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Case study assessment The key objective of the case study questions is to understand the thought process of the candidate. These case studies highlight the ability of the candidate to apply structured thinking to deal with ambiguous and complex business problems, and arrive at logical and intelligent conclusions. Assessment of the candidate should be based on the following: 1. Ability to analyze the situation 2. Identify key business issues 3. Summarize findings and takeaways 4. Outline next steps/ recommendations

Case Study Kellogg's 010212

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Page 1: Case Study Kellogg's 010212

Case study assessment

The key objective of the case study questions is to understand the thought process of the candidate. These case studies highlight the ability of the candidate to apply structured thinking to deal with ambiguous and complex business problems, and arrive at logical and intelligent conclusions.

Assessment of the candidate should be based on the following:

1. Ability to analyze the situation2. Identify key business issues3. Summarize findings and takeaways4. Outline next steps/ recommendations

Page 2: Case Study Kellogg's 010212

Kellogg Company: Customer is the King?

Kellogg Company (Kellogg or ‘the company’) along with its subsidiaries is engaged in the manufacture and marketing of ready-to-eat cereals and convenience foods such as cookies, crackers, toaster pastries, cereal bars, frozen waffles and meat alternatives. These products are manufactured by the company in 18 countries and marketed in more than 180 countries worldwide.

Kellogg operates through four geographic segments: North America, Europe, Latin America and Asia Pacific. The company's cereal products are marketed under the Kellogg's brand, and are sold primarily to the grocery trade through direct sales force.

The company uses broker and distribution arrangements for certain products in less-developed market areas. The company markets cookies, crackers, and other convenience foods, under popular brands such as Kellogg's, Keebler, Cheez-It, Murray, Austin and Famous Amos, to grocery stores in the US through a direct store-door delivery system.

Your client is the cereal division of Kellogg Company and according to the cereal division’s President; traditionally Kellogg's distribution strength has been with grocery stores, which account for the majority of its $1.1 billion cereal sales. But Wal-Mart, a discount chain, has been growing at a healthy rate of almost 15% annually and has become Kellogg's largest customer.

Your client is not sure about how to react to this development, and has asked you for assistance with its distribution strategy.

Wal-Mart: The retail behemoth

Wal-Mart Stores is a US-based retailer, which operates stores in various formats worldwide.

Key product categories

Ready-to-eat cereals

Cookies

Crackers

Toaster pastries

Cereal bars

Frozen waffles

Meat alternatives

Key Kellogg brands

Kellogg's Keebler Kashi

Pop-Tarts Eggo Morningstar Farm

Cheez-It All-Bran Stretch Island

Mini-Wheats Nutri-Grain Bear Naked

Rice Krispies Special K Gardenburger

Chips Deluxe Famous Amos Mother's

Sandies Austin

Club Murray

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The various retail store formats operated by the company include discount stores, supercenters, neighborhood markets and club stores. The company offers branded products as well as private label products across diverse categories which include apparel, health and beauty aids, electronics, toys, lawn and garden items, jewelry, automotive products, home furnishings, hardware, sporting goods, pet supplies, housewares, grocery, entertainment, hardlines, home improvement and many more. It also provides various services such as financial services, photo processing, pharmacy and optical services, floral, tire and battery centers and gasoline stations.

As of October 2011, the company owned 67 retail units in Argentina, followed by Brazil (496), Canada (329), Chile (299), China (352), Costa Rica (194), El Salvador (77), Guatemala (188), Honduras (62), Japan (415), Mexico (1,932), Nicaragua (67), the UK (542), India (9) and Africa (337).

Wal-Mart delivered solid financial performance for fiscal year 2011. Its net sales increased by 3.4% to $419 billion and operating income by 6.4% to more than $25 billion. Its diluted earnings per share from continuing operations rose 12% to $4.18 per share.

The company continued to deliver a stable return on investment of over 19%. It closed out the year with almost $11 billion in free cash flow and returned a record $19.2 billion to shareholders through dividends and share repurchases.

Wal-Mart Stores, Key Ratios

P/E 14.08

Return on Equity (%) 23.91

Debt/Equity (%) 72.75

Operating profit margin (%) 6.05

Dividend Yield 0.02

Note: Above ratios are based on share price as of 06-Dec-2011

With sales totaling $1.032 trillion in 2010, the US grocery store industry includes a range of businesses from grocery stores and convenience stores to large supermarket chains. (S&P Capital IQ’s definition of the industry excludes restaurants and department stores that sell gourmet foods.) Progressive Grocer, a monthly industry publication, reports that approximately 36,149 supermarkets operated in the United States in 2010. These outlets accounted for 16.7% of grocery store units and 54.5% of food item sales by grocery stores. The category includes supercenters and warehouse outlets. Other formats include convenience stores (with

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145,896 units, accounting for 67.6% of all grocery store units and 32.1% of sales), and wholesale clubs (1,219 units, accounting for 0.6% of stores but 11.2% of sales). Other smaller categories account for the balance.

“Grocery stores” generally specialize in food, as well as selling some household goods and over-the-counter pharmaceuticals. “Discount stores”, on the other hand, offer food alongside a wide variety of merchandise, including clothing, home electronics, and house-wares. Discount stores advertise lower prices for a wide variety of foods, particularly staple, nonperishable foods.

Supermarkets are the dominant retail outlets for food sales today. Supermarkets have traditionally been low-margin businesses. Because of this and the growing competition from the new formats described earlier, retailers must spend a great deal of energy improving operational efficiency and profitability.

Food sales by distribution channel ($ millions)

2010 2011 2012 2013 2014

Cash and Carry stores 34,310.3 36,106.2 38,057.7 40,188.4 42,418.8

Convenience Stores 99,048.6 104,058.3 109,545.9 115,508.8 121,752.0

Department Stores 2,009.7 2,100.0 2,187.4 2,290.5 2,395.8

Discount and Variety Stores 2,729.4 2,867.2 2,984.4 3,135.3 3,286.7

Drug Stores 11,822.6 12,556.6 13,148.4 13,937.7 14,728.7

Duty Free Retail 896.5 914.3 936.9 956.6 975.2

Food and Drinks Specialists 15,863.7 14,751.0 13,781.7 12,945.4 12,242.3

Hypermarket 273,847.2 284,417.2 295,711.4 308,221.7 321,126.1

Supermarket 401,157.7 415,868.7 433,287.7 451,009.6 469,376.9

Discounter 42,860.0 44,408.5 46,063.8 47,898.6 49,785.4

Other Retailers 13.6 14.3 15.0 15.8 16.6

Vending 9,952.3 10,366.2 10,668.2 11,102.9 11,525.0

Cereals tend to be the predominant choice of breakfast in the US, UK and Australia. In these countries, the market is highly competitive with higher levels of expenditure on product

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promotions. About 35% of the global cereal product launches in the year 2009 claimed to be functional cereals with health benefits.

