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THE GLOBAL MARKETPLACE MACRONORRENT MICRO-ENVIRONMENT ORGANIZATIONAL CASE 19 Kellogg Company This case was prepared by Craig A Hollingshead. W. Blaker Boling Richard L. Jones, and Ash White of

THE GLOBAL MARKETPLACE MACRONORRENT MICRO-ENVIRONMENT ORGANIZATIONAL CASE 19 Kellogg Company This case was prepared by Craig A Hollingshead. W. Blaker Boling Richard L. Jones, and Ash White of Marshall University From a news item in the New York Times Battle Creek, January 25, 1995-Since the Kel- los Company posted our quarter coming on Friday investors and analysts have become concerned that the company might be forced to cope discounting measures to deferal mar ket share, wakening is pratie margins last spring. Kellos significantly cutick on dis ning mc chuyone-ste free" offers one of its being cercals to lower costs and raise plats. The strategy crcded at first, but then sales in Kellogg's care comestic cercallinen ill continuing a de cline in market share that has seen Kees brands from wer) percent of lion market in the late 19o 35 percent to clay. Kellogg has assured investors that it will not reichen. However, in re Spot Kellor chan and chief execu tive officer Ansold Langho's remark that Kellos extremely sensitive toward ther volume decline, Kello share dropped by $2.75 on Friday to $45 on the New York Stock Exchange In little Creek, Michigan, baquarters of Kel- Logs Company. Chief Executive Officer and Chair man of the Band Arnold G.Langho reflected back on the company performance in 1994. Although Kellogg's sales increased for the fiftieth consecu Live year and earnings increased for the forty-first time in 12 years, the company did not micct is growth objectives for the year. Kellogg remained the world's leading producer of lovit cercal products and controlled 43 percent of the global market. Even though Kellogg continued to lead the inclustry in 1994. it faced many challenge Langha was concerned with the company wild Thich its marketing actives and continue lealing the industry, how it could maintain profit margin, and how it might in stock price, which was near a 3-year low in carly 1995 THE CEREAL INDUSTRY Cercal gratis milled into breakfast cereal is an 8 billion business worldwide. The worldwide de mind for ready to eat cereal is in a long-term up Wand trend. Annual per capita cereal consumption in North America is 10.3 perunds, while the work's leading consumer of cercal, Ireland, topped at 17 pounds However, cereal for helst Reprinted by permisdingen 805
806 CASE NINETEEN No Com venience foods. The main products of the company are ready-to-eat cereals, including Frosted Flakes, Corn Flakes, Apple Jacks, Prosed MiniWheats, Rice Krispies, Raisin Bean, Cracklin' Out Bean and Nut & Honey Crunch. These products are manufactured in 18 countries and distributed in more than 150 These cereals are sold primarily to grocery stores for resale to consumers and are marketed globally In addition to ready-to-eat cereals, Kelloge pro dukces or processes and distributes frozen dessert pies, toaster pastries, waffles, snacks, and other con venience foods in the United States, Canada and other limited areas outside the United States. Some of these products include Pop-Tarts, Eggo waffles, Nutri-Grain Rars, Crouettes, and Corn Flake Crumbs The corporate culture at Kellon is focused on the long-term well-being of the business Manage ment's primary objective is to increase share holders' value over time. In order to reach this objective, the Kellog Strategy was formed: is not part of the cultural tradition in many parts of the world. For example, in Africa and Asia, per capita cereal consumption runs well below! pound per year, offering a great opportunity for market development in North America and Eu rope, an increasing consciousness of healthy diet and nutrition needs drives increased demand among aclults. L.S. annual growth is estimated at 2 to 3 percent, with worldwide growth in the 5 to 7 percent range Competition within the industry centers around several companies, Kellogs Company is the worldwide leader with a 35 percent U.S. mar. ket share, 15 percent worldwide of the 10 most popular breakfast cereals in the world, six wear a Kellogg label. The number two player, and Kel logg's primary competitor, is General Mills, with a 25 percent U.S. market share General Mills was a messy conglomerate in the early 1980s. Since 1985, however, it has sought to focus more on ce real products. Wo .. General Mills formed joint ventures with Nestle (Cercal Partners World wide) and PepsiCo (Snack Ventures Europe). Both are relatively new, and neither of these enter prises has scored significant success. General Mills recent performance has been marred by disappointing