Kellogg to remove artificial colors, flavors from cereal

by Monica Watrous
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Kellogg Co. said it has been working to remove artificial colors and flavors from Froot Loops, Apple Jacks and other branded cereals by 2018.

BATTLE CREEK, MICH. — Kellogg Co. said it has been working to remove artificial colors and flavors from Froot Loops, Apple Jacks and other branded cereals by 2018. Rival General Mills announced a similar initiative in June.

The move is part of Kellogg’s ongoing efforts to restore growth in its cereal business, which has struggled in recent years on weaker consumer demand. The company said it also plans to remove artificial colors and flavors from some of its snack bars and Eggo frozen products.

Paul Norman, president of Kellogg North America.

“We know consumers are looking for foods with simpler ingredients, and work is well under way to answer that call,” said Paul Norman, president of Kellogg North America, during an Aug. 4 earnings call. “Already in North America, 75% of our cereals are made without artificial colors, and more than half are made without artificial flavors.”

In addition to lower sales of cereal and snacks, currency headwinds dampened Kellogg’s financial performance for the second quarter ended July 4. The company reported net income for the period of $222 million, equal to 63c per share on the common stock, down 25% from $295 million, or 82c per share, for the prior-year quarter. Net sales for the quarter slipped 5% to $3,498 million, which compared with $3,685 million the year before.

Net sales for Kellogg North America declined nearly 3% to $2.3 billion in the second quarter. Operating profit declined 2.5%, reflecting lower sales, higher distribution costs, costs associated with the timing of production and the resetting of incentive compensation.

In Europe, net sales decreased 15%, or 2.5% on a constant-currency basis. In Asia Pacific, net sales fell 5%. Excluding foreign currency translation, sales grew nearly 7% on strength in Asian businesses. In Latin America, net sales increased 2.5% on a reported basis and 15% on a currency-neutral basis, driven by good rates of growth across much of the region.

Net sales for the U.S. Morning Foods segment declined 2% to $742 million; however, the company said trends are improving in the cereal business, and consumption and share of the Special K brand was up in the quarter. Operating profit for the segment fell 4% to $131 million.

“As you may have seen in public consumption data, the performance of the cereal category has improved this year,” Mr. Norman said. “Total consumption across all channels was approximately flat in the second quarter, and, importantly, Kellogg branded sales were essentially flat, too, with our six largest cereal brands collectively growing sales and share in the quarter.”

The Cheez-It and Pringles businesses saw growth this quarter.

Net sales for the U.S. Snacks segment decreased 2% to $835 million, reflecting growth in the Pringles and Cheez-It businesses offset by continued weakness in wholesome snacks. Operating profit increased 29% to $160 million.

The U.S. Specialty Channels segment posted a 2% decline in net sales of $270 million for the quarter, which included positive performance of K-12 school and convenience businesses. Operating profit fell 6% to $59 million.

“In the convenience channel, we saw share growth in five of the seven categories in which we compete,” Mr. Norman said. “Although we did see some weakness in food service, partially due to the exit from some unprofitable business, we are confident that our specialty channels business will grow in the second half.”

Net sales in the North America Other segment, which includes U.S. Frozen Foods, Kashi and Canadian businesses, fell 5% to $439 million, reflecting good sales growth for the Eggo brand offset by a decline in sales of Kashi products. Operating profit was $37 million, down 50% from $74 million for the comparable quarter.

Net sales in the North America Other segment, which includes the Kashi business, fell 5% to $439 million.

Year-to-date net income dropped 36% to $450 million, or $1.27 per share, from $701 million, or $1.95 per share, for the comparable period. Net sales for the six months dipped 5% to $7,054 million from $7,427 million.

For the full year, the company continues to expect currency-neutral comparable net sales to remain unchanged year-over year, currency-neutral comparable operating profit to decrease at a rate between 2% to 4%, and currency-neutral comparable earnings per share to be flat to 2% lower.

“We’re seeing improvement in our U.S. cereal business, improvement in our European business, and good growth in both the Latin American and Asian businesses,” said John Bryant, chairman and chief executive officer of Kellogg. “And we’re confident that this improvement will continue into 2016.”
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