Alexandra Bimonte, Sean Hastings, Jessica Homesley, Carolyn Urbis,
and Mary Wynn
International Marketing, BUS-421
Dr. Robert L. Underwood
December 6, 2011
International Marketing: Global Operations of the Kellogg’s Company
I.Introduction and Global Operations Overview The History of the Kellogg’s Company The Kellogg’s Company was brought into existence by Will Keith Kellogg, who began making cereal as a career in the 1890s when he partnered with his brother Dr. John Harvey Kellogg, who was then working on creating food for patients of the Sanitarium in Battle Creek, MI. What resulted was the birth of the infamous corn flake, and thus the ready-to-eat cereal industry was born. On February 19, 1906, with 44 employees, W.K. Kellogg began the Battle Creek Toasted Corn Flake Company to offer the product to the public and begin mass production of Kellogg’s Toasted Corn Flakes. This cereal stood out from the competition, due to the unique corn flake concept which was made with malt. Success was instantaneous and is still evidenced today as it remains one of Kellogg’s most popular cereals(Kellogg Company, 2011).
In 1922, the company became known as the Kellogg’s Company, with its headquarters located in the town where the original cornflake was born, Battle Creek, Michigan. In 1916 Kellogg's All-Bran was introduced, and Kellogg's Rice Krispies were brought into the market in 1928. In 1914, W.K. Kellogg saw potential in international markets and the company began selling Kellogg's Corn Flakes in Canada. Manufacturing facilities were later built overseas with a plant in Sydney, Australia in 1924 and one in Manchester, England in 1938. Now, Kellogg’s has a presence in more than 180 countries and manufactures its products in 18 countries. In 2010, Kellogg’s reached sales of almost $12 billion worldwide while remaining a leader in many product categories. John A. Bryant (President and CEO) and Jim Jenness (Chairman of the Board) stated in Kellogg’s 2010 Annual Report, “We believe that our global presence makes us a stronger company. Having a broad geographic footprint enables us to leverage our successes and transfer knowledge from one region to another” (Kellogg Company, 2010: 7).
Industries and Products
Kellogg’s is known for the manufacturing and marketing of ready-to-eat cereals and other convenience food such as cookies, crackers, toaster pastries, cereal bars, fruit snacks, frozen waffles, veggie foods, party mixes, chips, syrup, and pancakes. Kellogg’s sells a wide breadth of products such as herb season stuffing (Croutettes), cereal bars (Froot Loops), toaster pastries (Pop-Tarts), frozen waffles and pancakes (Eggo), protein water and shakes (K2O), meat and egg alternatives (Morningstar). Typically, most products are sold under the Kellogg’s name, though the firm also maintains such well-known brands as “Keebler®,Pop-Tarts®,Eggo®,Cheez-It®,All-Bran®, Mini-Wheats®,Nutri-Grain®,Rice Krispies®,Special K®,Chips Deluxe®,Famous Amos®,Sandies®,Austin®, Club®, Murray®, Kashi®, Bear Naked®, Morningstar Farms®,Gardenburger®and Stretch Island®, Town House®, Fudge Shoppe®, Keebler®, Sunshine®, Sandies®, Frosted Flakes®, Pops®, Fiber Plus®, All- Bran®, Wheatables®, Corn Flakes®, El Fudge®, Apple Jacks®, Go Lean®, Chips Deluxe®, Fruit Loops®, Muslix®, Frosties®, Extra®, Be Natural®, Zucaritas®, Crunch Nut®, and Chocos®” (Kellogg Company, 2010: 1). The image below lists all of Kellogg’s Brands.
Image 1: Illustration of all Kellogg’s Brands
(Kellogg’s Annual Report 2010)
Kellogg’s maintains a global presence and operates in four geographic segments, including North America, Europe, Latin America, and Asia-Pacific. Kellogg’s products are marketed in 180 countries, are manufactured in 18 countries, and have over 50 manufacturing facilities across the globe.Most products are sold through a direct sales force, in which products are sold to grocers who then sell then products to consumers. Also DSD, a direct store-door delivery system, is used among various other distribution methods (Kellogg Company, 2010: 1).
