Running head: COMPETITIVE STRATEGIES IN FOOD INDUSTRY1

Kraft Foods Group, Inc.’s and Kellogg Co.’s

Competitive Strategies

Student’s Name

MBA 500 Essentials of Business Management

June 11, 2014

Larry Frazier

COMPETITIVE STRATEGIES IN FOOD INDUSTRY2

Abstract

This report shows how well Kraft Foods Group, Inc. and Kellogg Company do business,

and what their strategies are to develop and manage their companies. These two

companies both are among the top five leaders of the food industry who are powerful

enough to sail drive the industry. They both have effective competitive strategies to

improve their infrastructures and attack their challengers in many ways. This paper will

focus on these two companies’ strategies, what can impact their companies, and how they

protect their company from competitors.

COMPETITIVE STRATEGIES IN FOOD INDUSTRY3

Kraft Foods Group, Inc.’s and Kellogg Co.’s

Competitive Strategies

Industry Overview

The fFood industry haveindustry has been improving for decades because

customers’ demand has become increased sharply beyond the basis basic need of satisfied

hunger. There are more than 10,000 businesses manufacturing food across the globe that

manufacture food and provide products, such as cereal and ready-to-eat food.

Nevertheless, in the second half of 2013, some major companies reported could not gain

theirdisappointing sales and volume of food products as disappointing due to lackluster

economic conditions and cost of products. Tom Graves and Esther Kwon in Industry

Surveys Foods and Nonalcoholic Beverage (2013) state thatdescribe there are various

factors that contribute to changes in food price and demand. Among these are For

example, long-term factors affecting supply and demandsuch as are new technology that

improves agricultural productivity, growing demand around the world, amount of land

and water resources available, and more efficient developed markets. In addition, Short-

term factors are include climate changes, trade restrictions, and economic conditions.

Moreover, the government regulation of products in food might raise the costs of food

business, for including harvesters, farmers and local farms. Indeed, in 2011, President

Obama signed the FDA Food Safety Modernization Act into law in 2011. . Such

regulations require manufacturers to develop safety plans To to ensure the safety of the

COMPETITIVE STRATEGIES IN FOOD INDUSTRY4

U.S. food supply, and they, food manufacturers are required to develop the safety plans.

Those certainly impact certainly on the cost of products and manufacturing companies’

strategies.

Company Summaries

Kraft Foods Group, Inc.

Kraft Foods Group, Inc. (Kraft Foods) is one of the largest manufacturing

packaged food companies in North America and worldwide with its net revenues $18.3

billion. It manufactures and sells food and beverage products, including coffee, cheese,

refrigerated meals, refreshment beverages, and other grocery products, primarily in the

U.S. and Canada. There are plenty of brands under this company, such as Capri Sun,

Maxwell House, Kraft and Kraft Deluxe, and so on. These brands make benefits to the

company. The following chart shows the current financial budget of Kraft Foods.

Year

Profile

2013 2012 2011

Net revenues 18,218 18,271 18,576

Cash 2,043 3,035 2,664

Expenses 557 440 401

Net earning 2,715 1,642 1,775

Table 1. Kraft Foods Group, Inc.’s financial data. Adapted from Kraft Foods group, Inc. p. 19, by Kraft Foods Group, Inc. 2014.

COMPETITIVE STRATEGIES IN FOOD INDUSTRY5

As the chart shows, Kraft Food has gained its in profits, an increase of 65% compared to

2012. Although this company exhibits how well it did with its high net earning, it was

unable to control its costs, which that rose from $4.40m to $5.57m. The expenses are

obstacles that the company has faced over last year, and that have definitely impacted its

net revenues too much. In addition, it lost too much cash, in the amount of a thousand

million, which is also too much. However, Kraft Foods declared dividend $2.05 per

share, an increase of 410 percent over 2012. SOURCE!!

Kellogg Co. Kellogg Co. (Kellogg) is a multinational manufacturer of breakfast

food, snack food, crackers, and cookies. Its products are convenience foods, for example,

like ready-to-eat cereal, savory snacks, toaster pastries, frozen waffles, and veggie foods.