The United States constitutes the largest regional market for whole grain and high fiber foods, as stated by the new market research report on Whole Grain and High Fiber Foods. The dominance of the US market is likely to continue, backed by increased adoption of rice, wheat, barley as well as various specialty grains among consumers, nutritionists and dieticians. Europe and Asia-Pacific follow trail as the next major markets. Demand for whole grain and high fiber foods in Asia-Pacific is projected to grow at the overall fastest compound growth rate of 6.0% through 2015. The increasing health orientation among the upper and middle class consumers in the developing regions would drive the urban demand for value-added products.

By product category, Cereals represents one of the largest segments and is poised to grow further over the period. The increasing demand for natural packaged products with ingredients such as fiber and whole grain is expected to fuel the overall demand for baked food.

Key category sales ($ millions)

Segment 2010 2011 2012 2013 2014 2015

Bread & rolls 16885.7 17548.1 18266.4 19045.2 19890 20807.2

Industrial bread and

rolls10248.5 10570.6 10913.6 11278.8 11667.9 12082.4

In-store bakery

2648.2 2784.8 2932.1 3091.1 3263 3448.8

Tortilla 2294.3 2459.7 2644 2849.7 3079.6 3336.9

Artisanal bread &

rolls1694.6 1733.1 1776.8 1825.5 1879.5 1939.2

Breakfast cereals 12339 12805.6 13325.5 13904.6 14550.3 15271.2

Ready-to-eat cereals

10898.4 11348.5 11859.5 12437.9 13090.9 13827.2

Hot cereals 1440.6 1457.2 1466 1466.7 1459.4 1444

Cakes & pastries 10595.6 10811.3 11023.8 11232.6 11437.5 11638

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In-store bakery

5688.9 5819.9 5950.4 6080.3 6209.3 6337.3

Industrial cakes & pastries

4423.3 4498.9 4571.8 4641.7 4708.5 4772

Artisanal cakes & pastries

483.4 492.5 501.6 510.6 519.7 528.8

Morning goods 8375.1 8716.6 9094.4 9511.4 9971 10477

Industrial morning

goods4548.2 4784.8 5039.9 5315.1 5612 5932.8

In-store bakery

2800.6 2835 2879.8 2935.4 3002.5 3081.6

Artisanal morning

goods1026.4 1096.8 1174.7 1260.9 1356.5 1462.5

Cookies 7125.1 7244.4 7377.8 7526 7689.9 7870.4

Chocolate cookies

1723.5 1754.6 1788.1 1824.3 1863.3 1905.2

Butter-based

cookies1311 1342.7 1379 1420 1466.3 1518.2

Cream filled 1078.8 1102.1 1127.2 1154.1 1182.9 1213.7

American cookies

891.3 892.5 894.1 896.3 898.9 902.1

Wafer biscuits

772.1 780.5 789.6 799.5 810.1 821.5

Assortments

603.4 616.4 630.5 645.9 662.6 680.6

Plain cookies

519.2 528.2 539.8 554 571.1 591.3

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Other cookies

190.3 191.2 192.5 194.2 196.2 198.6

In-store bakery

21.6 22.1 22.7 23.2 23.8 24.3

Artisanal cookies

13.9 14 14.2 14.4 14.6 14.9

Egg-based 0.1 0.1 0.1 0.1 0.1 0.1

Crackers 5154.4 5283.2 5430.4 5597.3 5785.4 5996.7

Cheese-flavored crackers

1604.3 1639.2 1677.3 1718.7 1763.7 1812.6

Bread substitutes

1415.5 1466.9 1525.6 1592.2 1667.8 1753.1

Plain crackers

1487.1 1517.2 1552.6 1593.8 1641 1694.8

Other crackers

647.4 659.9 675 692.5 712.9 736.2

Confectionery

Chocolate17327.7 17664.1 18006 18352.3 18703.5 19059.6

Sugar confectionery 10176 10451.3 10742.6 11055.6 11390.8 11749.8

Gum3915 4126.4 4358.8 4621.2 4917.4 5251.7

Cereal bars3273 3406.3 3539.5 3672.8 3807.4 3942.8

Kellogg’s marketing department has shared the following information on sales and volume for its top five distributors with you.

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Sales ($ millions) 2007 2009 2011 5-year CAGR

Wal-Mart 142 162 246 14.7%

Big Joe’s 157 185 200 6.2%

D Mart 143 175 189 7.2%

The Grocer 101 109 153 10.9%

ShopMart 57 62 67 4.1%

Total top 5 600 693 856 9.3%

Total all distributors 1000 1079 1150 3.6%

Volume (million boxes) 2007 2009 2011 5-year CAGR

Wal-Mart 65 74 113 14.7%

Big Joe’s 72 81 85 4.2%

D Mart 65 77 80 5.3%

The Grocer 46 47 64 8.6%

ShopMart 26 27 28 1.9%

Total top 5 274 307 370 7.8%

Total all distributors 450 468 487 2.0%

Private label products have not only emerged as a valuable tool for retailers to deliver solid quality at substantial savings, but particularly critical for many consumers in a down economy. Private label products remain, on average 29% lower priced than national brands. Remove that price advantage, however, and dollar and unit share could plummet. In fact, this shrinking price gap very likely contributed to some of the private label share losses experienced during the past year. Going forward, private label products are subject to the same commodity price increase pressures as national brands. Establishing and maintaining effective pricing and promotion strategies should be on the top of the list of every CPG marketer in the marketplace today.

While retailers across channels are working to strengthen their private label programs, performance at the channel level varies rather markedly. Today, private label share is largest within the grocery channel, but, within the grocery channel, private label share of sales slid 0.6 points during the past year. Still, grocers are working hard to continue to strengthen and grow their private label programs and to maximize the return on investment on these efforts.