Internationally, the firm’s products vary slightly in name and packaging design, but many serve as parallels between the commonly known cereals sold in the United States. Several countries and their respective unique products are listed below.
Latin America: Zucaritas, Choco Zucaritas, Crusli, Sucrilhos, Vector, Musli, NutriDia, and ChocoKrispis (cereals) and Kaos (snack food).
Canada: Vive and Vector (cereals).
Europe: Coco Pops, Chocos, Frosties, Fruit’nFibre, Kellogg’s Crunchy Nut Corn Flakes, Honey Loops, Kellogg’s Extra, Sustain, Muslix, CountryStore, Ricicles, Smacks, Start, Pops, Optima, Tresor(cereals), and Fruit Winders (fruit snacks in the U.K.).
Asia and Australia: Cerola, Sultana Bran, Chex, Frosties, Goldies, Rice Bubbles, NutriGrain, Kellogg’s Iron Man Food, BeBig (cereals)and Rice Bubbles, Day Dawn, and Sunibrite (convenience foods) (Kellogg Company, 2010: 2)
Image 2: International Translations of “Snack, Crackle, Pop.”
(Kellogg Company Annual Report, 2010)
Rice Crispies remains today as one of the most well-known cereals manufactured by the firm. The catchy slogan of “Snap, Crackle, Pop” in the United States, is translated into other languages where this cereal is sold. For example, in Sweden the trademark slogan is translanted as “Piff! Paff! Puff!”, while in Germany it is known by “Knisper! Knasper! Knusper!” Both the slogan and the product of Rice Crispies have expanded globally (Kellogg Company, 2010: 5).
Images 2 and 3 were contained in Kellogg’s 2010 Annual Report, and give graphic representations of Kellogg’s global impact.
Image 4: Kellogg’s- a leader in Global Cereal Sales(Kellogg Company Annual Report, 2010: 4)
Kellogg’s Mission and Values The Kellogg’s Company prides itself on the high value of its products, as well as its culture and business practices. The firm has six clearly defined values that are incorporated into all facets of running the company, and all promote the larger goal of corporate sustainability. These six values, as the company describes, include integrity, accountability, passion, humility, simplicity, and results. To demonstrate just how important such values are to this company, in 2005 the W.K. Kellogg Values Award program was initiated, an honor that is bestowed upon one team and one individual who best upholds the previous values in their work. Integrity at Kellogg’s consists of being respectful of differences, being both positive and supportive toward colleagues, all while maintaining positive attitudes and being committed to integrity and ethical behaviors. Accountability encompasses taking responsibility and not making excuses, as well as actively discussing and supporting decision making processes. Being committed to success for all, keeping promises, and making sure safety and health are a top priority are also included. Being passionate involves taking pride in all aspects of The Kellogg’s Company, providing the best customer service, and promoting the company reputation while also being innovative. Humility is defined as the desire to learn and incorporates learning from past experiences, receiving and giving honest feedback, and being able to adapt and manage competition. Simplicity dictates that there needs to be direct lines of communication and that barriers across the organization should be avoided. Results equates to success, and this includes celebration when desired results are achieved by all employees, a philosophywhich leads to having employees feel both valued and appreciated (Kellogg Company: Our Values, 2011).
Each year Kellogg’s highlights its goals and plans in its Corporate Responsibility Report. This initiative began in 2008and serves to intertwine the marketplace, workplace, environment, and community ambition. Becoming an improved “corporate citizen” is at the center of the initiatives that Kellogg’s prides itself on. Improving nutrition, refining supply chain standards, reducing environmental waste, sponsoring food donation programs, working with non-profits like the United Way, increasing health and wellness among employees, and increasing workplace diversity, all support the legacy that W.K. Kellogg initiated (Kellogg Corporate Responsibility Report, 2011).
