Where Does Kellogg's Do Business?

The Economy

Where does Kellogg's do business?

Kellogg's has been in business in the United States since 1906. Their "ready-to-eat" cereals changed the way most people start off their day. In 1914 Kellogg's began expanding their business world wide. Within 24 years Kellogg's became an established product in England and Australia. They continued to expand to Latin America and Asia. (Kellogg History). Now over 100 years later, Kellogg's employs over 26, 000 people world wide, they have manufacturing plants in 17 countries and they sell their products in over 180 countries (for a list of manufacturing countries see Appendix A Table I).

Kellogg's sells a variety of products in each country, many of them similar to what can be found in the United States and some unique to their locations. In Canada they have a product called Vector which is a meal replacement or energy bar (Product - Vector). In Mexico they have a product called Choco Melvin that appears to be a chocolate drink similar to Olvatin (Kellogg's Choco Melvin). In the Middle East they have a product called Choco's which is a cereal consisting of chocolate flavored wheat flakes (All the Latest Kellogg's Products).

The marketing for Kellogg's products also varies from country to country. In the United States we have Snap, Crackle and Pop as the icon for Rice Krispies and Cocoa Krispies, in other countries they have a cartoon monkey as the icon for that country's version of this product. Another example of differing marketing strategies occurred before 1958; Kellogg's Frosted Flakes was promoted by Tony the Tiger in the United States and Katy the Kangaroo in Australia (Kellogg History). Tony the Tiger eventually won a marketing contest, making him the sole icon for Kellogg's Frosted Flakes.

Economic Factors

Since Kellogg's is such a large corporation it is necessary for them to pay attention to the ever-changing economies in which it does business. There are many factors that can be measured. Inflation and unemployment are explored further in this paper.

Inflation

Inflation is the steady increase of consumer prices and/or the decrease in the purchasing power of money (What is the Real Definition of Inflation?). Inflation affects businesses as well as consumers. For businesses the cost of raw materials and capital will increase along with inflation. In turn, the increase to businesses will cause the consumer's price of finished goods to increase causing sales (but not necessarily net income) to increase. This effect should cause companies to be interested in measuring inflation.

The primary way to measure inflation is through a Consumer Price Index or CPI. CPI, according to one source, is "an index of prices used to measure the change in the cost of basic goods" (Consumer Price Index). Another source defines CPI as simply "a measure of the level of inflation" (Definition of Consumer Price Index). Over the last Five years CPI has increased 14% (see Appendix A Table II). In comparison, Kellogg's sales have increased 35% (see Appendix A Table III). Although the change in CPI and the change in Kellogg's sales have not increase by the same percentage, a correlation analysis shows that CPI and sales have an r-squared value of .98, showing a strong, positive correlation (see Appendix A Table IV). This means that as CPI increases so will Kellogg's sales.

Forecasting CPI

United States Forecast

Forecasting CPI can be very helpful for businesses, especially in the case of Kellogg's because they have a strong correlation between sales and CPI. They can use the CPI index to more accurately predict their future sales. To create a forecast of CPI the last five years of data have been subject to a regression analysis. The formula derived from this process is CPI = 4.5321(year) - 8896.1 (shown in Appendix A Graph I). This formula has an r-squared value of .99, showing an almost perfect correlation between the actual data and the predicted data (found by using the above formula). By using this formula we can predict that CPI will be 199.82, an increase of 2% (see Appendix A Table III). Due to the possible volatile nature of inflation the forecast formula should be examined each year to obtain the most accurate information possible.

European Union Forecast

Forecasting inflation for other countries (or areas of business) is also important. Companies should keep track of the same data (if possible) for each of the countries that they are involved with. Since Kellogg's is involved in many countries with in the European Union it is a good idea to predict CPI for the European Union. The forecasting equation that was calculated for the European Union's CPI is CPI = 1.3214 (year) - 2549.9 (see Appendix A Graph II). This predicts CPI in the European Union at 102.15; however the r-squared shows a correlation of .90 which is on the weak side and more data should be collected to obtain a more accurate prediction.

Unemployment

Unemployment is a measure of the working population that is not currently employed. The working population does not include those who are unable to work. This measure is important for companies to be award of because it is an overall look at the economy and how it is functioning. If unemployment is high, the economy is not doing well and consumers will not be purchasing more expensive products. This would affect Kellogg's in their heath food products. Health food products tend to be more expensive because of rising demand and the requirement that the ingredients be all natural and pure (causing them to be more costly).

Over the past five years unemployment has stayed relatively constant, spiking in 2003 at 6% (Appendix A Table V). Although unemployment does not show a strong correlation to sales, unemployment can be a good measure of how investors may react to the market. A high unemployment percentage can cause investors to be less risky with their investments and they will be more likely to invest in low risk areas such as government bonds. Cautious investors could mean that Kellogg's would have to obtain funds from other outside lenders which could increase interest expense which in turn would lower their net income.

Forecasting Unemployment

United States Unemployment

An unemployment forecast will assist companies