returns from its Big G cereal busi ness and violations of Food and Drug Administra tion (FDA) regulations. Unregistered pesticide traces were found in the company's wat sup- ply. Although not a particular health hazard, this disrupted General Mills production and market ing plans. Traditionally more broadly diversified than Kellogs, Ciencral Mills had recently sold off its three restaurant chains Red Lobster, Olive Gar- den and China Coast. The company retained Betty Crocker, Gold Medal and Yoplait Products Divisions Other companies seeking market share were Quaker Oats Ralston Purina, Kral General Foods, and Nabisco With a growing worldwide demand, these companies had a chance to build markets and increase profits Continued aggressive investment in new cereal markets, increased returns on existing invest ments, maximizing cash flows, and minimizing the cost of capital through appropriate financial policies At Kellogg, it was believed that the 16,000 employ ces were the company's most important competi- tive advantage Kellogs Company History Kellogg Company's worldwide leadership came from the accidental invention of naked cereal at the Battle Creek Sanitarium in 1894. The sanitar ium was a famous Seventh Day Adventist hospi- tal and health spa where exercise, fresh air, and a strict diet were offered Sanitarium Superinten dent Dr. John Harvey Kellogs and Will Keith Kel logg, his younger brother and business manager, invented many grain-based foods served at the facility The sanitarium served land and tasteless bread. The Kellors brothers conducted experi ments to develop a better tasting alternative, Wheat was cooked, forced through granola rollers, and then rolled into long sheets of dough. KELLOGG COMPANY Kellogg Company and its subsidiaries are involved primarily in the manufacture and marketing of con
troduced. Television also became an important part of advertising in the 1950s. As the mid-1960 approached, Pop Tarts and Product 19 were added Consumers begin showing more interest in health and nutrition in the 1960s, So Kellogg Com- pany provided information programs for schools, health organizations, and consumers. During the 1970s, Kellogg provided more detailed package labels, including amounts of sodium and dietary fiber. By the mid-1980s, packages included choles terol, potassium, and nutrient Information New product introductions included Nutri-Grain, Crispix, Just Right and Mueslix In Kellogg's continued commitment to health, the company led an All Bran National Cancer In stitute campaign that produced more than 80,000 contacts to the National Cancer Institute (NCD) for information about the role of dict in reducing the risk of some kinds of cancers. Recently, Kel- logg took pride in providing information to con sumers about healthy lifestyles, cholesterol, and heart disease. One day the brothers experienced a fortunate ac cident. A batch of what was cooked but then set aside, neglected. Later, the brothers decided to process the stale dough. Instead of producing long sheets of dough, the rollers flattened the wheat mixture into small, thin flakes. Toasted, these flakes tasted light and crispy The patients at the sanitarium liked these new flakes so well that they wanted to eat them at home. To satisfy that demand, the Kellogg brothers Started the Sanitas Nut Food Company, selling the toasted wheat flakes by mail order. In 1898, Will Keith Kellogg extended the process to flaking corn. Seeing his brother's lack of interest in ex panding the food company, W. K. Kellogg went into business for himself On April 1, 1906, the Battle Creek Toasted Corn Flake Company started production. W.K. Kellogg used his manufacturing and marketing ideas to promote his product. He added malt fl- voring to the corn flakes to make them unique. He advertised to healthy people the benefits of a product with flavor, freshness, value, and conve nience. Kellogg used most of his working capital to buy a full page ad in The Ladies Home Journal in 1906. Results were amazing Sales quickly went from 33 cases to 2900 cases per day with con tinued advertising, the company's annual sales surged to more than a million cases by 1909 WK Kellogg became known for his innovative sales promotions, which included free samples and pre miums. The company was renamed Kellogg Com pany in 1922 Effective marketing led to the company's cess. In addition, Kelloge constantly sought ways to improve the product. He was committed to provid- ing consumers with information about diet and nutrition. Kellogg was the first company to print nutrition messages, recipes and product informa tion on cercal packages in the 1930s. By that time, products such as All-Brain and Rice Krispies had been introduced. Kellogg became an international business when