International Sales Total and Sales by Region 2010 international net sales for Kellogg’s, as the firm describes, were “flat” compared to the net sales of 2009. The net sales total in 2010 was $3.9 billionin comparison to the total international sales of $4.07 billion earned in 2009 (Kellogg Company 10-K, 2011). Europe experienced net sales of $2.2 billion in 2010, also representing a decline from 2009. Kellogg’s business in 2010 was operating in an inflationary environment in the United Kingdom and experienced difficulty in comparing their numbers from 2010 to that of 2009. Kellogg’s recently announced price increases in the UK, which are expected to offset inflation and help to fuel sales growth. Net sales in Latin America in 2010 were $923 milliona figure largely driven by the re-launch of healthy products such as Special K in the region. Sales in the firm’s Asia Pacific operating segment, which includes Australia, Asia and South Africa, experienced the most growth overall from 2009 to 2010. In 2010 sales were $842 million, up from $741 million in 2009, and this increase was fueled by strong performances in South Korea and India(Kellogg Company 10-K, 2011).
Prominent Export Markets Kellogg’s manufactures products in 18 countries and sells such products in 180 countries, necessitating the extensive use of exports. The firm’s products are exported around the world, with major export markets including Russia, Australia, the UK, and Korea. As the markets in the U.S. become more and more saturated, these international markets will be crucial to the future success and growth of the company (Kellogg Company- Kellogg around the World, 2011).
Geographic Coverage One of Kellogg’s major strengths is the firm’s geographic diversity. The wide geographical presence helps alleviate any risk that might be associated in an over-concentration in any one region. The North American market segment was responsible for 67.7% of the firm’s total revenue. Europe follows North America with 17.9%, Latin America at 7.4% and Asia Pacific at 6.7% (Global Data, 2011). This geographical diversification reduces the volatility in earnings and helps spur growth. This broad range of countries in which the firm offers its products also allows for a diverse group of customers to enjoy the firm’s products. One of Kellogg’s greatest opportunities in the future will be the firm’s continued growth and innovation in international markets, thus expanding the firm’s geographic coverage.
Sourcing and Import Markets According to Kellogg’s 2010 Annual Report, the principal ingredients the company utilizes for production and distribution in the United States are “corn grits, wheat and wheat derivatives, oats, rice, cocoa and chocolate, soybeans and soybean derivatives, various fruits, sweeteners, flour, vegetable oils, dairy products, eggs, and other filing ingredients” (Kellogg Company Annual Report, 2011). Kellogg’s has stated that most of the raw materials used in domestic production are primarily purchased from sources inside the United States. Internationally manufactured products contain raw materials and packaging materials as used within the firm’s domestic products, but they primarily import other countries not involved in typical domestic production.
Global Production and Distribution Facilities Kellogg’s products are manufactured in 18 countries around the world. In the United States alone, Kellogg’s has bakeries and plants in California, Georgia, Illinois, Kansas, Kentucky, Michigan, Nebraska, New Jersey, North Carolina, Ohio, Pennsylvania, Tennessee, Utah, and Washington (Kellogg Company 10-K, 2011). Furthermore, Kellogg’s manufactures and sells products within several nations in South America, Asia, Oceania, Europe, Africa, and the Caribbean (Kellogg Company 10-K, 2011).
The Kellogg Company has also been making use of a large-scale linear program, known as the Kellogg Planning System, for more than 10 years in order to help with its weekly operations(Russel& Taylor, 2010). KPS assists Kellogg’s in making tactical decisions concerning its operational, production, inventory, and distribution practices. Furthermore, KPS deals with “decisions on budgeting, capacity expansion, capacity reassignment, and other similar issues” (YouSigma, 2008). The primary objective of the system is to minimize the total cost of meeting estimated demand, and due to the great success that Kellogg’s has had with the KPS system in North America, the company has also introduced KPS into the Latin American market and is looking to develop global KPS as well (Anderson, Camm, Martin, Sweeney &Williams, 2009).
