Company Analysis: Kellogg - Essay Example

?Executive Summary Kellogg is one of the three big companies who offer cereals as their main product offering. The other two are Kraft and General Mills (Kellogg). All the mentioned companies are under immense competitive pressure due to tough economic pressure. Moreover, all these companies have a very strong product portfolio which is making them each other’s stiff rivals. The undergoing economic pressure is leading to higher cost of production, shrinking of margins and withdrawal on consumers from the market. Since the cost of core ingredients is fluctuating more than frequently, it is becoming tremendously difficult to price a product and pass the cost of production to consumers. The entire range of core ingredients like wheat, grain, maze, pulses and especially oil are becoming expensive day by day leading to difficulty in planning operations. However, all these companies are work very hard to stay in the game during these tough economic times, and enjoy which this economic downturn ends. Since, one of the requirements of this report is to come up with a product that is consistent with the company’s culture of innovation and quality. Therefore, the proposed product is in the ready to drink category and the product would be named as “Canoffee” and would target generation X (24-37 years old) and generation Y teen & adults (13-24). This product would cater the need to take a stimulating drink in the morning and one in the evening. This product will act as a Star in the company’s maturing product portfolio. Not only would that it give the company a first mover’s advantage in this category, because not else is having a product belonging to this category. This product would reinforce the company’s image of innovation and quality. Also the product features are such that they would appeal to the youth, who are the most promising customers of the company in the future and who would spend when the economic crisis would end. Company Analysis: Kellogg is the world’s leading producer of cereal and convenience food items. The company distributes its products in more than 180 countries. Some of the most highly recognizable brands offered by Kellogg’s are as follows: Keebler Pop-Tarts Eggo and Rice Krispies As of FY 2010, the company generated 68% percent of its revenues in North America, 18% in Europe, 7% in Latin America, and the remainder in the Asia Pacific region. Around 68% of the company’s sales come from North American (Kellogg, 2011). Market Overview: Today, Kellogg faces the most difficult operating environment, encompassing challenges that are unprecedented for the company. Among the challenges confronted by Kellogg are Rapidly rising prices for key ingredients like cereals, snack foods, corn and wheat. Rising energy prices have raised the production cost. This in effect is leading towards the squeezing of margins High input prices are also being experienced after the initial production of products. The cost of transportation and delivery to Kellogg's distribution centers is also rising dramatically. Intense competition from General Mills and Kraft in the company’s core U.S. market. A slowdown in consumer spending, as a result of continuing economic crisis in American and other parts of the world is leading towards drying up of sales of the company’s products. Kellogg's business is divided into two operating segments: Kellogg North America and Kellogg International. The company's North American division is subdivided according to “product type” for instance cereal (24% of 2010 total sales), snacks (33%), and frozen and specialty categories (11%). Kellogg International generates around 32% of sales and consists of three regional operating segments: Europe (18%), Latin America (7%) and Asia Pacific (7%). Due to rising food price, factors of production like energy and above all the world recession (U.S being the epicenter of the economic crisis), the U.S. market is experiencing a drop in consumer spending from where Kellogg generates the bulk of its sales. The company buys large number of agricultural commodities like corn products, cocoa, wheat and other products. As prices of these products particularly the products used in making of products would impact the profitability of the company. Production cost for Kellogg also depends on the prices of plastic, paper and printing. Since, packaging cost mostly depends on these three variables and packaging cost later on goes on to affect the cost of production. Kellogg is worst hit by the fluctuation of oil prices, because it has a door to door delivery system which is affected heavily by a rise in the prices of oil. Under such circumstances in order to remain competitive Kellogg has to pass on this cost on to consumers. But in a deteriorating economic environment where consumer are forced to curtail their consumption and spend whether they like it or not, Kellogg is losing out on its probable customers through this unfortunate price increase. Although, Kellogg has used future contracts to protect them from price fluctuation but the environment is proving to be so uncertain that future contracts are also becoming a risky proposition. Since the cost is rising all time, competitors of Kellogg like General Mills and Kraft have raised their prices and if Kellogg’s has to remain in the industry it has to increase its prices as well. Although, as a consumer staples food business, Kellogg is somewhat insulated for a slowdown in consumer spending because people continue to eat during recession. And since consumers are on a strict budget this means that they would be having most of their meals at home so this means Kellogg’s product portfolio can be of service to them. SWOT Analysis: Strengths: The company has strong brand equity, since it has been in operations for nearly a centenary. Therefore it is important for the company to make use of its brand image while introducing the new product in the market. Over the period of time company has developed a strong tradition for innovation, uniqueness and