it built facilities in Canada, Australia, and England. In 1930, the W.K. Kellogg Foundation was established. Today, it is one of the largest phil- anthropic institutions in the world, funding proj ects in health, education agriculture, leadership, and youth. During the 1950s, products such as Corn Pops Frosted Flakes, and Honey Smacks were in Production Kellogg Company traditionally sought market leadership through production efficiency and product quality control product innovation, and marketing effectiveness. The company spent con- siderable capital to maintain high-tech, high- capacity production capability. The result was low production costs but considerable excess capac ity. To take advantage of possible economies of scale in production, there was constant pressure to build and maintain markets. New product inno vations were an important part of this strategy Kellogg moved Nutri-Grain from the health food store to the supermarket in 1981 and modified the production process to gain extended shelf life for the product Kellogg practiced Japanese style total quality management (TOM) principles. The company Strictly monitored product quality control. It made sure that new automated manufacturing machinery was thoroughly tested before it went online to serve a market. Worker teams monitored quality controlled costs, and suggested improwements. Kel logs sought to improve inbound logistics by devel
There are 140 brands of cereal being bought by very loyal consumers. Some of the fastest growing brands are the most expensive, so it's not all about price In the early 1990s, Kellons and its major U.S. competitors sought to maintain higher pricing and profitability by steadily increasing their use of price promotion spending including lots of buy. one-get-one free offers, known as "bogos." How ever, this strategy failed to stop Kellogg's continued slide in U.S. market share. In 1994, Ket logg CEO Amold Langbo said: "In the long run, bo- gos don't work. They borrow share. They don't carn share Kellogg also was hurt by its lack of appealing new cereal products that were needed to pull up U.S.volume. Kellogg's Healthy Choice cereals, introduced in early 1994, have performed well, but the overall new product performance by Kellogg and its competitors since the carly 1980s has been at best, unspectacular. Kellogg's Global Markets Unlike some companies that sought product diver sification to build profits, Kellogg concentrated on marketing cereal and other food products. Fighty percent of its worldwide sales came from cereal The company's market development took the form of expanding to foreign markets. The company en tered Canada in 1914 and by 1991 had 17 cereal plants located in 15 foreign countries. Since then, the company has added Argentina, Latvia, India, and China. In 1994, Kellogg controlled 45 percent of worldwide cerealsales. Kellogg North America led its market with a 37 percent share in 1993. It enjoyed both good peod oct quality control and high labor productivity. It also led the market in advertising expenditures. In addition to ready to cat cereals, Kellogg North America offered other grain-based convenience foods frozen dessert pies, toaster pastries, waffles, granola bars and snacks. In 1993, new product roll- cuts included Low Pat Granola Bars, Nutri-Grain Bars, new Egge versions, Mini Eggos, and new fla vors of Pop Tarts The best of the overseas beachbeads seemed to be in the old British Empire (Britain, Ireland, Aus tralia), where eating breakfast cereal was culturally accepted. Kellogg Europe controlled 50 percent of the market, six times the share of its nearest com petitor. During 1993, the company was selected first in customer service among all British manufac- turers for the fourth year in a row. Ireland was the wodd's top cereal consumer, but market growth potential was still great. Kellons gained 5 percent in sales volume in Ireland during 1993. A promising new market in this division was the Republic of Latvia. In a joint venture with Adaxi Food Products, Kellogg opened a new cereal plant in 1993. This was the first Western cereal enterprise in the for mer Soviet Union Cereal for breakfast was not a tradition in this region, so market potential could be great. Initially demand would be low, but com petition would be zero Kellone was substantially increasing advertising expenditures throughout rope, trying to interest younger people in testing the convenience of cereal for breakfast or a snack instead of a croissant or scheurtzbror. This strategy was successful, resulting in a strong growth in the cercal business in continental Europe in the late 1980s and early 1990s. So far as market potential was concerned, some countries had a very low market penet- tion rate. Worldwide cereal