Supply Chain Overview Kellogg’s obtains its raw materials from primary suppliers around the world, and because of this, location plays an important role in the company’s manufacturing plants. Kellogg’s locates its manufacturing plants near distribution channels and the firm’s customers so that its products can reach consumers more rapidly (The Times 100, 2009).The large factories maintained by the firm help accommodate large production equipment, as well as the frequent deliveries of raw materials. To help off-set inventory costs, Kellogg’s processes packages that are ready for immediate distribution. Kellogg’s heavily relies on “wholesalers, supermarkets, high street stores and hotels” to sell its products and act as intermediaries (The Times 100, 2009). In the United States, Wal-Mart and its affiliates, accounted for about 21% of Kellogg’s consolidated net sales during 2010 (Kellogg Company, 2010).
Kellogg’s relies on Just-In-Time inventory system to maintain an efficient stocking system, for this type of system helps deter costs, but functions only if the supply chain is working at every part (The Times 100, 2009).In the United Kingdom, Kellogg’s partnered with TDG, a United Kingdom-based supply chain management company, to help store and transport (The Times 100, 2009). Kellogg’s has also collaborated with Kimberly-Clark, through TDG, to cut transportation cost in the United Kingdom. As is described, this “successful three-way collaboration...has reduced miles travelled and CO2 emissions considerably,” and has helped Kellogg’s reduce transportation costs by 7% (TDG, 2011). More importantly, this alliance with TDG allowed Kellogg’s to concentrate on its core competency, manufacturing food products.
However, Kellogg’s supply chain management has not been without its recent issues. In late 2009, Kellogg’s customers in the United States faced a nationwide shortage of Eggo frozen waffles. Kellogg’s claimed this shortage was because of flood damage in an Atlanta factory; but further inspection revealed that the factory was initially shut down for sanitization after inspectors found Listeria (a bacteria that can cause serious infection) in some Eggo products. Consequently, Eggo waffle consumers were left distraught when the normally stocked Eggo shelves had a sign that read, “Eggo Waffles Out of Stock.” At first, Kellogg’s believed this to be a short-term problem: but later, the company wrote on its website that the shortage could possibly last up to 8 months (Hartman, 2009). A Kellogg’s spokeswoman said “[Kellogg’s was] working around the clock to restore Eggo store inventories to normal levels as quickly as possible” (Ferrari, 2011). The Eggo fiasco cost the company nearly $60 million in 2 quarters, the Eggo brand “lost ground to both private label and smaller brands of waffles when supply was disrupted,” and “some shoppers [did not] resume normal buying patterns” (Ferrari, 2011).
Then in 2010, Kellogg’s faced another supply chain breakdown: 28 million boxes of Kellogg’s cereal were recalled after some consumers reported nausea and a “waxy” smell and flavor. Kellogg’s CEO David Mackay admitted at the end of 2010, the company “had had a disappointing year,” and Kellogg’s needed to stabilize “its supply chain” (Best, 2010). In April 2011, because of its many recall and supply chain issues, Kellogg’s hired a new senior vice president, Steven Sterling, to head its global supply chain. Yet on June 15, 2011, a Kellogg plant in Georgia received a letter from the FDA warning the company “about bacteria and substandard production procedures at a food manufacturing plan in Augusta, Georgia” (Dooren&Ziobro, 2011). In the wake of this “black eye for Kellogg,” the company “committed to improving its supply chain in the wake of embarrassing recalls” (Dooren&Ziobro, 2011).