high quality products. The company has a very reputable and strong management team. The chairmen of the board served a commerce minister in the regime of President George W. Bush. Kellogg avoids dependence on suppliers by maintaining a diversified pool of suppliers. The company has manufacturing plants in 17 countries. This enables it to lower its cost of distribution and most importantly the company insulates itself from the peculiar environment of any one country. The company is an employee-oriented organization and therefore believes in employee growth. They firmly believe that employee growth will ultimately lead to the growth of the organization. The company is sound financially and is insulated from recessionary effects, due to its line of business. Kellogg is leading in terms of market share, when talking about United States cereal market. In this market where companies like General Mills and Kraft are operating, it is a big victory for the company. Weakness: The company is operating in an uncertain environment where raw material prices are fluctuating all the time and costing is becoming very laborious. Frequent price changes are faced with customer resentments, while one time price increase makes company product prices less competitive. Also, the company is forced to pass on cost increase to consumers; under wise the depleted margin won’t allow sustained production. The company is highly dependent on oil prices, because of is door to door delivery system. Target customers are from different demographic region, who desire different sort of attention to details. Opportunities: Recession has forced people to eat at home. This raises the opportunity for convenience food. Asian markets present a viable new market for the company. Since the region has started taking health issues seriously, there is an opportunity for introducing company’s products in these markets. Awareness spread by various agencies regarding the importance of breakfast is all providing an opportunity to attract customers towards its product ranges. The company can reach out to new global communities through its existing distribution facilities. Health conscious is a rapidly spreading phenomenon these days. And the company is an important player of this sort of industry. Threats: The company is operating among competitors who are bigger, financially sound and well diversified in their product range than Kellogg. Consumers are demanding tastier cereals in their breakfast. Eco-friendly packaging is leading the company to buy costly packaging material. Private labeled brands are also starting to emerge in the cereals market. Such brands are offered by large retail chains. The biggest market of the company is United States which is under the pressure of recession, therefore the country is experiencing a suppression of demand that is hurting Kellogg. Bargaining power of suppliers of this industry is high. This leads Kellogg to go to the futures market to purchase raw material. In case the demand at the time when the future contract matures is not same than the company would be holding on to large quantity of inventory which brings with it inventory holding cost, spoilage and theft. Since the aisles of the superstores are cluttered with cereals, it becomes difficult to differentiate two similar products. Moreover, the bargaining power of the customers of this industry is also high, along with threat of substitutes (anything that can be eaten in breakfast is a viable replacement for this product). New Product Idea: Canoffee implies coffee in a can which is relatively a new concept in the World. In the past few years because of changes in lifestyle and western influence, the trend of drinking coffee has increased. Based on this concept is the RTD that is ready to drink beverage category. Canoffee will be a part of RTD beverage that will cater to upper middle and upper class young adults aged between 18 and 30 years. Consumer Analysis As mentioned that the taste for coffee in many countries around the world is acquired. Cafe culture and youth oriented restaurants have played a vital role in increasing the consumption and developing the taste of coffee among relatively affluent generation X (24 to 37 years old) and generation Y teen & adults (13 to 24 years). Changing of values has become very common because of the increased exposure to western culture and media have made coffee consumers. These consumers can be classified as either being loyalist with greater ‘options’ at their disposal, the coffee drinkers tend to seek value from products they usually buy not mere satisfaction. RTD’s are usually associated with the young and active lifestyle approach. Introducing coffee in cans shouldn’t be a new concept to the prospective customers. However for some customers this would involve attitude and change towards canned cold coffee. Target Market for Canoffee Canoffee’s target market includes the young adults (male and female) aged b/w 18-30 years, school, college and university graduates, post graduates ,bachelors, engaged or young married having disposable income, living in the major urban metropolitan areas. These individuals are ambitious, broadminded, imaginative, independent outdoor enthusiasts , fun seeking, brand conscious people belonging to upper middle and upper social class who spend their free time either going out with friends, or reading newspapers and magazines, watching television and movies ,listening to radio channels or simply enjoy internet surfing. Their purchases are backed by terminal values such as freedom, living an exciting, prosperous, enjoyable life, social recognition and true friendship. Defining the Positioning Statement Canoffee is positioned to be a product differentiator in RTD canned coffee category. It is a ‘social’ drink that aims to provide its target audience with convenience, better taste and a more upscale image at an affordable rate. Analysis: As mentioned before, Canoffee will be a cold coffee in cans. It is thus vital to create a strong image of the product in the minds of