Kellogg

News

Kellogg Company announced a 50:50 joint venture with Wilmar International Limited for the sales and distribution of cereal, wholesome snacks and savory snacks in China. Wilmar will largely provide operational support – contributing infrastructure, supply chain scale and a sales and distribution network as bwell as local expertise while K will deploy its Kellogg’s and Pringles brands. Kellogg Company will record the venture under equity method accounting. The JV will be headquartered in Shanghai and is subject to regulatory approvals by the Chinese government and anti-trust approvals. This has not been easy in the past, Coca Cola (NYSE:KO) is a recent example.

Analysis

While the announcement has little immediate impact on earnings, many believe this new strategy for expansion of both Kellogg Company (NYSE:K)s cereal and snacking brands in China is a rational progression of the firm’s broader strategy to build a truly global cereal and snacks business.

Kellogg Company (NYSE:K) has previously had success with a JV partnership in Turkey and Wilmar participates in multiple successful JVs around the world.

Many Western food companies have been focusing on growing their business in China. Yum! Brands, Inc. (NYSE:YUM), and McDonald’s Corporation (NYSE:MCD) are recent examples.

While Kellogg’s is not fast food, there is some interesting data on this topic.

According to a survey in the Workers’ Daily, 72.7 percent of young people under 15 years old prefer Western fast food to Chinese fast food.

Willmar generated US$7 bn of revenue in the Chinese branded consumer products market in 2011, primarily as the largest bottled cooking oil producer. It has an established distribution network in over 60 cities across 1st, 2nd and 3rd tier cities. Wilmar’s scale and selling and distribution capabilities may accelerate Kellogg Company (NYSE:K)’s expansion in China – a market where
it has limited success.

According to Euromonitor, Kellogg Company (NYSE:K) has a 5% share of a $225 mn Chinese cereal category, though much of this may have been through its Navigable Foods subsidiary which it recently divested. The cereal category remains small in China currently, according to Goldman Sachs Research.

In other similar news:

BEAM Inc (NYSE:BEAM) will expand its Japan distribution alliance with Suntory, the largest whisky and spirits company in Japan in 2013. Under the enhanced distribution alliance relationship Suntory will begin distributing Jim Beam and Maker’s Mark, BEAM Inc (NYSE:BEAM) ‘s leading brands in the fast-growing Bourbon category. Suntory already distributes Beam’s brands in several other categories including Canadian Club Whisky, Laphroaig scotch and Sauza tequila.

Disclosure: No positions in any securities mentioned