These products were produced in 18 countries and sold in more than 180 countries across

the world. The following chart shows the current fiscal years of Kellogg Co.

Year

Profile

2013 2012 2011

Net revenues 14,792 14,197 13,198

Cash 1,807 1,758 1,595

Expenses 637 533 594

Net earning 1,808 961 864

Table 2. Kellogg Co.’s financial data. Adapted from Kellogg Co. p. 15, by Kellogg Co. 2014.

This chart explains how well Kellogg did in 2013 over the previous last year. With

double-gained net earnings compared to 2012, it did its work amazingly, ; in just only

one year, its income rose sharpely from $961m to $1,808m. The revenue has been going

COMPETITIVE STRATEGIES IN FOOD INDUSTRY6

up since 2010. Plus, this company could has been able to control its cost significantly.

The expenses did have not impacted its revenues so much, so that influenced contributed

to the high profits last year. Kellogg also gained a bit of cash, almost $50m. The price of

Kellogg’s stock market has been seeing a considerable growth for five years. In fact, it

rose has risen from $36 to $58 per common share. For the stakeholders, even thought it

gained a huge benefit last year, the company did not declared much of an to increase in

dividends. SOURCES?? much.

Current competitive strategies of Kraft Foods Group, Inc. & Kellogg Co.

Kraft Foods Group, Inc.

Kraft Foods has a strong brand portfolio that shows this company is doing very

well in the industry. It offers products encompassing four customer segments: beverages,

refrigerated meals, cheese and grocery. This company sells highly recognized brands in

many of the categories. Kraft Foods has more than 25 brands earning net revenues of

more than $100 million each. It holds 11 of 17 the highest branded market shares, which

contribute over 80% of its net revenues in the U.S.A. (Kraft Foods Group, Inc., 2014).

That means the company has a huge share in the industry. Kraft Foods has reached met

the demand of consumers and improved its market penetration.

In addition, its manufacturing and distribution capabilities are very strong. This

company operates 40 processing and manufacturing facilities in the U.S. and Canada.

According to Kraft Foods Group, Inc.’s Annual Report (2014), Kraft Foods produces its

beverage goods in nine locations, refrigerated meals products in nine locations, cheese

products in 13 locations and grocery goods in 15 locations. Also, the company has more

COMPETITIVE STRATEGIES IN FOOD INDUSTRY7

than 40 distribution centers in the U.S. and Canada. Every center has the a great capacity

to store all products. The company uses many ways to deliver the products to consumers,

such as common carriers and its private fleet.

Even though Kraft Foods lost a billion dollars in cash, it still has a robust cash

reserves. Because of its original maturities, the company maintains its credit rating and

pays dividends. Losing cash is not a big problem in the company. Hence, strong cash

reserves ensure that Kraft Foods is able to invest in the flexible situation even if there is

the challenging environment. SOURCES??

Kellogg Co.

Kellogg, the world’s largest cereal company, has a robust brand portfolio and

markets its well-recognized brands in over 180 countries around the globe. The company

is ranked among top 100 brands in the world’s top 500 brands. Kellogg maintains its

brands by focusing on advertising and consumer promotion. In fact, it invested more

than a billion dollars on in advertising (Kellogg Co., 2014). Not only does investment in

brand building help the company increase sales, profits and margins but it also helps

retain its strong market position. Furthermore, the company has a strong market position

in the snacks category. Kellogg is ranked first place in Korea and Germany and second

in the UK, Italy, France and Japan (Kellogg Co., 2014). Strong brand recognition

supports Kellogg to increase consumer loyalty and its revenues.

Kellogg focuses on the changes of demand and provides innovative products that

are for customers in different markets. The company invested approximately $200

million dollars in research and development activities in order to catch customers and

improve its products. For example, Krave cereal in the snack market, which was

COMPETITIVE STRATEGIES IN FOOD INDUSTRY8

launched in early 2012, has had a significant growth and keeps its position on theat a high

level. The innovation of its products helps the company achieve the risen rising

profitability.

