked to Special K brand strength

Kellogg's has capitalised on the strength of the Special K brand among weight-conscious women by expanding it into meal replacement slimming. Special K has enjoyed good growth in the US market, growing its market share from 2% in 2007 to 4% in 2010. However, it faces intense competition from direct sellers Herbalife and Amway, which have well-developed weight loss programmes, which heavily feature meal replacement slimming. It also faces competition from Slim Fast from Unilever, which also forms part of a wider weight loss programme and which benefits from a wider range of products. As Kellogg's presence in meal replacement slimming is directly related to its Special K brand, the company has expanded only into markets where it already has a strong presence in breakfast cereals. While growth will be strongest in the Indian market, Kellogg's potential for growth here is limited by the lack of a presence for Special K and the disproportionate reliance on powder concentrates whereas the Special K range is based around RTD shakes and low calorie snack bars. Meal Replacement: Most Dynamic Markets 2011-2016 and Kellogg 2010 Company Share
300 200 100 0 India Brazil US Japan South Korea Australia Mexico China Malaysia Thailand Absolute value growth 2011-2016 US$ mn % CAGR 2011-2016 Kellogg % company share 2010 15 10 5 0 % CAGR 2011-2016 and company share Absolute value growth 2011/2016 US$ mn 400 20
PASSPORT 31
RECOMMENDATIONS
FROZEN PROCESSED FOOD
Region focus in frozen processed food not about to change

Kellogg's presence in frozen processed food is limited to North America. Frozen bakery is its major interest in the US market underpinned by the Eggo brand. The brand suffered in 2010 as Kellogg experienced supply problems, which meant it could not meet demand for the product. Eggo's share of frozen bakery in the US fell from 23% to 19% in 2010. In frozen meat substitutes, its key brands are Morningstar Farms and Gardenburger. Kellogg was not active in this category outside of the US in 2010. Morningstar consolidated its dominant position in frozen meat substitutes in the US in 2010, rising from 66% to 68%. The outlook for the category is good with sales set to expand by US$50 million over the 20112016 period. Stronger growth in absolute value terms is expected in other markets, notably Germany, where sales will increase by US$75 million. Kellogg, however, appears to have little interest in expanding its global presence in frozen processed food, focusing instead on snack bars and breakfast cereals. Kellogg Co: Frozen Processed Food Sales by Market and Category 2006-2010
1,200 Kellogg frozen processed food by category US$ mn 1,000
800
600 400 200 0 2006 Canada Frozen Bakery 2007 Mexico Frozen Bakery 2008 US Frozen Bakery 2009 US Frozen Meat Substitutes 2010 US Frozen Ready Meals
PASSPORT 33
FROZEN PROCESSED FOOD
Kellogg targets premium frozen ready meals with Kashi

Kellogg's investments in its supply chain announced in 2011 should ensure that there is no repeat going into 2012 of the supply disruptions for its Eggo brand. However, frozen bakery in the US is set to contract by US$30 million, putting further pressure on Eggo sales. The outlook in Canada is better, however, with category sales expected to expand by US$34 million over 2011-2016. Kellogg is again the leader here. In 2011, Kellogg announced the expansion of the Kashi frozen ready meal range with two new variants. It is a bold move to invest in frozen ready meals given Kashi's whole grain, healthy positioning when this category has suffered from consumer bias against frozen food. This mistrust of frozen food is based on the somewhat misguided belief that frozen food offers less nutritional value. Effectively, Kellogg is targeting the premium end of the frozen ready meals price range with the Kashi launch. Kellogg is unlikely to compete with Nestl's Stouffer's range which leads in the US and wisely chose to differentiate itself by focusing on an under-exploited segment. The challenge, however, will be to overcome consumer perception surrounding frozen ready meals, as the Kashi range is priced at a premium when compared to ranges such as Stouffer's. US Frozen Processed Food: Growth Prospects by Select Categories 2011-2016
Absolute value growth 2011/2016 US$ mn 800 600 400 1 200 0 -200 Frozen Bakery Frozen Meat Substitutes Absolute value growth 2011-2016 US$ mn Frozen Ready Meals % CAGR 2011-2016 0 -1 3 2 % CAGR 2011-2016
PASSPORT 34
RECOMMENDATIONS
BISCUITS
Kellogg looks to bolt on acquisitions in international markets

