(K) Kellogg’s Food Contaminated Again

The Food and Drug Administration (FDA) released a report on June 14, 2011 stating that traces of listeria have been found in the food products of a Kellogg Company (K) bakery in Augusta, Ga. The regulators after an inspection in February this year came up with such findings. The Augusta plant makes Keebler and Famous Amos cookies, and is one of five cookie bakeries Kellogg operates in North America.

FDA said that listeria was found in several spots along the production line where the food stands at a higher risk of getting contaminated on direct contact. The FDA also noticed other unhygienic conditions such as insects hovering around the food. Even leaky pipes near food mixers and poling water near spiral coolers were a common sight at the plant.

Listeria is a kind of bacteria that can cause serious and sometimes fatal infections in young children, elderly people and others with weak immune systems. Symptoms include high fever, severe headache, stiffness, nausea, abdominal pain and diarrhea.

Battle Creek, Mich.based Kellogg took up the matter quite seriously. It voluntarily closed the plant in February, engaging in a through clean-up.

These charges against the retail giant came as a serious blow for the company. Kellogg’s reputation seems to be at jeopardy as it is the second time in barely two years that FDA has come up with such charges against Kellogg.

In January 2010, FDA had ordered Kellogg to improve sanitation facilities at different Georgia plants after Eggo buttermilk waffles were found contaminated with listeria. Again in June 2010 Kellogg voluntarily recalled about 28 million boxes of cereal including Froot Loops and Honey Smacks on complains of unusual taste and odor.

All this impacted Kellogg’s sales to a great extent. Eggo’s disrupted production for months gave way to a dwindling market share. On the other hand, North American cereal sales dropped 5 percent in 2010, partly because of the recall, putting Kellogg in a tight situation ultimately.

However, some streak of encouragement still remains based on the two strategies adopted by management in 2006, namely “Sustainable Growth”, and “People, Passion and Pride”. Moreover, Kellogg continues to market brands that generate higher margins. But the common headwind for all food companies does not spare Kellogg anyway. Presence of stiff competitors like General Mills, Inc. (GIS) and Ralcorp Holdings Inc. (RAH) concern us.

The company currently has a Zacks #3rank which translates into short term “Hold” rating.

GENL MILLS (GIS): Free Stock Analysis Report

KELLOGG CO (K): Free Stock Analysis Report

RALCORP HLD-NEW (RAH): Free Stock Analysis Report

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