Kellogg is still creating the value of its popular product, Pringles, which bolsters

the company in international snacks business. Here we see the influence of a Blue Ocean

strategy, which is all about creating value (Kim & Mauborgne, 2004). Pringles has the

strong brand and the premium position in business, so it drives high internal net sales

growth for the whole year. The acquisition allowed Kellogg to become an entrant into

the growing markets, Asia and Latin America.

What the companies are doing to improve their current competitive position

Kraft Foods Group, Inc.

Kraft Foods focused on achieving growth product improvements and new

products. Innovation was what the company was looking for, so it spent approximately

$118 million to develop its products last year. Due to the company being in the food and

beverage industry, a highly competitive industry, consumer preference was the primarily

in its strategy. It Kraft competed based on products, price, promotion activities and

place. At work here is Red red ocean strategy, in which is that competitors try to be

better than their rivals or beat the others to get more market shares of within the existing

demand (Kim & Mauborgne, 2004). Kraft Foods has to outperform its competitors and

improve its products to enhance its profits. Besides, the company values superior

customer satisfaction that it would grab more market share from other companies. Not

only will the company develop the qualities of its products but it will also build the

greater image of the products for consumers.

COMPETITIVE STRATEGIES IN FOOD INDUSTRY9

Kraft Foods values the long-term loyalty of consumers. Its Kraft’s intellectual

property rights are valuable, so and it would reduce the value of its brand whether if the

company could not protect them these rights. for environment, such as the trade secret

law, trademarks and copyright. Any changes in laws covering trade secrets, trademarks,

and copyrights and/ or other changes that could give competitors some opportunities that

would materially harm its Kraft’s business. Thus, tThe company considers that it is

extremely important to guard this intellectual property. Another high value for Kraft

Foods is the long-term loyalty of its consumers. On top of that, mMaintaining the loyalty

depends on information technology. The technology, including the Internet, helps the

company manage a variety of activities to provide information to consumers. In order to

gain trust, the company focuses on providing great information and improves improving

digital marketing activities in many areas across the world.

Kellogg Co.

Kellogg continually enhances the value of its brands. This company has a

number of significant brands that are successful in the food business. Brand value is

based on consumer’s recognitions, which are of the image and the reputation the

company has created. It Kellogg also focuses on marketing that promotes its products to

consumers with a great deals. Its promotional promotions activities are conducted

through customers directly, with activities such as price discounts, in-store displays and

events.

Besides cultivating its brand value, Kellogg’s success depends on how the

company anticipates changes in customer preference and responds response to demand.

The company, therefore, is still developing its products. The company spent 199 million

COMPETITIVE STRATEGIES IN FOOD INDUSTRY10

dollars in the research and development departments that were are located around the

world to experience local consumer needs. Kellogg focuses on reformulating its products

to catch the new demands of consumers. For instance, recently, consumers have paid

theirbeen paying more attention on to health, so the company improves globally some of

its products by reducing sodium, sugar and trans fats in order to keep the wella good

position in this industry.

Most importantly, recently, Kellogg has released the a new strategy called Project

K, which generates a significant saving plan. This project is expected to drive future

growths, margins and profits. The company has approximately 31,000 employees across

the globe (Kellogg Co., 2014). These labor costs s causes huge expenses of for the

company, so Project K would help it reduce the costs, and the company estimates would

have fewer employees than it dosedoes, a decrease of 7%, in 2017. This is going to be the

effective strategy that makes Kellogg continue to succeed.

Likely Mmoves or sStrategy sShifts that the cCompanies wWill mMake

Kraft Foods Group, Inc.

Cost reduction is the effective strategy the company uses this year. Because of

the high price of raw materials and agriculturale materials that it used last year, the cost

of products was very high, which means this factor directly impacted directly on net

revenues. Michael E. Porter in The Five Competitive Forces That Shape Strategy states

that suppliers have their strong power to raise costs, charge higher prices, and limit

control quality to industry participants (2008). Because ingredients costs werehave been

COMPETITIVE STRATEGIES IN FOOD INDUSTRY11

risenraised by the agriculture companies, Kraft Foods has to seek an optimal balance

between its expenses and the prices of its products.