consumers. Canoffee will be in direct competition with other beverages so I decided to position the product keeping in view the competitors position in marketplace. Since there is no brand recognition other than that of the parent company Kellogg, which will be leveraged to develop a brand identity and a corresponding image in the minds of the prospective consumers of this product. Marketing Mix: Price Pricing Objectives: Our pricing objective is to increase the sales volume during the first year of launch and in this way increase the market share in RTD beverage category. Pricing Method: The competitive indexing method (market based pricing) will be used for setting prices below the level of our main competitors in the Ready to drink category. Pricing Strategy: An analysis of the competitors revealed that imported cans in this category range between $1 and $2. Keeping in view the brand image and identity and the social class we are catering, I have determined the price of the can for the consumers to be one dollar and five cents. Marketing Mix: Distribution The distribution of the canned cold coffee will be expanded in two phases. During the initial phase of the product it will be distributed through our existing distribution capabilities. In the second phases however the distribution will be expanded to Top 1000 stores of the world on the basis of sales data, using competent distributors. Promotion Strategy: The promotional strategy of the company will utilize different marketing channels like online and on air advertising, direct selling, social media marketing, and word of mouth. This would allow Kellogg to tap into the benefits of theses medium of communications or marketing channels. The promotional budget for the marketing campaign of this product would increase with the passage of time and would be based of percentage of sales strategy. The marketing budget would be revised quarterly, and management would recommend the marketing and promotional budget of each marketing channel. Thus, any marketing channel which proves to be unproductive, the management would discard it from the plan. In this way, the overall promotional activities would become more productive. The main idea of the company is to increase customer awareness in the initial periods of the business and to make the customer aware about the offering of the company. Company will also make use of direct selling and direct marketing, using the services of opinion leaders and celebrities. The selection criterion of a celebrity is very simple that the celebrity’s image should be compatible with the personality traits of the target market. Competitor Analysis: This action of Kellogg’s would be very damaging for the competitors because all of these companies have a waste rang of ready to eat meals, but none of them has a product that can be classified as ready to drink. So if Kellogg introduces this product, it would have a “First Movers Advantage”. Not only that the company would disrupt the dynamics of the market. It would shift the competitive swing in its direction. Also more importantly this product will make the company to seek new suppliers of ingredients like milk, sugar, and caffeine. This product will come out in the market as a star product having brand equity leverage by a strong parent brand of Kellogg. Financial Forecasting: Assumptions: Cost of Goods Sold is 35% of the total value of sales for each year. Percentage of sales method is employed over here. Company growth rate is expected to be 6%. Product sales growth rate is estimated to be 15% Number of units sold in the first month is 30,000 The growth rate of product is therefore 15% * 6% Sales Forecasting YEAR 1 YEAR 2 YEAR 3 Units 360,000 438840 534,946 Cost of Goods sold 252,000 267,120 283,147 Revenue 720,000 763,200 808,992 Income Statement YEAR 1 YEAR 2 YEAR 3 REVENUE 720,000 763,200 808,992 Total Revenue 720,000 763,200 808,992 Less COGS Gold 252,000 267,120 283,147 Total COGS 252,000 267,120 283,147 Operating Profit 468,000 496,080 525,845 EXPENSES SALARIES EXPENSE Lower level) 449280 449,280 449,280 SALARIES EXPENSE (Managerial Level) Marketing and promotional expense 25000 28,750 33,063 DEPRECIATION EXPENSE - Other assets 6,000 6,000 6,000 DEPRECIATION EXPENSE (Machinery) 5,000 5,000 5,000 TOTAL EXPENSES 485,280 489,030 493,343 Net Income (17,280) 7,050 32,502 The net income shows that the company would be at loss in the first year. However in the second year, the company would be able to generate profits. Also with the passage of time the sales as well as the profitability of the company would increase. Therefore considering the low breakeven period of the product, Kellogs should introduce the product in the market considering the financial benefits of the company. References and Bibliography Zenker, S & Martin, N 2011, ‘Measuring success in place marketing and branding,’ Place Branding and Public Diplomacy, vol. 7, pp. 32-41. Parolini, C 1999, The value net: A tool for competitive strategy, Wiley, New York. East, R, Vanhuele, M, & Wright, M 2008, Consumer Behaviour: Application in Marketing, The Cromwell Press Ltd, Trowbridge, Wiltshire, Great Britain. Kotler, P 2009. Marketing Management. Pearson: Prentice-Hall. Lehmann, R 1985, Market Research and Analysis, R.D. Irwin, Columbia University. Smith, K, Grimm, M, & Gannon, J 1992, Dynamics of competitive strategy, Sage Publications, Thousand Oaks, CA, US. Mason, C 2001, ‘What do Investors Look for in a Business Plan?’, International Small Business Journal. Available from: [accessed 04 December 2011] McKeever, M 2008, How to write a business plan, Nolo, California Abrams, R, & Kleiner, E 2003, The successful business plan: secrets & strategies, The Planning Shop, Canada. Kellogg. (2011). Kellogg Company Annual Report 2011. Available from http://files.shareholder.com/downloads/K/1769219924x0x548009/3650aec1-4f99-4cf1-9e76-83052a80eb0f/KELLOGG_11AR.pdf [Accessed 1 April 2012] Kellogg. Our History. Available from http://www.kelloggcompany.com/company.aspx?id=39 [Accessed 1 April 2012] Read More