Minicase 1 Kellogg Company}

Kellogg Company has its headquarters in Battle Creek, Michigan. The company manufactures and sells ready-to-eat breakfast cereals and convenience foods including toaster pastries and cereal bars.

Selected data from Kellogg Company's 1994 annual report follows (dollar amounts and share data in millions):

In its 1994 annual report, Kellogg Company outlined its plans for the future, which it described as its six "global strategies." A brief description of these plans follows.
1. Focus on the cereal and convenience food markets that are considered to be core businesses. The company has already divested seven businesses in the past three years that it considered noncore, such as the Mrs. Smith's pie business. In the coming year, Kellogg Company plans to invest more heavily in advertising in order to build brand recognition in the U.S. cereal market.
2. Continue to launch more new products.
3. Continue to be the first to introduce ready-to-eat cereals in countries around the world. Kellogg Company achieved this goal in India and the Soviet Union, and plans to achieve the goal in China.
4. Maintain or reduce present levels of capital expenditures. Kellogg Company plans to achieve this goal by using value-based management and value engineering.
5. Reduce operating costs. This measure is made necessary because of the limited ability to increase sales prices. Kellogg Company reported that cost of goods sold per kilo was virtually flat in 1994 .
6. Repurchase shares of its own stock aggressively. This is done partly to improve earnings per share.
\section*{Instructions}

(a) For each of the six global strategies, describe how gross profit and net income are likely to be affected.

(b) Compute the percentage change in sales, gross profit, operating costs (cost of goods sold plus selling and administrative expenses), and net income from year to year for each of the three years shown. Evaluate Kellogg Company's performance. Which trend seems to be least favorable? Do you think the global strategies described will improve that trend? Explain.

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Net sales 1994 $6,562.0 1993 1992 $6,295.4 $6,190.6 Cost of goods sold 2,950.7 2,989.0 2,987.7 Selling and administrative expense 2,448.7 2,237.5 2,140.1 Net income 705.4 680.7 431.2