Kraft Foods has its own foodservice, Kraft Foodservice, that provides sales

expertise and resources to the industry in the U.S. and Canada. The US Department of

Commerce (USDC) estimates that sales from food and beverage will be growing up in

the next two years (Graves & Kwon, 2013). Whether theIf this growth in the foodservice

market happens rise as the USDC forecasts, it will lead Kraft Foodservice will lead to

better net income. for the company.

Kraft Foods considers that consumer preference for fat-free and healthy food

products is increasing sharply. The company will be tapping people’s health and

wellness concerns. It continues to build and improve the nutritional food for to satisfy the

demand. Kraft Foods has launched more than 1,300 products with reduced sodium to

meet consumer needs (Market Line, 2014). For example, the company recently launched

MiO, a liquid beverage mix serving of zero-calories and sugar-free. This shows how aA

blue ocean can be created from within a red ocean (Kim & Mauborgne, 2004). MiO is in

a robust position to capitalize on the growing need of for healthy food in this challenging

industry.

Kellogg Co.

Kellogg is obviously concentrates concentratingevidently on Project K. Last year,

Kellogg announced this project, which is a four-year effective program that will develop

the infrastructure of the company in every single detail. Project K focuses on improving

its products in the existing business, increasing net earnings and reducing costs. For

instance, the company estimates that the its expenses will be approximately $400 million

COMPETITIVE STRATEGIES IN FOOD INDUSTRY12

in 2014, a decrease of 30%. The company expects that the project will lead to the better

growth in revenues.

In addition, the company emphasizes on healthy food. Due to the negative effects

of unhealthy food habits, consumers look for healthy food and change their lifestyle, so,

as mentioned above, the demand of for healthy food is increasing rapidly. A recent study

shows more than 35% of all new snack products have a health-related claim (Market

Line, 2014). Kellogg will aim at these consumers certainly by launching new products.

Because its ready-to-eat cereal products are well positioned, the company will develop

the quality of the products, in such ways as reducing sodium in any products and making

them less lower fat or non fat free to maintain the value and well-positiongood

positioning of these products.

Where the two Two Ccompetitors are most Most Vvulnerable

Kraft Foods Group, Inc.

AfterSince the U.S. Food and Drug Administer Administion (FDA) changed the

regulations in packing, which to focuses on the safer packagepackaging, the expenses of

Kraft Foods has have been increasing. The company must develop its packages to follow

the law, that which impacts net revenues, financial condition and operating result

adversely. On top of that, ingredients cost is volatile because of suppliers have a the

powerpower ability to shift ingredient price. The bargaining power of suppliers is that

they might refuse to work with the company or charge high prices for unique resources

(Porter, 2008). There This is the kind ofis unforeseen situation that will make it difficult

for Kraft Foods will be unable to control its expenses carefully.

COMPETITIVE STRATEGIES IN FOOD INDUSTRY13

Being in the red ocean, the company will face more theincreasing development of

the existing companies and more new competitors in the future. These can grab

consumers from Kraft Foods’ share market. Porter (2008) also says that new entrants

eventually will decrease profitability of all companies in the an industry. There are more

than thousands of businesses manufacturing food that use competitive strategies against

Kraft Foods, so that is a huge obstacle that could causing cause the company failsto

falter.

Its indebtedness also impairs its ability to control its financial condition. Its total

debt was $10.7 billion at on December 28, 2013 (Kraft Foods Group, Inc., 2013).

Whether or not there is a challenging situation, such as the economic crisis, new

regulations or other factors that beyond its control, the company has to be careful with

how it spends its money on investing in new segments or developing its products.

Kellogg Co.