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Consumer product manufacturers can no longer ignore or take an entirely adversarial stance against private label offerings. They must carefully consider specific dynamics within relevant product categories, changing consumer behavior, and retailers’ strategy and position in order to devise appropriate responses to private label. They may even discover that private label may not constitute a threat in all cases. In some categories and for some CPG manufacturers, there will be interesting opportunities to explore together with retail partners.

You were provided a breakdown of Wal-Mart cereal sales for the four largest competitors as below to further aid your understanding of the business situation.

2007 2009 20110%

10%20%30%40%50%60%70%80%90%

100%

10.3% 10.9% 11.1%

31.0% 29.7% 27.1%

29.2% 30.0% 32.8%

29.5% 29.4% 29.0%

Private label Tasty Treats Co. CeReal Co. Kellogg Co.

In your interactions with the clients purchase, sales and marketing professionals you found out some facts about the industry and the competitors:

1. After nearly half a decade of aggressive pricing and lower industry margins, the cereal companies have refrained from price competition within the same channel.

2. Because food retail is low-margin businesses, controlling costs is critical. In both industries, the difference between strong and weak players may be decided by a mere 1% difference in net margins. Even the best managed supermarkets and grocery stores and drugstore must pay more than half in product costs for every dollar of their sales. Given the significance of product costs for a retailer, sharp changes in food inflation or drug inflation can have a significant impact on a company’s profitability. The quest for lower product costs has spurred a wave of industry consolidation, as supermarket and drug operators seek to increase their purchasing power over suppliers.

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3. On the retail side, there exists strong competition between the players and on an average retail margins for discounters remains wafer-thin at 2%. Additionally, increase in input costs continue to pressure cereal manufacturers who have now been passing on this cost in the way of higher prices. The World Bank has given a stark warning of the impact of the rising cost of food, saying an estimated 44 million people had been pushed into poverty since last summer by soaring commodity prices. According to Robert Zoellick, the Bank's president, food prices have risen by almost 30% in the past year and were within striking distance of the record levels reached during 2008. The World Bank expects higher input costs to push up retail prices at the current level by a CAGR of 15% until 2015.

4. Visits to Wal-Mart indicate that each national brand company holds 30% of the shelf space, while private label have 10%.

5. Cereal Co. brands tend to be placed lower on the shelf than your client's products. (The lower shelf placement could be especially important to children who are looking at the different types of cereals).

6. Some Cereal Co. brands have sales promotion tags, and the team notes that store flyers advertise specials on Cereal Co. brands for Wal-Mart customer cardholders.

7. During earlier discussions with Wal-Mart, you discovered that your client's

competitors have 50 sales representatives dedicated to the Wal-Mart account. Your client has seven.

To better understand consumer behavior for this engagement, you have been provided with insights on the customer behavior.

1. Approximately 60% of buyers go straight to one cereal and grab it. We can call this group the "brand-loyal" shoppers. Another 40% of shoppers look at all the cereals and then select one that interests them. Let's call this group the "impulse" buyers.

2. Research indicates that consumers are not price-sensitive and are extremely loyal to their preferred brand. But when the preferred cereal is unavailable, the brand-loyal customers will purchase discounted cereals approximately 35% of the time.

3. In 25% of loyal cases, the customer walks away without purchasing any cereal at all. In the remaining 40% of cases, the brand-loyal customer will act like an impulse shopper and select another brand.

4. Cereals are distributed from the factory to the distributor's warehouse twice monthly. The retailer then stocks the shelves itself.

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5. In-store investigations reveal that Wal-Mart stores averaged 15% of sugar cereal brands out-of-stock, across all brands.

Other information

US breakfast cereals market analysis

The US breakfast cereals market grew at a steady rate during the period 2006-2010, as a result of steady sales growth in the ready-to-eat cereals category. Although the overall market growth is expected to accelerate in the forecast period, the annual rate of growth is set to fall from a high of 3.6% in 2014 to a low of 3.3% in 2015.

The US breakfast cereals market generated total revenues of $12.3 billion in 2010, representing a compound annual growth rate (CAGR) of 3.1% for the period spanning 2006-2010. In comparison, the European and Asia-Pacific markets grew with CAGRs of 2.6% and 5.7% respectively, over the same period, to reach respective values of $7.7 billion and $2.6 billion in 2010.

Market consumption volumes increased with a CAGR of 1.5% between 2006 and 2010, to reach a total of 1.5 billion kg in 2010. The market's volume is expected to rise to 1.7 billion kg by the end of 2015, representing a CAGR of 1.7% for the 2010-2015 period. Ready-to-eat cereals sales proved the most lucrative for the US breakfast cereals market in 2010, generating total revenues of $10.9 billion, equivalent to 88.3% of the market's overall value. In comparison, sales of hot cereals generated revenues of $1.4 billion in 2010, equating to 11.7% of the market's aggregate revenues.

The performance of the market is forecast to accelerate, with an anticipated CAGR of 3.5% for the five year period 2010-2015, which is expected to drive the market to a value of $14.6 billion by the end of 2015. Comparatively, the European and Asia-Pacific markets will grow with CAGRs of 3.3% and 5.8% respectively, over the same period, to reach respective values of $9.1 billion and $3.4 billion in 2015.

Competitive Landscape

The US breakfast cereals market is concentrated with top three players accounting for 75% of the total market value. The US breakfast cereals market has the presence of leading players like Kellogg’s, General Mills and Ralcorp Holdings. The US breakfast cereals market is dominated by Kellogg's, with a share of 31% in terms of value. Supermarkets/hypermarkets are the predominant buyers. Substitutes are numerous, and can be from a multitude of food types, depending on consumer preference. However, the threat of substitutes is considered to be moderate. The presence of strong brands in the US market discourages new entrants.

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Supermarkets/hypermarkets are the predominant buyers in the US breakfast cereals market, accounting for more than 85% of the market. Furthermore, breakfast cereals are just one of many products sold by most retailers, which illustrates that retailers are not reliant on breakfast cereal sales and increases buyer power. End-consumers are likely to display brand loyalty, which will exert a pull-through on retailers as they are forced to stock the most popular brands in order to meet end-consumer demand. This potentially decreases buyer power to an extent. Overall, buyer power is moderate. Suppliers to the breakfast cereals market include farmers and grain traders who grow and trade in wheat, oats and barley crops. These are mostly independent operators with little influence over the market.

However, there are a significant number of further inputs that are necessary for certain brands of cereals. Taking Kellogg's as an example, the company lists its principal ingredients as corn grits, wheat and wheat derivatives, oats, rice, cocoa and chocolate, soybeans and soybean derivatives, various fruits, sweeteners, flour, shortening, dairy products, eggs, and other filling ingredients, which are obtained from a number of different sources. Again, the most common suppliers of these additional inputs are farmers.