II. The Foreign Currency Marketplace Currency Management and Organizational Impacts Kellogg’s, like most large multinational firms, is subject to significant risk on the basis of foreign currency exchange rate fluctuations. As the firm describes in its financial statements, Kellogg’s maintains assets, incurs liabilities, and generates revenues in a multitude of currencies beyond the American dollar, including the British Pound, euro, Australian dollar, Canadian dollar, Mexican peso, Venezuelan bolivar fuerte, and the Russian ruble. Kellogg’s also makes use of American dollars in its financial reporting, which necessitates that all of the firm’s global revenues, expenses, assets and liabilities be converted into the dollar at the time of reporting based on current exchange rates. Due to this requirement, volatility in exchange rates for the American dollar can cause reported values to be negatively impacted, despite the fact that the actual values of these revenues or assets have not changed in the countries in which they were earned or obtained (Kellogg Company 10-K, 2011: 6).
In 2010, the impacts of exchange rates on Kellogg’s net sales and operating profits varied in each of its global operating segments. From 2009 to 2010, the firm experienced improvements in the foreign currency impacts on net sales in both North America and Asia, with shifts of .6% and .7% respectively. Kellogg’s, however, also experienced negative changes of -2.8% in Europe and -8.9% in Latin America in regards to foreign currency impacts on net sales. Likewise, the firm’s operating profits in Asia and North America were positively impacted by changes in foreign exchange rates between 2009 and 2010, with shifts in total impact of 15.2% and .7% respectively. However, negative changes in regards to operating profits were felt in the company’s remaining segments, with declines of -3.4% in Europe and -12.3% in Latin America. Overall, the impacts of foreign exchange shifts on Kellogg’s worsened in 2010, with a cumulative -.1% change in terms of impact on consolidated net sales, and a -.5% decrease in impact on operating profits (Kellogg Company 10-K, 2011: 13). In terms of the total translational impact of foreign exchange rates on the firm’s earning per share, the firm benefited from a $.04 increase during 2010. While this overall impact was positive, it represents a decline from the $.22 increase the firm enjoyed during 2009. The considerable impacts on profits caused by the fluctuations of exchange rates, primarily in Europe and Latin America, has been cited as one of Kellogg’s weaknesses, as analysts in 2011 indicated that the firm’s inability to hedge currencies caused the firm to be exposed to significant currency risk (Forbes, 2011). In addition to these marked impacts on sales and profits, Kellogg’s has stated that foreign exchange market volatility has made it difficult for the firm to estimate its future earnings in American dollars for predictive purposes (Kellogg Company 10-K, 2011: 17). As of August 2011, however, it appears that Kellogg’s was enjoying relatively positive foreign currency effects, as the firm’s estimated earnings per share are believed to benefit from a $.09 per share increase due to favorable foreign exchange rates (GlobeNewswire, 2011).
In 2010, the impact of foreign exchange fluctuations on company operations was felt primarily in Latin America, and more specifically, in Venezuela. During 2010, the sale of snacks in the company’s Latin American segment experienced a marked decline, primarily caused by a decrease in sales within Venezuela. A portion of the Kellogg’s products sold within the Venezuelan market are imported from Mexico, and in 2010 the firm began to feel the effects of exchange rate controls in Venezuela which significantly increased importation costs (Kellogg 10-K, 2010: 13). In addition, during 2010, the Venezuelan economy was deemed “highly inflationary” by the firm (Kellogg Company 10-K, 2010: 25). Due to this rampant inflation and the impacts of these exchange rate controls on cost, it is likely that the firm will reduce imports into the Venezuelan market, and possibly seek alternative means of introducing products into the country.