During tougher economic period, customers avoid spending much money in

grocery stores and look for lower-priced products. If the buyers have many alternatives,

the buyer power, which meaning that consumers can put the firm under pressure with

lower prices, will be high (Porter, 2008). As we have said, tThere are plenty of

competitors that are in this industry, so Kellogg faces the a situation, in which the

company cannot raise the prices, because of the buyers’ power. In fact, the firm has to

follow the consumer demand; otherwise, it will lose its consumers. Additionally, rivalry

among existing competitors can put the pressure on the company by taking familiar form

or launching new promotions (Porter, 2008). ThereforeClearly then, Kellogg still is still

in the a challenging industry thatwhere others can beat the company any minute.

COMPETITIVE STRATEGIES IN FOOD INDUSTRY14

Kellogg has recalled its product that can hamper its brand image adversely. In

February 2013, the firm recalled 36,000 boxes of Special K Red Berries cereal that were

contaminated with dangerous pieces of glass (Market Line, 2014). That certainly

impacted certainly the consumer confidence in Kellogg’s products. Moreover, there have

been several other products that were recalled in the past. Not only have the recalls

impaired its consumer confidence confidence, but they have also reduced net sales and

raised the cost of products. This is an opportunity to for the competitors to grab its

market share and improve their brand image to build trust in consumers.

Kellogg has also faced a problem with high raw material prices. Supplier power

has forces forced the company to deal with the higher prices even if the material is the

same quality. The season-average corn prices, for example, are raised one more dollar

per bushel, an increase of 15%, and the soybean oil prices are expected to range between

50 to 55 cent per pound from ….(Market Line, 2014). As a result,Such increases in the

expenses costs of the raw materials can impact the revenues adversely.

What the two competitors’ Ccompetitive moves Moves That Wwill pProvoke the

Mmost eEffective rRetaliation by the Two Competitors

Kraft Foods Group, Inc.

Kraft Foods has generates generated Mondelez International, Inc.

(Mondelez), its new trademark that focuses on markets located outside of the U.S.A. and

Canada (Kraft Foods Group, Inc., 2013). Mondelez helps Kraft Foods grab more market

shares in other countries. Even though to improvingve Mondelez’s brand image cost too

much, it is a long-run business that Kraft Foods will help Kraft Foods dominate the food

market across the globe under the Mondelez’s brand name.

COMPETITIVE STRATEGIES IN FOOD INDUSTRY15

The company will develop its product portfolio, including well-known brands

such as Maxwell House, Planters, Oscar Mayer and Capri Sun that generate high sales in

North America. In fact, its existing products will have a negative impact onto its

competitors certainly. These products will improve the revenues of the firm, and then its

stock market price will absolutely rise. After that, investor will see an opportunity to

invest in this company, and its stock market price will keep growing up.

Kellogg Co.

Kellogg weighs the Project K as the best competitive move, which focuses on the

infrastructure of the firm. The project will help the company reduce s costs, and then it

will have more money to invest more in advertising or to produce new products to grab

more market share from its competitors. This strategy does not attack its competitors

directly, but Project K will develop the financial management of the company, which will

make it can more able to control its expenses, such as labor costs and, tax charges, and

saving costs even while paying dividends paid. Every cent it spends has to return such a

great opportunity to the firm. That will be the effective development of the company. In

the future, Kellogg might just be just the only one company who can control costs and

thus earn the highest revenues in the industry.

After Since Kellogg has became the well- positioned in the global snack industry,

it has moves moved forward to the new market, which is packaged food and frozen food.

Due to its well-known brand, the company will provide various choices of food that

impact the existing competitors, such as Kraft Foods Group, Inc. and ConAgra Foods.

This move will gets its challengers’ attentions and force them to look back to how good

COMPETITIVE STRATEGIES IN FOOD INDUSTRY16

their products are and how well they invest in advertising. ThereforeThis will keep,

Kellogg in its position as is one of the strongest competitors in food industry.