A further input is packaging to preserve and protect the products of this market. Manufacturers of carton board, corrugated board, and plastic are key suppliers, as these are the principal packaging materials used in this market. The grade of carton board used for outer-packaging is typically made by using recycled/waste paper or recovered fibers. Due to the number of potential inputs to this market, the relative influence of the supplier on the market varies. Overall, supplier power is moderate. Entry to the market is possible when an existing company diversifies its operations into the production of breakfast cereals, or by the establishment of an entirely new company.

Government regulation requires breakfast cereal product packaging, by law, to display weight of contents, best before date, nutrition information, ingredient listing and allergen statements. Potential players would need industry-specific knowledge within the field of breakfast cereals to meet nutritional guidelines and provide information regarding the contents of the product on the product packaging in compliance with government regulation. Certain brands include a number of additional ingredients and differ in their approach to marketing so that particular niche segments are targeted. It is still possible for a new entrant to achieve relative success in targeting a certain niche segment such as health and fitness orientated cereals. Furthermore, shelf space in retail outlets is finite, and because most cereals are quite bulky items, retailers will be unlikely to substitute known brands for new, unproved ones, which makes it more difficult for new entrants. Overall, there is a moderate threat of new entrants to the US cereals market.

Substitutes to the breakfast cereal market include traditional foods. A typical US breakfast might include eggs, bacon, ham, breakfast sausage, biscuits, toast, pancakes, waffles, bagels, French toast, cornbread, English muffins, and pastries such as croissants, doughnuts, and

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muffins. From the point of view of end consumers, the benefits of substitutes to this market are moderate in many cases. Some breakfast cereals are said to be 'nutrient dense', i.e. while supplying only a modest amount of energy (calories) they make a significant contribution to intakes in nutrients such as vitamins, minerals and fiber. Also, because breakfast cereals are commonly consumed with milk, they help provide a significant proportion of calcium to the diet. Substitute foods may not provide the same nutritional benefit. Overall, there is a moderate threat from substitutes to the US breakfast cereals market.

The US breakfast cereals market is dominated by leading players such as Kellogg's, General Mills, and Ralcorp Holdings. General Mills and Kellogg's dominate the market in value terms, and both have a combined market share of around 60%. Although breakfast cereals are central to the business of companies like Kellogg's, market players have diversified into other categories (e.g. snack bars) and geographical markets, which ease rivalry. In this market, product differentiation is relatively broad depending on the inclusion of a variety of alternative ingredients. Furthermore, players attempt to meet changing consumer demands and they distinguish themselves by appealing to a particular niche segments. Overall, there is a moderate degree of rivalry in the US breakfast cereals market.

Kellogg Company, History

2010: Management Changes The company announced that Mr. John A. Bryant would be appointed as the company's President and Chief Executive Officer.

2010: Product Recall Kellogg Company voluntarily recalled selected packages of Kellogg's Honey Smacks, Kellogg's Froot Loops, Kellogg's Corn Pops and Kellogg's Apple Jacks.

2009: Contracts/Agreements- The company entered into a partnership with Katalyst to confront hunger in the US.

2009: Product Recall- The company announced a voluntary nationwide recall of Keebler soft batch cookies and Special K Protein meal bar honey almond flavor.

2008: Acquisitions/Mergers/Takeovers The company acquired assets of IndyBake Products LLC and Brownie Products Co.

2008: Acquisitions/Mergers/Takeovers- The company acquired assets of the Chinese biscuit manufacturer, Zhenghang Food Company.

2008: Acquisitions/Mergers/Takeovers- The company acquired Australia based natural cereal manufacturer, Specialty Cereals Pty Limited.

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2008: Acquisitions/Mergers/Takeovers- The company acquired the trademarks and recipes of Mother's Cake & Cookie Co., a regional brand.

2008: Acquisitions/Mergers/Takeovers- The Kellogg Company acquired The United Bakers Group (UB), one of Russia’s largest cracker, cookie and breakfast cereal producers.

2007: Acquisitions/Mergers/Takeovers The company completed two separate business acquisitions for a total of approximately USD 123 million to support the continued growth in its North America operating segment.

2007: New Products/Services- The Rice Krispies with Real Strawberries and Kellogg's Nutri-Grain Fruit & Nut bars were introduced by the Kellogg Company.

2006: New Products/Services- Kellogg became the first manufacturer of ready-to-eat cereals to offer organic varieties of its established ready-to-eat cereal brands. All of Kellogg's organic products were certified as organic by the US Department of Agriculture.

2003: New Products/Services- Kellogg introduced specialty products such as Kellogg's Special K, Keebler Chips Deluxe Carb Sensible Cookies with flavors such as chocolate chip, chocolate chip with pecans, and peanut butter; and Kellogg's Eggo Special K.

2001: Corporate Changes/Expansions- Kellogg moved its convenience foods, such as Rice Krispies Treats and Nutri-Grain Bars, into the Keebler system.

2000: Acquisitions/Mergers/Takeovers- Kellogg purchased Kashi for USD 32 million.

2000: New Products/Services- Eggo Waffles, Lender's bagels, Kellogg's Pop-Tarts toaster pastries and Nunti-Grain cereal bars, convenience breakfast were introduced in North America by the end 20th century.

1999: Acquisitions/Mergers/Takeovers- Kellogg reached an agreement to acquire Worthington Foods, Inc., based in Worthington, Ohio, for USD 307 million.

1996: Acquisitions/Mergers/Takeovers Kellogg purchased the Lender's Business from Kraft Foods for USD 466 million.

1992: Divestiture- The company sold its Fearn International for USD 58.5 million.

1991: New Products/Services- Nutri-Grain Bars were introduced.

1987: New Products/Services- Two versions of Kellogg's Mueslix that were based on the company's popular European muesli cereals were introduced.

1986: Corporate Changes/Expansions- Kellogg's new 300,000 square-foot

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headquarters building was opened.

1985: New Products/Services- Kellogg's Fruitful Bran, Kellogg's Strawberry Krispies, Kellogg's Just Right were introduced.

1984: New Products/Services- Kellogg's Raisin Squares were introduced.

