Kellogg’s First Global Scale Acquisition Targets Pringles

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Analyst Insight by Ildikó Szalai

Kellogg has announced its agreement to acquire Procter & Gamble's only food label, Pringles, for US$2.7 billion as the sale of the brand to Diamond Foods has been terminated due to an ongoing accounting scandal and change in management at the US snack food maker.

Procter & Gamble claimed significant interest in Pringles from a number of suitors. Currently, many multinational food companies are refocusing their strategies and even restructuring their organisations in order to build a strong portfolio of snack products. Most importantly, Kraft Foods is in the process of creating a global snacks company. Although Pringles would have fit seamlessly into the future Kraft global snacks portfolio, an acquisition/integration of this scale may have come too soon for a company only just being created.

Kellogg a surprise buyer in sweet and savoury snacks

Kellogg can be considered a surprise buyer of Pringles' global snack assets given its current very minor presence in the sweet and savoury snacks category, generating retail value sales of US$58 million in 2010 compared to the company's global packaged food sales of US$16.4 billion.

Furthermore, Kellogg's recent acquisition activity has followed a pattern of expansion either into categories with strong health credentials or emerging markets. For example, in 2008 in Australia, the acquisition of Specialty Cereals, owner of a range of breakfast cereals positioned in the healthier foods arena, served to benefit from the strong wellness trend-driven high profit margins in mature markets. The acquisition of Russian company United Bakers significantly boosted Kellogg's presence in Eastern Europe although this was limited to the Russian market. Kellogg's presence elsewhere in the region is modest and the company is entirely absent from the key Polish market. The small-scale acquisition in China of Shandong Navigable Food Co Ltd also served the company's objective of widening its emerging market consumer base.

Kellogg's key acquisitions in its domestic US market over the 2006-2010 period included Bear Naked Inc, IndyBake Products LLC, Brownie Products Co and Mother's Cake & Cookie Co, all of which were smaller acquisitions aimed at increasing the company's presence in the better-for-you category and/or bakery products.

However, given the small scale and low number of acquisitions in new categories and markets, currently it is only Kellogg's breakfast cereals which have a significant presence in international markets, with its other products still largely only marketed in North America, with the exception of its snack bars, which generate nearly one third of retail value sales outside the US. The acquisition of global scale assets to further diversify Kellogg's international presence outside breakfast cereals is a positive step for the company. However, how the Pringles brand fits into the Kellogg portfolio and the level of synergies to be achieved with its existing international operations are less certain. As Kellogg has announced its intention to become a global cereals and snacks player, the acquisition of further snacks brands will likely be required to enhance its portfolio.

Pringles to enhance Kellogg's international presence in snacks

With the integration of Pringles, Kellogg will assume a distant second ranking in the global sweet and savoury snacks market with over a 2% value share, behind PepsiCo with 28%. Pringles' largest regional market is Western Europe where it generates around 36% of its retail value sales, followed by North America (34%). The brand's largest emerging market is Asia Pacific (17%). Although both Pringles and Kellogg's largest market in Asia Pacific is Japan, Pringles will be a welcome boost to Kellogg's presence in various smaller markets in the region, such as South Korea, Taiwan and Thailand. 

Kellogg’s North American vs International Market Sales by Category, 2010

Source: Euromonitor International

Kellogg's opportunities and challenges in sweet and savoury snacks

In terms of international expansion through global scale acquisitions, Kellogg has been a relatively late mover compared to other leading multinational food manufacturers, although it maintained its 0.8% global packaged food value share over the 2006-2010 period, to which Pringles will add 0.1 percentage points from 2012 onwards. A Pringles-scale acquisition outside its core cereal market has been a necessary step for Kellogg, although it has entered a category heavily dominated by PepsiCo. On the positive side, through this acquisition Kellogg will be well positioned to benefit from the dynamic growth expected in sweet and savoury snacks in most regional markets, but particularly in Latin America and Asia Pacific.