Recommendations for the modification Modification of Eeach cCompanies’

cCurrent sStrategies

I will recommend the modification of Kraft Foods Group, Inc.’s strategy. . Kraft

Foods’ strategy seems to be a long team investment that will show the benefits in the

future. It has to be careful with its financial activities, including launching mew new

products, improving its existing products and investing in other countries. Even though

the company still has a great deal of debt, it will spend less money for on the taxes.

Overall, Kraft Foods is doing a great job on its way.

To comment on Kraft Foods’s strategy, however, I will discuss its mission that

will to sell products in new markets. There is much demand around the world that

because people need even more food than usual, so and the company sees what is

happening in the real world. Not only do people in North America need food, but people

in other continents do too. However, in every country, there are plenty of local

manufacturers who provide food. The company takes enormous risk in marketing

products in new locations. In fact, it is hard for consumers to use new brands that they

have not seen them before. Kraft Foods has to face not only its main competitors in the

U.S. but also new challengers in which they who mayill move in.

The strategic move into foreign markets will allow the company to succeed in

selling more products across the world, but if it will does not achieve the goal it expects,

this move will impact materially and adversely the company’s finances and its brands.

Furthermore, investors will lose the confidence in the company as well. Even though it is

COMPETITIVE STRATEGIES IN FOOD INDUSTRY17

ready to take the high risk, the firm must retain the loyalty of its customers and investors

and cannot fail in this mission. Otherwise, this will be a great opportunity for its

competitors to take its market shares.

I will also give a recommendation for to Kellogg Company. Project K is such a

significant competitive strategy in that it is makes making the company focus more on its

financial budget, which will and help it succeed in operating its business. This company

found the leak that suffered its budget suffered, which is high expenses in for laborlabors

and raw materials. The project can help the company spend less money than the past.

Therefore, it can control the expenses so that it will raise the revenues. This strategy will

alter the way it runs its company.

This project takes will take a long time to accomplish the its goal. That It is not

such a good idea that the company will spend too much time only focusing on this.

While the firm keeps running the project, it should cope with unforeseen circumstances,

which are new regulations, higher prices or new entrants.

Unlike, Kraft Foods Group, Inc., Kellogg is a new entrant of in the frozen food

market. There are many existing competitors in this industry, so the company must be

careful with how it steps into the new market. In terms of marketing, it is will be hard for

the company to change the perspective of consumers to purchase new frozen products

under the Kellogg’s brand name because there are plenty of goods that consumers usually

buy in a grocery store. This is the risk that the firm has to take.

These companies both are doing very well in the industry. Kraft Foods is the

leader of packaged food, and Kellogg is the best cereal seller in the United States. If the

firms run businesses together, they will have more than half of market share around the

COMPETITIVE STRATEGIES IN FOOD INDUSTRY18

world. The combination of these leaders leading food firms will be the best way to

succeed in this industry.

References

Graves, T. & Kwon, Y. E. (2013). Industry Surveys surveys Foods foods & Nonalcoholic

nonalcoholic beverages. Retrieved from Business Source Complete database.

Kellogg Company: 10K. (2014). Kellogg Company 10K. Retrieved from

http://investor.kelloggs.com/investor-relations/default.aspx

Kellogg Company: Annual Report. (2014). Kellogg Company annual report.

Retrieved from http://investor.kelloggs.com/investor-relations/default.aspx

Kim. C. W. & Mauborgne R. (2004). Blue ocean strategy. Boston, MA: Harvard

Business Press.

Kraft Food Group Inc.: 10K. (2014). Kraft Food Group Inc. 10K. Retrieved from

http://ir.kraftfoodsgroup.com/financials.cfm

Kraft Food Group Inc.: Annual Report. (2014). Kraft Food Group Inc. annual report.

Retrieved from http://ir.kraftfoodsgroup.com/financials.cfm

COMPETITIVE STRATEGIES IN FOOD INDUSTRY19

Market Line. (2014). Kellogg Companycompany. Retrieved from Business Source

Complete database.

Market Line. (2014). Kraft foods group, Inc. Retrieved from Business Source Complete

database.

Porter. E. M. (2008). The five competitive forces that shape strategy. Boston, MA:

Harvard Business Press.