1975: New Products/Services- The company introduced new products such as Kellogg's Frosted Rice, Kellogg's Cracklin' Oat Bran, Kellogg's Raisins, Rice & Rye; Kellogg's Honey & Nut Corn Flakes, Kellogg's Most, a high-fiber, multivitamin, iron supplement cereal; and a frozen pizza line.

1973: Corporate Changes/Expansions- The Kellogg Company started the construction of a second cereal factory in Wrexham, Wales.

1971: New Products/Services- Kellogg released Eggo Blueberry Frozen Waffles with imitation blueberries, followed by Eggo French Toast.

1970: Acquisitions/Mergers/Takeovers- Kellogg's bought Fearn International Inc., in order to focus on the Eggo Waffles line. Kellogg's Frosted Mini-Wheats cereal was introduced nationally.

1963: Corporate Changes/Expansions- Kellogg opened an international technical center in Europe to combine its applied research, development, and engineering departments in one facility.

1956: New Products/Services- Kellogg's Special K became the first cereal fortified with seven vitamins and iron, thus giving it its special designation which was released nationwide.

1951: Corporate Changes/Expansions-Kellogg's new Queretaro, Mexico, plant was developed.

1948: Corporate Changes/Expansions-The company built its sixth factory in the city of Springs in the state of Transvaal, South Africa.

1941: New Products/Services Kellogg Company introduced a new product, a dog food named Gro-Pup, which led to the creation of an animal food business.

1938: Corporate Changes/Expansions The company opened its Manchester plant.

1931: New Products/Services Kellogg introduced new corrugated cereal cartons that improved the appearance of its rather plain-looking cases.

1930: Corporate Changes/Expansions The W. K. Kellogg Foundation was founded.

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1925: New Products/Services Kellogg's Pep a whole-wheat and part bran flake cereal, was introduced and marketed to athletes.

1923: Acquisitions/Mergers/Takeovers The Kellogg Company purchased the Canadian business for USD 400,000 and moved its Canadian headquarters from Toronto toLondon, Ontario.

1922: Incorporation/Establishment Kellogg Company was incorporated in Delaware after it acquired all the assets of the former Kellogg Toasted Corn Flake Company. The company officially renamed itself as Kellogg Company.

1922: Official Trials/Tests The company used an extensive sampling campaign to introduce ready-to-eat cereals to a skeptical public.

1920: New Products/Services Kellogg Company branched out by offering ready-to-eat cereals in individual servings to hospitals, institutions, hotels, and rail diningcars.

1916: Patent Grant To protect the company's trademark, John Leonard applied for more than 40 patents on different items, even for Kellogg's Cigars.

1912: New Products/Services Besides corn flakes, Kellogg Company launched other products, such as Kellogg's Toasted Wheat Biscuit.

1910: New Products/Services Kellogg Company offered its first premium, the Funny Jungle land Moving Pictures book that featured pictures of animals and short rhymes. This was the start of the company's efforts to build a relationship with children.

1909: New Products/Services The company introduced its second product to the public, Kellogg's Toasted Rice Flakes.

1906: Incorporation/Establishment Kellogg Company was founded. The wooden-framed Bartlett Street plant in Battle Creek served as Kellogg Company's first factory. It was previously home to the defunct Hygienic Food Company.

1894: New Products/Services W.K. and Dr. John Harvey Kellogg discovered the process of creating flaked cereal while experimenting with shredded wheat cereal.

Kellogg Company - SWOT Analysis

Strengths

1. Geographical Diversification

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A wide geographical presence helps the company mitigate the various risks associated with over dependence on a particular market. As of February 25, 2011 Kellogg manufactures its products in 18 countries and markets them in over 180 countries. During 2010, the North American segment contributed 67.7% of the company’s total revenue followed by Europe (17.9%), Latin America (7.4%) and Asia Pacific (6.7%). Such geographical diversification helps the company reduce the volatility in its earnings from different markets as well as offers new avenues of growth. Moreover, the wide geographic market enables the company to target a diverse range of customers with a wide variety of products.

2. Strong Brand Portfolio

Kellogg boasts of a broad portfolio of products manufactured in 18 countries worldwide. Such strong brand strength supports the innovation process in launching new products and enhancing the revenue stream of the company. All its products are recognized world over giving it instant brand recognition. It products consists of ready to eat cereals and convenience foods that helps it cater to the various needs of its customer base. Kellogg is one of the leading producers of cereal and convenience foods, including cookies, crackers, toaster pastries, cereal bars, fruit snacks, frozen waffles, and veggie foods. The various brands offered by the company include Kellogg’s, All-Bran, Apple Jacks, Bran Buds, Cheez-It, Chips Deluxe, Cinnamon Crunch Crispix, Club, Cocoa Krispies, Complete Bran Flakes and Complete Wheat Flakes. It also offers Corn Pops, Cracklin’ Oat Bran, Crispix, Cruncheroos, Eggo, Famous Amos, Kashi, Keeblezr, Kellogg’s Corn Flakes, Kellogg's Mini-Wheats, Morningstar Farms, Nutri-Grain, Pop-Tarts, Rice Krispies, Sandies and Special K brands. The company’s Special K, All-Bran and Rice Krispies brands are three major brands in its global portfolio. The international popularity of the company’s brands demonstrates its ability to adjust to and capitalize on changing consumer dynamics and trends.

3. Strong Focus on Innovation

A strong focus on innovation puts the company at an advantage while catering to the growing needs of its customer base. Kellogg considers a global approach to innovation, expanding and adjusting its portfolio to meet consumer needs around the world. The company invested approximately $187m in 2010 and $181m in 2009 and 2008 in its research and development (R&D) programs to create new products or expand the use of its existing products. In 2010, Kellogg’s launched new innovations such as Special K Clusters and Milk Chocolate Krave cereals. The company also made investments in its information technology infrastructure with respect to the reimplementation and up gradation of its SAP platform and supply chain. Kellogg carries out its R&D activities at W. K. Kellogg Institute for Food and Nutrition Research in Battle Creek, Michigan, as

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well as other worldwide locations. Recently, the institute was expanded and 400,000 square feet was devoted for product development and 87,000 square feet was allocated specifically for the pilot plant. The office space has been doubled with the addition of 70,000 square feet of space. The new facility includes a flexible experimental production area, innovation labs, research facilities, and an improved pilot plant. A strong innovation, backed by solid marketing strategy, helps the company drive top-line growth and keeps its categories vibrant.

