Will Kellogg Snap, Crackle and Pop in China, or Just Get Soggy?


Since 1927, Rice Krispies have been an American breakfast staple. Who doesn't like to hear that trademark snap, crackle and pop as the milk hits the cereal? Well, Kellogg (K) is about to find out whether or not the Chinese do.

The cereal and snack-food giant has just struck a deal to manufacture and distribute its products in China. For companies and investors hungry for growth, China can sometimes seem like the answer to everyone's prayers: a country with more than a billion people and an expanding middle class eager to eat up anything America can throw at it.

But it doesn't always work out that way. Home Depot (HD), Best Buy (BBY), and Mattel (MAT) all went into China smiling -- blithely assuming the Chinese consumer was going to buy up everything they had to offer -- and left crying. Kellogg, however, may just have a secret weapon up its sleeve, one that any foreign-enterprise adventurer shouldn't leave home without: a local partner that knows the tastes and psychology of the region.

The Agribusiness King of Singapore

In Kellogg's case, that partner is Wilmar International. Based in Singapore, Wilmar has more than 400 manufacturing plants and an extensive distribution network that includes China, India and Indonesia. Its business specialties include edible-oils refining, sugar milling and refining, and -- important for Kellogg -- grains processing.

The two companies will partner 50-50 on all of Kellogg's China operations. Wilmar will contribute its home-team infrastructure, its massive supply-chain scale, and its extensive sales and distribution network. Kellogg will contribute its globally recognized portfolio of brands and products, focusing on two in particular: Kellogg and Pringles.

Wilmar has been around for more than 20 years, and seems to know the region intimately, along with the business of manufacturing and distributing grains-based food products. This is encouraging news for Kellogg investors, as the company seems to be smartly following in the successful Asian footsteps of another big American brand: Starbucks (SBUX).

How to Sell Coffee in the World's Premier Tea Market

So far, China has been very good to Starbucks. The company believes that China will be its second biggest market by 2014. But what's left to conquer after you've conquered the biggest country in the world by population? Why, the second biggest country in the world by population: India.

Sponsored Links

Earlier this year, Starbucks inked a partnership deal with Indian conglomerate Tata Group to spread the gospel of coffee across the subcontinent. Tata is relatively unknown in the U.S., but is very well known in India and elsewhere around the globe for products as varied as cars, steel, and hotels. But most important for Starbucks, Tata is best known for its beverages: tea in particular.

This is important because India is primarily a tea-drinking country, so who better than the primary purveyor of the country's favorite beverage, Tata Group, to shepherd America's favorite coffee shop, Starbucks, around the country?

Everyone's a Winner

Like Kellogg and Wilmar, the Tata Group and Starbucks partnership was also a 50-50 enterprise. Deals like this are a bargain for all the companies involved. Local companies get the brand cachet and instant product recognition of the American companies, while the latter get personally escorted around tricky foreign markets -- "tricky" being an understatement.

Home Depot found out the hard way that, in China, do-it-yourself means you're too poor to have someone else do it for you: The company just announced it will be closing its seven remaining stores there. Best Buy ended up closing all its Best Buy branded stores in China, as well, which it imported with no adjustment for how Chinese consumers are used to shopping -- part of which includes price haggling. Mattel opened a flagship, six-story Barbie store in Shanghai to great fanfare in 2009, only to close it two years later: Chinese parents thought Barbie was sexy rather than cute, and therefore not appropriate for their children.

There's no way to know right now exactly how Rice Krispies will go down in China. If Kellogg is smart, it will rely heavily on Wilmar for product advice and consumer tastes, as well as do a lot of consumer testing: better to find out now whether its benchmark products will be a crackling delight or a soggy disappointment.

John Grgurich is a regular contributor to The Motley Fool. The Motley Fool owns shares of Starbucks and Best Buy. Motley Fool newsletter services have recommended buying shares of Starbucks, The Home Depot, and Mattel. Motley Fool newsletter services have recommended writing covered calls on Starbucks and creating a bear put spread position in Mattel.

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