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Is Kellogg Still A Buy?

July 23, 2014 | About:
Suravi Thacker

Suravi Thacker

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Marketing is a very important weapon for a company and Kellogg (K), the provider of convenience food, has rightly used it. A product which is not properly marketed does not reach the customers’ eyes. Kellogg’s strong marketing initiatives for its newly acquired Pringles business worked wonders in its first quarter results. Although its numbers were mixed, it overwhelmed its investors.

By the numbers

Because of severe winters which hampered store traffic, revenue dropped 3% to $3.74 billion. However, new varieties like chocolate filled cereals set the breakfast market in the U.S. on fire, helping Kellogg offset weakness in traffic.

Additionally, Kellogg’s buyout of the Pringles snacks business made the acquirer attain a strong position in the snacks market, second only to PepsiCo’s (PEP) Frito-Lay chips. PepsiCo enjoys the leading position in the segment due to its innovation. Its strategy of offering flavors as per the taste of the consumers in the region has enabled PepsiCo to win customers’ hearts. For example, PepsiCo’s seafood flavors for the Chinese buyers have been quite successful.

Pringles contributed largely to Kellogg’s revenue mainly owing to its promotional strategies implemented. It improved on Pringles’ distribution network and made the products available in the supermarkets and dollar stores where customers are quite frequent. It also tried to improve on the method of displaying its products in order to attract customers.

Despite increased advertising on new products the company managed its costs efficiently, leading to a 32% surge in earnings to $311 million, over last year. This was mainly owing to its cost cutting measures which brought some relief. It eliminated 7% of its workforce, or 2,000 jobs, in order to curb costs.

The Positives

Kellogg’s acquisition of Pringles was indeed a crucial one. It not only helped the company witness a great quarter, but also provided great opportunities. Pringles’ strong market presence and a wide geographical footprint helped the acquirer fetch huge overseas revenue. Its international segment posted a whopping 2.3% jump in sales mainly because of Pringles’ foreign operations. This will give Kellogg more exposure to the emerging markets, which have huge demand.

Also, the food retailer is planning to increase Pringles’ production in order to meet the growing demand and provide stiff competition to PepsiCo’s Frito-Lay. However, there are no new products on the cards.

Along with strengthening of its existing products, the breakfast and snack provider has some other great plans too. It has recently entered into a joint venture with an agribusiness group called Wilmar International Ltd, which will expand its footprint in China and make its supply chain more efficient.

Conclusive Thoughts

Kellogg has made a smart way out of the problem of increasing commodity prices. It not only raised product prices, but also lured the customers towards its products. The company’s acquisition is expected to go a long way with further expansion on the cards. Moreover, Kellogg’s new venture in China will be an opportunity for the company to expand its recently acquired Pringles offerings in the growing market of China. All these factors, coupled with a growing international segment make this company quite attractive.


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