Weaknesses

1. Indebtedness

The company has a substantial amount of indebtedness. The debt to equity ratio of the company stands at 273.5% for the fiscal year 2010. The indebtedness is substantial in relation to the shareholders’ equity. The total debt of the company was approximately $5,904m and total equity of $2,158m in 2010. This could result in impairing the ability of the company to obtain additional financing for working capital, capital expenditures or general corporate purposes, particularly if the ratings assigned to its debt securities by rating organizations were revised downward. It could restrict the flexibility of the company in responding to changing market conditions and make it more vulnerable during times of slowdown. Another major consequence of the company's indebtedness would be that the company would require a substantial portion of the cash flow from operations to be dedicated to the payment of principal and interest on debt, thereby reducing funds which could be used for expansion through acquisitions, marketing spending and expansion of product offerings.

2. Pending Litigation

The company's involvement in litigations not only damages its reputation but also results in additional costs and valuable time for the company in defending them. In 2009-2010, the company is involved in litigation with Annex Holding, the former owner of Wholesome & Hearty Foods Company. Few years back, Kellogg acquired certain assets and liabilities of Wholesome & Hearty Foods Company which manufactures veggie foods under the Gardenburger brand. Kellogg engaged in a major construction project at the Utah manufacturing plant in 2007. However in May 2008, it withdrew the Gardenburger products from the market, publicly citing facility improvements as the reason for the product withdrawal. The expenses incurred for this were transferred on Wholesome & Hearty Foods Company and seeking damages for products. Annex claimed that Kellogg is attempting to shift the blame for its construction-related problems to annex, which led to the market withdrawal of Gardenburger products. The

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law suit is still pending. Such litigations not only lead to significant expenses being incurred, they also hamper the brand identity of the company.

3. Product Recalls

Frequent product recalls could be a major concern for the company as it tarnishes its brand image. In June 2010, the company in consultation with the United States Food and Drug Administration (FDA) was implementing a voluntarily recall of certain breakfast cereals due to an uncharacteristic off-flavor and smell coming from the liner in the package. The company recalled some of its products earlier as well. In 2009, it announced voluntary nationwide recall of select Keebler Soft Batch Cookies and Special K Protein Meal Bar Honey Almond Flavor. In January 2009, the company recalled certain Austin and Keebler branded peanut butter sandwich crackers and select snack-size packs of Amos peanut butter cookies and Keebler soft batch Homestyle peanut butter cookies due to concerns over possible contamination with Salmonella. Such widespread product recalls result in significant losses due to the costs of a recall, the destruction of product inventory, and lost sales due to the unavailability of product for a period of time. It also results in a loss of consumer confidence in its food products, which could have a material adverse effect on the company’s business results and the value of its brands.

4. Decline in Ready-to-Eat Cereal Industry

The company is getting affected by declining market of ready-to-eat products. In 2010, the company’s total revenues declined by 1.4%. Kellogg offers ready to eat cereals and convenience foods. The ready to eat cereal segment generated low returns for the company in 2010. The global sales of ready-to-eat cereals fell 2.55% in the 52 weeks ending April 17, 2011 to $6.41 billion, which covers retail outlets such as supermarkets. Also, during that same time period the sales of cheap private label cereals, decreased by 7.2% to $637.5m. Units shipped have decreased due to the recent rise in grain and milk prices. Moreover, the popularity of egg based breakfast sandwiches is increasing. The ready to eat cereals drives roughly 30% of milk use. Six cereal brands of Kelloggs, include Cheerios, Raisin Bran, Kellogg's Corn Flakes, Rice Krispies, Corn Pops, and Special K. Between 2007 to 2010, sales of some of these brands fell by double digits. Although, Kellogg's Frosted Flakes rose by 1% to $246.7m in the 52 weeks ending April 17 2011, while sales of Fruit Loops, Raisin Bran and Special K fell in the single digits. Sales of Kellogg's Corn Pops dropped 19% to $73.9m. Given the declining demand, the company’s profit margins may be hampered.

Opportunities

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1. Emerging Markets Providing Ladder for Growth

The company might be significantly benefited from expanding its business in new emerging markets. Currently, the company already has operations in China and India. It is also projected that a demand upswing for ready to eat cereals and convenience foods is expected to increase in countries such as India and China. The company can focus its attention to other emerging economies of Asia like, Malaysia, Indonesia, Taiwan, Thailand, Philippines among Others. According to the World Bank, the global GDP was 2.7% in 2010, is expected to grow 3.2% in 2011. The prospects for developing countries are better with a relatively robust recovery, likely to grow 5.8% in 2011. Further, GDP in rich countries was 1.8% in 2010 and is expected to increase 2.3% in 2011. Furthermore, the World trade volumes, which fell by a staggering 14.4% in 2009, are projected to expand 6.2% in 2011, respectively. Growth in the East Asia and Pacific region (especially China) as well as South Asia (especially India) has been resilient. India and China’s GDP is expected to grow at 9.3% and 9.5%, respectively during 2010- 2011. In addition, the Indonesian economy is expected to grow at the rate of around 7% in 2011, and would rank amongst the biggest economies in the Southeast Asia. International expansion has generated new employment opportunities for the residents and has boosted their earnings. Thus, with competition at its peak and markets getting saturated, the company can focus on these regions for new growth avenues. Additionally, the company delivers strong revenues as well as strengthens its market leadership position.

2. Growing Organic Foods Market

In both the US and the EU there is an increasing demand for organic food products and organic production. In the EU, around 4% of the agriculture land is under organic production methods. Global organic food and beverages market is driven by key factors such as increasing consumers’ awareness towards organic benefits, increased organic farming in the world, and implementation of government regulations. Demand for organic food and beverages is increasing in conventional food supply stores because of development of private labels and increasing interest of large retailers such as Wal Mart, Tesco, and Safeway to sell organic products. The organic food and beverages market is also expected to benefit from subsidies, financial aids, and R&D programs conducted by different government and non-government organizations. Also, according to the "U.S. Families’ Organic Attitudes & Beliefs 2010" around 41% of the US population preferred buying organic food as compared to 31% in 2009. The global organic food and beverages market is expected to grow from $57.2 billion in 2010 to $104.5 billion in 2015 at an estimated CAGR of 12.8%. In 2010, Europe had the largest share in the global organic food and beverages market with revenue of $27.8 billion.

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With the company operating retail chains and having established brands, could see higher demand for its products.

