Kellogg Company (K - Free Report) closed its operations in Venezuela, thanks to tumultuous economic condition. Poor access to raw materials due to economic barriers, supply chain disruptions and the limited access to dollars to import goods due to currency controls have disrupted operations of the company’s Venezuelan subsidiary.
The Venezuelan division produced 75% of the breakfast cereals for the country, per the company's website and employed around 400 workers. Post the news of discontinuation of operations in Venezuela, Kellogg’s manufacturing plant has been captured by the leftist government, under the leadership of President Nicolas Maduro.
Importantly, Kellogg deconsolidated and changed to the cost method of accounting for the Venezuelan subsidiary in December 2016.
What’s Exactly Happening in Venezuela?
The oil-rich country of Venezuela is now reeling under hyperinflation and strict price controls. The country is divided between the followers of the United Socialist Party (PSUV), earlier led by Hugo Chávez and currently fronted by Nicolas Maduro, and those who want an end to the more than 15-years of rule of the party.
Venezuela, having one of the largest oil reserves in the world, heavily depended on revenues from oil imports for sustenance. During the presidency of Hugo Chavez in early 2000s, oil prices were booming. The leader used this money to fund various social programs and was successful in addressing illiteracy, healthcare and poverty issues. Also, the price of key items, food and medicines were fixed at a rate below the cost of production to make it affordable. Chavez also restricted the conversion of national currency into dollars and fixed the rate.
When oil prices began to fall the economy went haywire. The government failed to support the projects, paralyzing the country with poverty and inflation. Moreover, the government also stopped companies from raising prices to keep up with hyperinflation.
Venezuelan President Reacts
The enraged president Maduro decided to hand the company over to the workers so that they can continue production. He believes that Kellogg’s exit is unconstitutional and has begun judicial proceedings against management.
In retaliation, Kellogg said that the company is not responsible for the unauthorized use of the commercial names as well as brands and will exercise legal actions if needed.
Importantly, Kellogg is not the first company to exit the country. Other companies include Clorox (CLX - Free Report) , Kimberly-Clark (KMB - Free Report) , General Mills (GIS - Free Report) and General Motors (GM - Free Report) . Though Kellogg stated that it looks forward to resume operations once conditions improve, we believe that chances are dim considering the dismal economic situation.
Kellogg currently carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Kellogg Company Price
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