Firm Description, Products, and Competition: Kellogg Company

Kellogg Company was founded as the Sanitas Food Company in 1900 by W.K. Kellogg and Dr. John H. Kellogg. Later on, W.K bought out his brother. In 1922, he adopted the Kellogg company name and diversified into ready-to-eat cereals, cookies and cracker products, and frozen breakfast foods by 1970s. In 2006, it had total worldwide sales of almost $11 billion (Garcia, 2013). It became Britain’s biggest selling grocery brand in 2007 in ready-to-eat cereals and nutritious snacks product lines.

Kellogg’s has achieved its position in the industry through diverse competitive strategies. Firstly, it has excellent brands, significant brand value, and commitment to corporate social responsibility. Some of its brands are household names globally, such as the Nutri-Gain and Rice Krispies. Kellogg’s CSR activities include protecting the environment, selling nutritious products, ensuring a safe and healthy workplace, and promoting workforce diversity (Asongu, 2007). Another competitive strategy is its successful market segmentation and product differentiation. These strategies have made the company a top brand in the packaged food and meat sector.

Tyson Foods

Tyson Foods is a protein-focused food company with Beef, Pork, Chicken, and Prepared Foods segments. The beef segment processes live-fed cattle, fabricating dressed beef carcasses into case-ready products. Globally, Tyson Foods is the second-largest marketer and processor of chicken, pork, and beef. It is also the largest exporter of beef from the U.S. There are several widely known elements of its competitive advantage. It improved cost structure by investing in projects with high returns, diversified pricing mechanisms, upgraded to value-added branded products to satisfy demand, and continues to excel in product quality and customer service.

Evaluation of Financial Statements

Short-term Liquidity

Maintaining liquidity ensures the business runs smoothly and can meet its obligations. Short-term liquidity is the firm’s ability to meet its short-term obligations, measuring the relationship between current liabilities and current assets (Akoto, 2013). A company can compute this using current or the acid test ratios. The former assumes that all current assets are convertible to cash whenever necessary to meet current liabilities. The current assets should be at least double the value of current liabilities. That is, the ratio of 2:1. The acid test or quick ratio deducts stock and work-in-progress from current assets, giving a better measure of liquidity than the current ratio.

As per Kellogg’s annual reports (Kellogg Company, 2020; Kellogg Company, 2021), the current assets and current liabilities are as indicated in tables A1 and A2 (see Appendix A). Table A1 computes the quick ratio for 2020 and 2021 using the formula; (Current assets – Inventories) / Current Liabilities. Table A2 computes the current ratio using the formula current assets / Current liabilities. A rule of thumb of 1:1 is considered satisfactory for this ratio. If the ratio is lower than 1:1, the firm is experiencing financial difficulties (Kuppapally, 2010). Kellogg’s quick ratio of 0.38 and 0.42 for 2021 and 2020, respectively, implies that Kellogg is not in a desirable financial position to meet its short-term obligations. The current ratio decreased from 0.67 in 2020 to 0.64 in 2021, indicating a decline in the firm’s ability to cover short-term obligations.

Lower current assets (uses of cash) and higher current liabilities lead to lower current ratios. Kellogg’s cash flow from operations totaled $1,701 million in 2021 compared to $1,986 million in 2020 (Kellogg Company, 2020; Kellogg Company, 2021). This decline resulted from higher annual income tax payments and changes in incentive compensation and other accruals from 2020. One possible reason why current assets decline is because of increase in inventories (Šarlija & Harc, 2012). In 2020, Kellogg’s inventories totaled $1,284 million, a value that increased to $1,398 million in 2021.

The company was resilient during the COVID-19 outbreak, but the pandemic still impacted some of its operations. The company expects the cash provided by operating activities in 2022 to total $1.7-$1.8 billion (Kellogg Company, 2021), a change that would be barely significant compared to 2021 values. Because its principal source of liquidity is operating cash flows supplemented by borrowings, the trend signifies potential financial flexibility in the future.

In 2020, Tyson Foods’ current assets totaled $7,598 million, inventories $3,859 million, and current liabilities $4,234 million (TYSON FOODS, INC., 2020). Therefore, current ratio was 1.79 ($7,598 million/$4,234 million), and a quick ratio of 0.88 {[$7,598 million-$3,859 million]/$4,234 million}. In 2021, current assets totaled $9,822 million, inventories $4,382 million, and current liabilities $6,325 million (TYSON FOODS, INC., 2021), translating to a current ratio of 1.55 and a quick ratio of 0.86. Graphs B1 and B2 compare Tyson Foods and Kellogg based on their current ratio and quick ratio, respectively, in 2020 and 2021 (see Appendix B).

Graphs B1 and B2 indicate that the current ratio for both companies declined in 2021 compared to 2020, a trend repeated with the quick ratio (Appendix B). This trend implies that Kellogg might be unable to cover its short-term obligations, but this challenge also exists to the rival, Tyson Foods. By improving its short-term liquidity, Kellogg could earn a competitive advantage in the sector and remain sustainable in the long term.