Threats

1. Rising Manpower Cost

Manpower costs throughout the globe have been rising due to the shortage of talented manpower and increasing government mandated minimum wages. The government has passed a resolution to increase labor costs, due to increased overtime and tight labor markets. The rise in labor costs could be a cause of concern for the company. For instance recently, the US government has increased the minimum wage rate from $7.75 per hour in 2010 to $8.5 an hour in January 2011. The UK government planned to increase minimum wage by 2.5% from £5.93 an hour in October 2010 to £6.08 in 2011 (effective from October 2011). Also, the minimum wage in France stood €9 per hour as of January 2011, as compared to €8.86 in 2010. The Indian government, with effect from April 1, 2011 raised the National Floor Level of Minimum Wage to Rs 115 per day from Rs 100 per day. The company with 31,000 employee base is bound to come under pressure due to the pay hikes. If Kellogg fails to comply with future price hikes, it may face labor strike that may result in huge losses, apart from tarnishing its brand image.

2. Growing Competitive Market

The company could be impacted due to the growing competition in the market. With rising competition, the food industry has been witnessing consolidation wherein smaller entities are being acquired or merged by the major players. The influx of private labels in the industry is also on the rise. The players in the market compete on various factors such as new product introductions, product quality, taste, convenience, nutritional value, p rice, advertising and promotion. Kellogg competes with major global players such as, ConAgra Foods, Inc., General Mills, Inc., Ralcorp Holdings Inc., parent of Post, Quaker Oats, Kraft Foods Inc., NutraCea Inc., J & J Snack Foods Corp, Ralcorp Holdings, Inc. and Other. To survive and succeed in a stiff competitive environment, it becomes very important for the company to distinguish its product and service offerings through a clear and unique value proposition. Rising competition may also force the company to reduce its prices, which in turn may adversely affect its margins.

3. Government Regulations

Failure to comply with the Government regulations could hinder Kellogg’s ability to earn revenues. The company, being a producer and marketer of food products, is subjected to various regulations by federal governmental agencies, including the Food and Drug

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Administration, the Department of Agriculture, the Federal Trade Commission, the Environmental Protection Agency and the Department of Commerce, as well as various state agencies, with respect to production processes, product quality, packaging, labeling, storage and distribution. In addition, advertising of its businesses is subject to regulation by the Federal Trade Commission. The company is also subjected to certain health and safety regulations, including those issued under the Occupational Safety and Health Act. Kellogg should comply with all such stringent governmental regulations, failure of which may expose the company to new liabilities or may hamper its existing operations, which could result in a decline in its profitability margins.

4. Rising Raw Material Costs

The rising raw material prices could affect the business of the company. Agricultural commodities such as corn, wheat, flour, sugar, malt extract, rice, salt soybean oil and cocoa, and other products such as fruits, flour, vegetable oil, dairy products, eggs and Others are some of the products used as raw materials by the company. Kellogg also uses carton board, corrugated, and plastic for packaging its products. It also uses natural gas and propane at its production facilities and diesel fuel for its distribution activities.

Case Questions/ Solutions

1. What key areas would you want to explore in order to understand the Kellogg’s business predicament? List down the points in brief.

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Solution:a. Evaluate if sales growth at Wal-Mart is good or bad for Kellogg Co. b. Analyze the performance of Kellogg at Wal-Mart in relation to competitor’s

performance.c. Determine where Kellogg is lagging behind competitors.

2. What does the sales and volume data imply about Wal-Mart and the potential impact on the client’s bottom-line?

Solution: a. The top 5 distributors of Kellogg have been growing in terms of sales, with Wal-

Mart growing fastest at a CAGR of 14.7% in case of sales and volumes.b. While Kellogg’s sales through other distribution channels are growing faster than

volume, Wal-Mart’s volume and sales growth are the same (CAGR of 14.7%), so the average price at Wal-Mart (sales/volume) has remained nearly constant over the last 5 years.

c. The growing proportion of Kellogg’s sales generated through Wal-Mart could have negative implications for Kellogg’s margins in the long-term. As a large customer offering low prices to customers, Wal-Mart may push Kellogg to lower prices in return for the large volumes sold through the discount store when compared to other channels.

Average price ($)

2007 2009 2011 5-year CAGR

Wal-Mart 2.18 2.19 2.19 0%Big Joe’s 2.18 2.28 2.35 2%D Mart 2.20 2.27 2.36 2%The Grocer 2.20 2.32 2.39 2%ShopMart 2.19 2.30 2.39 2%Total top 5 2.19 2.26 2.31 1%Total all distributors

2.22 2.31 2.36 2%

3. What can we infer about Kellogg’s competitors in the discount channel from Wal-Mart’s sales data? Who should Kellogg be worried about and why?

Solution: a. Although Wal-Mart’s sales of Kellogg’s products have been growing at 15% over

the past 5 years, its’ competitor CeReal’s sales has been growing at a faster pace than Kellogg (32.8% of Wal-Mart’s sales).

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b. Kellogg should be concerned about CeReal sales share increasing at Wal-Mart while its own share has been falling. This indicates that Kellogg’s may be losing market share to CeReal Co. at Wal-Mart and the company should investigate about the reasons for the same.

4. The retail industry has been struggling to grow margins in the current economic environment. Optimistically, Wal-Mart management wants to expand its current margins by 4 percentage point by the end of the next 4 years. What should be the average pricing of Kellogg cereals to maintain the above?

Solution: Average cost in 2011: (Average price in 2011) – (margin) INR2.19 {1-(2/100)} INR2.19* (98/100) = $2.14

Average cost in 2015: (average cost in 2011) * input price inflation (assuming higher prices passed on by Kellogg) $2.14 {(1+15/100)^(4)}= $3.74

Average price in 2015: (Average cost in 2015) + (margin) = $3.74 {1+ (6/94)}= $3.98

5. Product availability could be a key determinant of cereal sales at retail stores. By how much can Wal-Mart augment sales by eliminating forgone purchase occasions?

Solution: Sales growth: (15% out of stock x 60% brand-loyal customers x 25% willing to forgo purchase) = 2.25%

6. Well, it sounds that as consultant you understand the business predicament of Kellogg. What steps would you recommend the client to deal with this situation?