In terms of the most dynamic markets in biscuits, Kellogg has a limited presence. It has a 2% category share in China, but its strongest presence is in the US through the Keebler brand, which it acquired in a reverse merger in 2000. Kellogg wanted to expand its snacks business and was particularly attracted to Keebler's direct store delivery system whereby rather than work through wholesalers, distribution was handled directly between Keebler and retailers allowing for complete control over merchandising and inventory levels. This key strength, however, makes it difficult for the brand to be expanded into new markets as it involves replicating the distribution system from the ground up. In the US, the Keebler brand is ranked number one in biscuits ahead of Oreo from Kraft Foods. The brand's market share of biscuits, however, has been on the decline since 2008. Instead, Kellogg opted for acquisition in foreign markets with the United Bakers Group in Russia and Navigable in China. In Russia, where the biscuits market will expand by US$84 million over the forecast period, Kellogg has a 7% market share. In China, the strongest growth will take place in savoury biscuits and crackers, which will represent 59% of total growth in the category. Here, Kellogg maintained a 1% market share in 2010. Biscuits: Most Dynamic Markets 2011-2016 and Kellogg 2010 Company Share
2,500 2,000 1,500 1,000 500 0 India China Brazil US UK Mexico Indonesia Argentina Turkey Vietnam Absolute value growth 2011-2016 US$ mn % CAGR 2011-2016 Kellogg % Company Share 2010 25 20 15 10 5 0 % CAGR 2011-2016 and company share Absolute value growth 2011/2016 US$ mn
PASSPORT 36
RECOMMENDATIONS
BRAND STRATEGY
Kellogg cross-category leveraging to boost brand sales

Kellogg's packaged food portfolio consists of leading global and regional breakfast cereals, snack bars and frozen food brands. Kellogg employs cross-category brand leveraging, taking a successful brand and expanding it into other categories in order to drive overall brand growth. Examples include Kellogg's Special K from breakfast cereals into breakfast bars. This umbrella brand strategy enables effective and more cost-efficient marketing support for each new product development and brand extension. In July 2010, Kellogg also extended the Eggo product line with the launch of Eggo Real Fruit Pizzas, an all-in-one combination of fruit and granola on a baked cinnamon and maple-flavoured crust. In 2011, Kellogg expanded the Kashi range known for its cereals and snack bars into frozen processed food with a range of frozen ready meals. This range underwent extensive development since being acquired by Kellogg, as it hopes to leverage the Kashi brand across various categories in order to target the premium natural foods segment. Also in 2011, Kellogg launched Kashi TLC Pita Crips in the sweet and savoury snacks category. Frozen processed food has struggled in the US, with consumer perception that it is less healthy than chilled processed food. Therefore the move by Kashi into this category is somewhat surprising although it fits in with the wider Kellogg strategy of leveraging its brands across categories. The market positioning for Special K is geared towards women concerned about their weight. This has allowed the brand considerable flexibility in targeting meal replacement, breakfast cereals, sweet and savoury snacks and snack bars. Kellogg has been adept at maintaining a consistent message, however, irrespective of what category its brands are expanded into; Special K for women looking to maintain their weight and Kashi for those concerned about artificial ingredients, for example.
PASSPORT 38
BRAND STRATEGY
Keebler struggles to maintain momentum

In June 2011, US regulators found listeria at a Kellogg plant in Georgia, USA, which produced Keebler biscuits. The subsequent recall effected Keebler Soft Batch Cookies. This had a significant effect on consumer confidence in the brand in the latter half of 2011. However, prior to this, the brand had already been struggling with competition from brands such as Oreo, which enjoyed strong growth in 2010 owing to new product innovation such as Golden Oreos launched late in 2009. It went onto launch Oreo Triple Doubles in 2011, which consisted of three layers of biscuit with two crme fillings. There were some bright spots for Keebler, however, with the Fudge Shoppe brand performing well in chocolate coated biscuits in the US in 2010 and gaining almost 50 basis points in market share in that category. A major focus for product development has been miniaturisation with new variants added to its Right Bites range including Fudge Shoppe as it strives to balance the calorie consciousness of consumers with their need for indulgence. Kellogg derives 99% of its Keebler sales from the US market, making the brand vulnerable to new product launches and advertising campaigns from competitors. Kellogg has opted to acquire companies in emerging markets rather than launch the Keebler brand abroad. Keebler: Global Sales 2006-2010
1,360 1,350 US$ mn 1,340 1,330 1,320 1,310 1,300 2006 2007 2008 2009 2010
PASSPORT 39
BRAND STRATEGY
Special K targets women concerned about their weight