consumption aver- aged around 2 pounds per year, compared with North America's 10 pounds.Cereal for breakfast was not yet culturally accepted in certain areas Kellogg marketing people thought it was merely a matter of education to get these consumers turned on to eating breakfast cereal. In some countries, there also was the matter of obtaining dairy products for topping Some countries didn't drink a lot of milk and/or have an established dairy industry or an established channel of distri bution that offered refrigeration. People did not have facilities to keep milk to pour over their Corn Flakes, Kellors had a few cultural and intra structure problems to solve before its market po tential estimates could be realized. Kellogg Asia Pacific controlled a 47 percent market share. New plants in India and China would serve millions of potenti come more than one third of the world's population. Here again, market development would require effecting signif- icant changes in the traditional tastes and prefer ences of local consumers. Kellogg developed specific cercal products for niche foreign markets A high-mineral multigrain cereal was developed for the health conscious Australians, while in Japan, where fish and rice made a traditional breakfast,
Kellogg was offering Genmal Flakes made from whole grain rice. Operations in the Latin America Division com ered Mexico, Central America, and South America, and Kellos dominated this market with 78 percent market share. This market share placed Kellogg in control of the developing markets as well. A new plant was under construction De Buenos Aires, Argentina, and capacity increases - curred at the plants in Bogota, Colombia Manicay Venezuela and Sio Paulo, Brazil. Performance for the year in Latin America was favorable for the most part. However, disappointing results in Mex. icold a negative impact on the overall perfor mince of the division Opportunities for future growth were quite vorable with the increased interest in health and nutrition in Latin America Kellogg had performed many different activities in order to make con sumers more aware of the importance of nutrition Some of the activities included school nutrition ucation programs, which covered 300,000 children In Mexico alone, fiber symposia, and nutritional newsletters to health professionals In an attempt to provide consumers with ad ditional value in its products, Kellogg added extra vitamins to the cereals in Latin Americans diets and added in to products in other selected countries. This adaptation of products to the cul ture was one of Kellogg's ways to boost cereal consumption In Europe, sales decreased 8 percent due to unfavorable foreign currency exchange rates. If this problem had not occurred, sales would have been up by percent. Dividends increased for the thirty-seventh consecutive year, with 10 per cent growth in 1993. Price earnings multiple re mained at one of the highest levels in the food industry. However, the performance of stock was disappointing In 1993. Kellogg decided to divest units that did not fit with long-term strategic plans. So the British carton container and Argentinian snack food businesses were sold for a total preta gain of $65.9 million(Other results of operations may be found in the financial statements provided at the end of the case In 1994, Kellogg followed a price maintenance policy to provide value to consumers. The com pany also cut back on coupons. Since then, the company's market share has been steady THE FUTURE THE COMPANY TODAY The future for Kellogg and the ready-to-cit cereal industry looked quite favorable at the end of 1995 Demand continued in a long term upward trend with growth estimated at 2 to 3 percent in the United States and 5 to 7 percent overseas. This con tinued growth would come with the increasing recognition by consumers of the nutritional value of cereal Domestic growth also would come with the increasing ages of Baby-Boomers from young adulthood to midklle age, where cereal consump tion had grown steadily It also appeared that the trend among competi tors in the industry was to cut promotional spend ing. These competitors coul have unbounded opportunities to establish a position in the new mar kets that were being entered, such as India and Chin. CEO Langho has come to the conclusion: this business was ever easy, it isn't anymore Even with intense competition and many chal lenges faced by Kellogg during 1993, worldwide revenues increased by 2 percent. This was the forty-ninth consecutive year for increases. In the United States alone, sales rose by 6 percent. There were 24 new product introductions worldwide Kellogg received 40 percent of its revenues from outside the United States

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