Solution:Kellogg’s business strategy could be either “margin based” or “volume based”. However, let’s consider the feasibility of each strategy in the current scenario.

a. Margin-based strategy: The sales through Wal-Mart appear to have a potential negative impact on the bottom line of Kellogg, as they have lower margins than sales through grocery stores. The client could work with grocery stores to ensure

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that they are able to compete effectively with Wal-Mart in the cereal market. This strategy could be risky since Wal-Mart is a large and important customer.

b. Volume-based strategy: To defend its current position at Wal-Mart stores, the client should move toward a partnership with Wal-Mart and improve its sales position. Based on the data points in the case study the following could be the reasons for Kellogg’s underperformance at Wal-Mart.

i. Price: Research input indicates after 5 years of aggressive price discounting, the cereal companies have refrained from price competition within the same channel. If prices are not driving the difference, then we need to consider other aspects of marketing such as brand selection, shelf space, product placement, and in-store promotions.

ii. Shelf-space: Research input indicates that national-brands hold 30% of the shelf space and CeReal Co. brands are placed lower on the shelf than your client's products. The lower shelf placement could be especially important to children who are looking at the different types of cereals. Kellogg can work with Wal-Mart to improve its shelf placement to ensure better visibility for its products.

iii. Promotion: Research input indicates CeReal Co. brands have sales promotion tags, and the team notes that store flyers advertise specials on CeReal Co. brands for Wal-Mart customer cardholders. So, even if all the companies are maintaining product prices, maybe CeReal Co. is strategically discounting prices to gain market share.

iv. Sales support: The client's competitors have 50 sales representatives dedicated to the Wal-Mart account while the client has seven. CeReal Co. appears to be dedicating more resources to its relationship with Wal-Mart than the client is. This may explain its better product placement and promotion programs.

v. Stock-outs: Research indicates, some brand-loyal customers simply walk away without purchasing cereal whenever their preferred brand is unavailable. Second, we know that other brand-loyal customers purchase lower-priced cereal whenever they encounter a stock-out of their preferred brand. Both of these instances lower Wal-Mart's revenue. By eliminating stock-outs, Kellogg could increase its sales by simply ensuring that customers don't walk away without making a purchase. Converting these

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purchase occasions to sales would increase Wal-Mart's sales of sugar cereals by over 2%.

7. Based on your recommendations, do you think Kellogg’s could achieve Cereal Co’s sales growth through Wal-Mart.

a. If yes, how much sales do you think Kellogg’s could generate through Wal-Mart by 2015?

b. Can you identify any other incremental sales opportunities for Kellogg by 2015?

c. Also, what would be the volume sales for Kellogg’s in 2015 based on your calculation? (can be added - volume growth CAGR 2011-15)

d. Overall, will 2015 sales through Wal-Mart impact Kellogg’s overall profit margin, how?

Solution

a. Since the recommended solution is the volume based strategy. Kellogg’s would look to employ Wal-Mart specific initiatives to boost its sales growth through Wal-Mart in next few years and match or exceed the sales growth of Cereal Co.’s through the retail. The factors to consider here would be:

o 2011 sales (value) through Wal-Mart

o Growth in Kellogg’s sales through Wal-Mart during 2011-15

o Resulting shelf space for Kellogg’s cereal products

o Resulting sales growth from elimination of stock-outs

o Based on all the above, the target for Kellogg’s would be to achieve at

least the same level of shelf space and corresponding sales growth of Cereals Co through Wal-Mart during the period 2011-15.

Considering Kellogg’s matches Cereal Co.’s sales growth in Wal-Mart during the period 2011-15, the sales for Kellogg’s for year 2015 could be calculated as:

2015 sales= 2011sales (1+ (Avg. annual sales growth of Cereals Co in Wal-Mart))^4 + Increased sales by eliminating stock-outs.

= 246*(1+18.6)^4+ 9.73

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= 486.7 + 9.73

= $496.4 million

Now for Avg annual sales growth of Cereals Co. = (2011 sales/2007 sales)^(1/4)-1

= (278.2/165.3)^(1/4)-1

= 13.9%

Cereal Co.’s sales for an year = (Kellogg’s sales in Wal-Mart/Kellogg’s share in Wal-Mart)*Cereal Co.s share

2011 sales = (246/29%)*32.8%

= $278.2 million

2007 sales = (162/29.4%)*30%

= $165.3 million

b. Increased sales by eliminating stock-outs = (Forecast sales of cereals in Wal-Mart in 2015*2%)*(estimated share of Kellogg’s in 2015 in sugar cereals in Wal-Mart)

Forecast sales of cereals in Wal-Mart in 2015= Current sales of Wal-Mart(1+CAGR of Wal-Mart cereal sales 2007-11)^4

= (246/29%)(1+15.2%)^4

= $1493.98 million

Estimated share of Kellogg’s cereals in Wal-Mart in 2015 = Kellogg’s 2015 sales/Wal-Mart 2015 sales of cereals= 486.7/1493.98

= 32.6%

Therefore, increased sales by eliminating stock-outs = (1493.98*2%)*(32.6%)= $9.73 million

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c. For volume sales 2015 = 2015 value sales (from above)/2015 price

= $496.4 million/$3.97

= 125 million boxes

d. Even though the profit margin for Kellogg’s remains the same from product sales point of view, the net profit margin for the company will be marginally lower in 2015 as compared to 2011. This is due to the additional amount spent by the company to employ Wal-Mart specific strategies including in store representatives, promotions, frequent replenishment of supplies to avoid stock-outs and other relationship building exercises.

8. Strategically, what other areas Kellogg’s can look at which offers significant opportunities to increase its revenue without sacrificing the bottom-line? (categories, PL partnership)

Solution:

Kellogg’s primarily business divisions include:

Breakfast cereals

Snack bars

Crackers

Other (toaster, pastries, waffles, beverages

Now, since the company is recommended to improve its sales of breakfast cereals through Wal-Mart, it would need to employ Wal-Mart specific strategies as described by you and therefore would invest in relationship building with the retailer. The manufacturer can leverage this opportunity further by pushing its other products such as snack bars, crackers through Wal-Mart outlets across the nation. The added cost for this would be minimum while the benefits can be increased sales growth and market share in Wal-Mart stores for all of Kellogg’s product categories.

In addition to own products, Kellogg’s should also look at the opportunities provided by the private label sales in Wal-Mart. Since the margins for private label are more attractive and consumers have shown interest in quality private label products, Kellogg’s should look to enter into a partnership with Wal-Mart to supply them private label breakfast products. This

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would provide higher margins for Kellogg’s (without the cost of brand building, advertising) and also a chance to build stronger relationship with Wal-Mart).