Special K is among Kellogg's most lucrative brands in sales terms. The company has been adept at expanding the brand continually into new categories going beyond breakfast cereals into snack bars and meal replacement. Kellogg has targeted weight-conscious women maintaining a consistent message of low calorie filling food, which when combined with good lifestyle choices can reduce weight. However, this has meant that it lacks a strong following among men. It also has missed out on the trend towards family-wide healthy eating as the brand is overly associated with 'mum' as opposed to everyone. The move therefore into meal replacement, which made up 6% of global sales in 2010, was a good one as it allows for new product development focused squarely on weight loss, RTD shakes as well as meal replacement bars and protein drink mixes. In 2012 meal replacement added a further US$112 million to Special K's global brand sales. The brand is also present in snack bars and sweet and savoury snacks, capitalising on growing demand for healthy on-the-go snacking.
Kellogg's Special K: Global Sales 2006-2010

2,500 2,000 US$ mn 1,500 1,000 500 0 2006 2007 2008 2009 2010
PASSPORT 40
BRAND STRATEGY
Nutri-Grain opportunities to expand into new categories

Nutri-Grain was Kellogg's second largest brand by value sales in 2010. While Special K began in breakfast cereals before being extended to snack bars, the reverse is true for Nutri-Grain. The Nutri-Grain brand has benefited from growing consumer awareness of healthy eating and its product positioning as a whole grain all-day snack. Its presence in breakfast cereals is largely limited to Australia, which made up 89% of NutriGrain sales in breakfast cereals. The brand here has seen strong growth in sales over the review period suggesting further opportunity to expand Nutri-Grain in other breakfast cereal markets. Nutri-Grain in some markets such as the UK has struggled in snack bars as competition from other brands erodes the early mover advantage Nutri-Grain had in this market. Brands such as Nature Valley and Jordan have seen strong growth while Nutri-Grain has seen its market share of snack bars fall here from 10% to 7% in 2010. The US remains the brand's major market, making up 52% of its global sales in 2010, and here the brand has continued to post robust growth over the review period. Kellogg's Nutri-Grain: Global Sales 2006-2010
520
510 500 US$ mn
490
480 470
460
450 440 2006 2007 2008 2009 2010
PASSPORT 41
RECOMMENDATIONS
OPERATIONS
Kellogg reinvests in its operations in 2011

As of the end of fiscal 2010, Kellogg employed some 31,000 people and manufactured in 18 countries and marketed in more than 180 countries. In recent years, Kellogg has made acquisitions that strengthened its international growth potentials, as well as gaining access to well-established manufacturing and distribution facilities outside the US. The acquisition of United Bakers, one of Russia's largest producers of cookies, crackers and cereals, provided distribution and six manufacturing facilities throughout the country. The purchase of Navigable Foods, a biscuits manufacturer with strong roots and tradition in the Chinese market, gave Kellogg two new manufacturing facilities and a wide distribution network. Other notable acquisitions include Specialty Cereals in 2008 in Australia and IndyBake Products in the US also in 2008. Outside the US, Kellogg has manufacturing facilities and warehousing in Australia, Brazil, Canada, China, Colombia, Ecuador, Germany, Great Britain, India, Japan, Mexico, Russia, South Africa, South Korea, Spain, Thailand, and Venezuela. Kellogg commenced its K LEAN programme in 2009. K LEAN seeks to optimise the company's global manufacturing network, reduce waste and develop best practices on a global basis. However, following a series of recalls and supply interruptions in 2010/2011, the company's CEO of less than a year John Bryant said the company had "cut deeper than it should have". Kellogg announced US$70 million in additional capital expenditure in the latter part of 2011, adding back some of the jobs cut and focusing on employee training and its relationships with suppliers. Kellogg hopes that this investment will ensure better quality control and a more reliable supply chain.
PASSPORT 43
OPERATIONS
Manufacturing facilities in the US: 2011

Cereal plants and warehouses
Battle Creek, Michigan
Other plants
San Jose, California Atlanta, Augusta, Columbus, Rome,Georgia Chicago, Illinois
Lancaster, Pennsylvania Seelyville, Indiana, Kansas City, Kansas Memphis, Tennessee Florence, Louisville and Pikeville,Kentucky Grand Rapids, Michigan Omaha, Nebraska Blue Anchor, New Jersey Cary and Charlotte, North Carolina Cincinnati and Zanesville, Ohio Muncy, Pennsylvania; Rossville, Tennessee Clearfield, Utah; and Allyn, Washington
PASSPORT 44
RECOMMENDATIONS
RECOMMENDATIONS
Kellogg: Reduce reliance on US market and build global brands

