Kellogg Company K) and Wilmar International Limited (WIL) recently entered into a 50:50 joint venture for business expansion in China. Through the joint venture, to be headquartered in Shanghai, China, the companies will produce, sell and distribute packaged food like cereal and savory snacks. Yihai Kerry Investments Co. Ltd, Wilmar's wholly-owned subsidiary in China, will be involved in the operations. According to the contract, Wilmar will provide infrastructure, supply chain scale, sales and distribution channels in China, whereas Kellogg will share its globally popular portfolio of cereal and snacks brands. The joint venture will enable Wilmar's local market expertise to complement some of the world's biggest cereals and snacks brands such as Kellogg's and Pringles.
China is one of the key emerging markets with the largest consumer base. The number of middle class consumers with positive consumer spending is growing and a majority of them are shifting to an urban lifestyle. As a result, the demand for convenient and branded packaged food is on the rise, presenting good growth opportunity for the company.
Also, increased milk consumption is driving the cereal market in China. Wilmar with its prior experience and expertise in the Chinese market will be able to utilize Kellogg's brand name to achieve maximum market share and profitability.
As the world's leading producer of cereal and snacks, Kellogg has been slowly building its business in the emerging markets by making small acquisitions and entering into joint ventures. The Pringles acquisition will also provide additional growth opportunities in these fast growing nations. Expansion in the emerging markets will offset the saturation in the U.S. cereal market and poor macroeconomic conditions in European markets.
On the other hand, Wilmar, one of the leading agribusiness companies in Asia, will benefit from the strong infrastructural support and brand identity of Kellogg.
Currently, we have a Neutral recommendation on Kellogg Company over the long term. Kellogg Company carries a Zacks #3 Rank in the near term (Hold rating).
We are bullish on the long- term prospects of the company given its solid brand positioning, its geographic diversity and cost saving initiatives. Moreover, we are encouraged by the growth potential, diversification and international presence that the Pringles deal provides. However we are concerned about commodity cost inflation and sluggish European macroeconomic conditions.