This Company Wants to Have Breakfast in China
Himanshu is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
The difficult economic conditions in Europe have been quite taxing for companies which have significant operations in the region. Not many of them have been able to escape the bitter effects of a weak demand coupled with rising input costs. This has led them to expand their operations into other regions, in an effort to patch up their bleeding financials.
One of these troubled companies is Kellogg Company (NYSE: K), which recently announced a joint venture with Wilmar International Ltd., a Singapore-based agribusiness group, to expand its cereal and snacks business in China.
The decision was taken after the company endured a lackluster second quarter due to its dependence on the European market as well as increasing commodity costs. The prevailing problems affected its earnings, which dropped by 15.6% over last year. However, unfavorable impact on revenue was offset by a stellar performance in Kellogg’s cereals business and Pop-Tart business, enabling top line to grow 2.6% to $3.5 billion.
Increasing demand for cereals in U.S. and a largely untapped market in China prompted the convenience food provider to take advantage of the potential untapped market.
The deal with Wilmar seems like a good strategic move since the agribusiness company is an established player in the Chinese market. Though Kellogg’s already sells some cereal products in China, the venture will lead to further expansion of its products through Wilmar’s distribution network and supply chain.
China has been eyed by many food retailers as a potential market for ready-to-eat foods. Cereal consumption has been growing in the region since consumers are becoming more health conscious. Additionally, consumers growing preference for milk is also driving cereal sales.
In fact, increasing demand for cereals in the breakfast menu has been influencing a number of Chinese food makers to expand their offerings. For instance, Bright Foods, a regional player, has acquired Weetabix in order to add Alpen muesli to its list of offerings.
Even industry peer General Mills (NYSE: GIS) has expanded its cereals operations in China through Cereal Partners Worldwide, a joint venture with Nestle. General Mills expansion in the region was highlights the growing demand for cereal breakfasts in the region. The benefits have already been evident in its first quarter results, which registered a whopping 35% jump in its earnings.
Kellogg has recently acquired Procter & Gamble’s Pringles business in order to grow its international presence. With breakfast food already taken care of through the cereals business, Kellogg has taken a step further to reap benefits of the growing snacks business. The partnership with Wilmar will help Kellogg in selling the popular Pringles chips in China.
With its Pringles chips, Kellogg will give stiff competition to PepsiCo’s (NYSE: PEP) Frito-Lay brand which has a strong presence in China. PepsiCo enjoys a leading position in the chips segment due to its drive for innovation. Its variety of flavors, specific to the Chinese population, has been working well. Among all the flavors offered by PepsiCo, its seafood flavors have been the most popular ones in the region.
Kellogg, however, intends to eat away PepsiCo’s market share by increasing advertising for its recently acquired business along with product innovation. Advertising, for both cereals and Pringles chips, will be an important part of its expansion into the large market.
The deal looks like a lucrative one and could help Kellogg witness better days in future. Market for cereals in China is expected to grow quite heavily in the coming years. Moreover, Kellogg’s acquisition of Pringles can be a further boost to its market presence, especially if the company manages to bring innovation in its flavors. If these products are marketed well, the company will be able to enjoy times of relief even though it might take some time.
justhimanshu has no positions in the stocks mentioned above. The Motley Fool owns shares of PepsiCo. Motley Fool newsletter services recommend PepsiCo. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.