As illustrated in Kellogg’s subsidiary in Venezuela, current exchange rates clearly play a large role in the future investment decisions of the firm. Recent tightening of the foreign exchange rate by leader, Hugo Chavez, effectively forced Kellogg to reassess its currency position in the region. After previously utilizing the parallel market of exchange, which was not fixed, Kellogg translated Venezuelan statements using the new exchange rate set by SITME, a policy operated by the Central banks in Venezuela. In mid-2010, the exchange rate became fixed at 5.3 bolivars to one U.S. dollars, which is a currency ratio far below the black market value of an estimated 9 bolivars to the U.S. dollar. The fixed exchange rate came primarily from Chavez’s decision to keep the rate from being subjected to “capitalist speculation” (The Economist, 2010). Import businesses in Venezuela are being squeezed out of the market, just as Kellogg’s has also reported that it is “no longer cost efficient to import goods” (Kellogg Company 10-K, 2010: 14). Fortunately for the snack producer, Venezuela’s production accounts for only 1%-2% of business, and thus the continued negative macroeconomic outlook for the nation should have only minimal effects on Kellogg’s financial status.
In order to cope with the inherent risks of foreign exchange rate fluctuations, the firm indicates that it assess foreign currency risk on the basis of both transactional cash flows and potential translational volatility. To reduce the risks of currency fluctuations both in the short term and long term, the firm enters into contracts, options, and currency swaps. Kellogg’s notes that the total value of its foreign currency derivative instruments as of the beginning of 2011 stood at $1,075 million, though this represents a decline from 2009. As is described by the firm, these derivatives serve as “hedges of anticipated transactions, translational exposure, or existing
assets or liabilities” (Kellogg Company 10-K, 2011: 25).
As Kellogg’s provided the firm’s mid-year 2011 financial report, it remains clear that the source of losses remains in the European geographic sector of the company. Despite the continued struggle to improve sales in the region, Kellogg has improved its foreign currency impact in Europe with gains of 10.2% over the end of the second quarter of 2010 (GlobeNewswire, 2011). Clearly Kellogg’s is using its ability to manage the recent fluctuation of the Euro and pound to its advantage despite poor its poor performance in the European subsidiary. In the other three regions, North America, Asia, and Latin America, Kellogg’s experienced gains over second quarter 2010 in foreign currency impact of .7%, 20.6% and 11.3%, respectively (GlobeNewswire, 2011). The debt crisis in Europe and subsequent bailouts has provided uncertainty and volatility in the foreign exchange market in Europe. By using intelligent foresight of currency fluctuations, Kellogg’s can effectively continue to manage its operations abroad. While Kellogg’s does use derivatives such as cash flow hedges, fair value hedges, and net investment hedges in efforts to eliminate currency fluctuations, it does not profess to involvement in “speculative trading,” which would subject the company to further risk (Kellogg 10-K, 2010: 51).
Kellogg’s uses a “currency-neutral” approach to evaluating the underlying business trends of the firm.This approach allows the firm to assess the currency-neutral EPS value based on the current year’s profit at the end of prior year’s exchange rate. Essentially, this approach allows Kellogg’s to assess the firm’s profits without the impact of the volatile foreign exchange market (Kellogg Company 10-K, 2010). As long as Kellogg’s remains committed to managing foreign currency effectively by monitoring the long-term consequences of its expansion abroad, they should be able to maintain positive figures in foreign currency gains. Kellogg’s should avoid staying too focused on the currency-neutral approach as it moves into new markets and as subsidiaries are subjected to the constantly fluctuating exchange rates against the US dollar. The firm should remain aware of currency regulation changes in countries such as Venezuela, while analyzing the political and macroeconomic factors in order to assess further expansion in the unpredictable currency markets.
Kellogg’s CEO, Ronald Dissenger, has recently mentioned that the “latest estimate indicates $0.09 of benefit on forward rates,” in comparison to swap rates. The nine-cent increase in earnings per share is substantial, and the choice to hedge in forward swaps should result in less exposure to risk and will allow Kellogg’s to lock in exchange rates in nations experiencing large fluctuations in its currency value (Seeking Alpha, 2011). Even though Kellogg’s has been critiqued for its conservative approach to foreign exchange rate decisions, we believe it is in the best interests of the firm to abstain from speculative deals that involve further risk exposure.