Kellogg wants China to wake up to its cereal

[September 25, 2012]  NEW YORK (AP) -- Kellogg is hoping it can finally turn cereal into a breakfast staple in China.

The maker of Frosted Flakes, Pop-Tarts and Eggo waffles says that it formed a joint venture to expand the distribution of its cereals and snacks in the country as early as next year. The breakfast giant says the deal will tap the infrastructure and local expertise of Wilmar International, a Singapore-based agribusiness.

The Battle Creek, Mich.-based company also plans to use the deal to sell Pringles chips, which it acquired earlier this year to grow its international business.

Kellogg Co. currently gets most of its revenue from North America, where growth in the packaged food industry has been relatively weak. But like other companies, Kellogg is increasingly casting its sights on developing markets such as China and India, where the appetite for convenience foods is growing more quickly.

Kellogg notes that China is expected to be the largest food and beverage market within the next five years, as the ranks of middle-class consumers continue to multiply in large cities. As for cereal, the company says consumption is rising as milk becomes a more common part of the diet.

China's past scandals with tainted milk nevertheless remain a major stumbling block for cereal makers, says Paul French, chief China market strategist for Mintel, a research firm.

"They've been having a go at trying to get them to eat (cereal) for some time," he said.

Another hurdle is that milk in China doesn't taste the same as in the U.S. because it tends to be watered down and filled with additives, French said.

When middle-class Chinese consumers do eat cereal, French said they typically opt for muesli-like brands rather than cornflakes, because they tend to contain dried fruit and are more akin to local products. He noted that the Chinese food maker Bright Foods earlier this year acquired a majority stake in Weetabix, which makes Alpen muesli.

French said cereal companies are finding greater success selling breakfast bars, which don't require milk and can be marketed as energy boosters for white-collar workers.

Kellogg nevertheless sees potential for growth. The Chinese market for cereal is expected to reach $225.4 million this year, more than double what it was five years ago, according to Euromonitor International. That's still just a fraction of the U.S. cereal market, estimated at $9.99 billion.

A representative for Kellogg said the company already sells brands including Frosted Flakes, Rice Krispies and Special K in China.

General Mills Inc., the maker of Cheerios and Wheaties, already has a joint venture with Nestle, called Cereal Partners Worldwide, to sell several of its cereals in China.

With Pringles, which is sold in more than 140 countries, Kellogg is also looking to move beyond the breakfast table. The Pringles deal catapulted Kellogg to the world's second-biggest salty snack maker, after PepsiCo Inc.'s Frito-Lay.

Although Pringles already has a broad presence in China, Frito-Lay has been much more aggressive in offering flavors that appeal to the Chinese, said the Mintel analyst, French. Those include seafood flavors popular in various regions, as well as foreign flavors such as "Italian Ham" and "Texas Steak" that the Chinese might find exotic, French said.

This isn't Kellogg's first attempt to expand in China. The company bought Zhenghang in 2008 but sold the Chinese snack food maker earlier this year after a review of its position in the country.

Kellogg plans to start operating its joint venture with Wilmar in China by Jan. 1, pending regulatory approvals. Wilmar International is a unit of Yihai Kerry Investments Co. Ltd.

For now, Europe remains Kellogg's largest international market. But the company is seeing weakness in the region, with its international sales in the second quarter down 3.8 percent.

Shares of Kellogg rose 28 cents to close at $51.73 Monday.

[Associated Press; By CANDICE CHOI]

Follow Candice Choi at http://twitter.com/candicechoi.

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