Interesting Way to a Healthy Portfolio

Himanshu is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Marketing is a very important weapon for a company and Kellogg Company (NYSE: K), the provider of convenience food, has rightly used it. A product which is not properly marketed does not reach the customers’ eyes. Kellogg’s strong marketing initiatives for its recently acquired Pringles business worked wonders in its third quarter results. Its numbers beat the Streets’ expectations and overwhelmed its investors. But there is more to it. Let us unravel the opportunities.

The Refreshing Breakfast – Well Served!

Driven by great varieties of breakfast offered, revenue jumped 12.3% to $3.7 billion. New varieties like chocolate filled cereals set the breakfast market in the U.S. on fire, helping Kellogg witness great demand.

Additionally, the primary driver of the top line growth was Kellogg’s buyout of the Pringles snacks business which made the acquirer attain a strong position in the snacks market, second only to PepsiCo’s (NYSE: PEP) Frito-Lay chips. PepsiCo enjoys the leading position in the segment due to its innovation. Its strategy of offering flavors as per the taste of the consumers in the region has enabled PepsiCo to win customers’ hearts. For example, PepsiCo’s seafood flavors for the Chinese buyers have been quite successful.

Pringles contributed largely to Kellogg’s revenue mainly owing to its promotional strategies implemented. It improved on Pringles’ distribution network and made the products available in the supermarkets and dollar stores where customers are quite frequent. It also tried to improve on the method of displaying its products in order to attract customers.

However, increased advertising on new products coupled with rising input costs increased the cost burden of the convenience food manufacturer. Nevertheless, the company ended up managing its costs efficiently leading to a 2.5% surge in earnings to $296 million over last year. In fact, the performance this time brought relief to investors since Kellogg had reported an earnings drop of 16% in its previous quarter. Dependence on the European market dragged down earnings. But Kellogg made its way out of the problem.

The Positives…

Kellogg’s acquisition of Pringles was indeed a crucial one. It not only helped the company witness a great quarter, but also provided great opportunities. Pringles’ strong market presence and a wide geographical footprint helped the acquirer fetch huge overseas revenue. Its international segment posted a whopping 15% jump in sales mainly because of Pringles’ foreign operations. This will give Kellogg more exposure to the emerging markets which have huge demand.

Also, the food retailer is planning to increase Pringles’ production in order to meet the growing demand and provide stiff competition to PepsiCo’s Frito-Lay. However, there are no new products on the cards.

Along with strengthening of its existing products, the breakfast and snacks provider has some other great plans too. It has recently entered into a joint venture with an agribusiness group called Wilmar International Ltd which will expand its footprint in China and make its supply chain more efficient.

The cereals market in China is growing at a fast pace making it very attractive for food retailers such as General Mills (NYSE: GIS) to take advantage of it. General Mills also has entered into a partnership agreement with Nestle to expand the cereals business in China. Demand for cereals has been moving north since consumers are becoming highly health conscious, enabling General Mills to enjoy the benefits. General Mills reaped great benefits in terms of higher earnings from its new cereal operations in China. Hence, even Kellogg is expected to do the same.

Conclusive Thoughts

Kellogg has made a smart way out of the problem of increasing commodity prices. It not only raised product prices but also lured the customers towards its products. The company’s recent acquisition is yet to beget full benefits and is expected to go a long way with further expansion on the cards. Moreover, Kellogg’s new venture in China will be an opportunity for the company to expand its recently acquired Pringles offerings in the growing market of China. All these factors coupled with a growing international segment make this company quite attractive. 


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.

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