Push forward in emerging markets Kellogg remains overly dependent on the mature markets of North America and Western Europe. It remains a modest player in markets such as China which will post very strong growth in biscuits over the forecast period. Its focus on acquiring smaller regional brands is appropriate; however, it has thus far failed to exploit synergies with its existing portfolio to truly drive growth. Replicate US success elsewhere Kashi is a well-developed range with a presence in snack bars, breakfast cereals including hot cereals, biscuits and sweet and savoury snacks. Kellogg should consider expanding this brand outside of the US including into Western Europe. There is a clear opportunity, for instance, in hot cereals in the UK market. Also, the success of Nutri-Grain breakfast cereals in the Australian market suggests there is potential for this variant to be introduced into other markets to capitalise on the strength of the Nutri-Grain brand.
Consider hot cereals Hot cereals is set to post strong growth led by India. Kellogg remains weak in the Indian market and should focus here for future acquisitions. It has also failed to launch a product in this category in the UK where it could capitalise on its existing distribution network to drive sales. The company's lack of new product development here suggests a failure to keep abreast of consumer trends in key markets. Consider new launch in children's breakfast cereals The opportunities in children's breakfast cereals are largely limited to the emerging markets given parental concern in the West over sugar content and nutritional value. Merely adding vitamins may not be sufficient to overcome parents scepticism of brands such as Frosted Flakes. Kellogg should consider launching a new children's breakfast cereal which from the outset meets the demands of both taste and nutrition clearly differentiating the new product from its other brands. This breakfast cereal could target a more affluent target market.
PASSPORT 46
Experience more...
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PASSPORT 47

Kellogg in Packaged Foods

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Kellogg in Packaged Foods

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KELLOGG CO IN PACKAGED FOOD (WORLD)

SCOPE OF THE REPORT

Breakfast Cereals US$29,411mn

Meal Replacement US$7,373 mn

Snack Bars US$11,013 mn

Frozen Processed Food US$111,946 mn

PACKAGED FOOD: KELLOGG CO

Key company facts

Battle Creek, MI, USA

PACKAGED FOOD: KELLOGG CO

Hits to North American sales hurt Kellogg in 2010

12,000 Total revenue US$ mn

1,000 Net income US$ mn

9,500 2006 2007 2008 2009 2010

PACKAGED FOOD: KELLOGG CO

Healthier biscuits offer ray of hope for Kellogg

North America Snacks International Cereal

PACKAGED FOOD: KELLOGG CO

Return to growth in Q3 but capital expenditure hits profits

Net sales US$ mn

0 North America Europe Latin America Asia Pacific

PACKAGED FOOD: KELLOGG CO

High debt levels

PACKAGED FOOD: KELLOGG CO

Kellogg: Investment needed to exploit opportunities

PACKAGED FOOD: KELLOGG CO

Kellogg struggles in 2010

PACKAGED FOOD: KELLOGG CO

Kellogg hit by price war but moves up rankings

Danone, Groupe Kellogg Co

General Mills Inc Ferrero Group Grupo Bimbo SAB de CV

PACKAGED FOOD: KELLOGG CO

Emerging markets engine for packaged food growth

PACKAGED FOOD: KELLOGG CO

Kellogg still reliant on North American market

PACKAGED FOOD: KELLOGG CO

Acquisitions help drive growth over review period

Absolute value growth 2006-2010 US$ mn

PACKAGED FOOD: KELLOGG CO

Strong presence in breakfast cereals and snack bars

PACKAGED FOOD: KELLOGG CO

Kellogg faces market maturity and private label threats

PACKAGED FOOD: KELLOGG CO

Kellogg leader in most dynamic muesli markets

PACKAGED FOOD: KELLOGG CO

Kellogg missing out in hot cereals

PACKAGED FOOD: KELLOGG CO

Unit price growth to return in US market

PACKAGED FOOD: KELLOGG CO

Children's breakfast cereals: Opportunities in emerging markets

PACKAGED FOOD: KELLOGG CO

Breakfast cereals landscape likely to change if Post is sold

PACKAGED FOOD: KELLOGG CO

Granola/muesli to lead snack bars

Other Snack Bars

Energy and Nutrition Bars

PACKAGED FOOD: KELLOGG CO

Expansion in granola/muesli bars a priority

Absolute value growth 2011-2016 US$ mn

Kellogg % company share 2010

PACKAGED FOOD: KELLOGG CO

Follow Clif Bar example in energy and nutrition bars

PACKAGED FOOD: KELLOGG CO

Criticism of nutritional content hits fruit bars