Kellogg: 'Morning foods is not going to be the growth driver for us'

by Monica Watrous
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Kellogg cereals
Kellogg recently introduced Chocolate Frosted Flakes and Special K with probiotics.
 

BATTLE CREEK, MICH. — Don't expect ready-to-eat cereal to drive growth at Kellogg Co., chief executive Steven A. Cahillane told investment analysts during a Feb. 8 earnings call.

Steve Cahillane, Kellogg
Steven Cahillane, c.e.o. of Kellogg

“We know we can stabilize it; we aim to stabilize it,” he said, adding, “You shouldn’t look at U.S. Morning Foods and say this is going to be the growth engine for the Kellogg Co.”

Cereal sales have struggled in recent years as American consumers opt for protein bars and other portable items for breakfast. In the recent quarter, Kellogg introduced Special K with probiotics to tap into consumer interest in digestive health. The company also rolled out Chocolate Frosted Flakes. Meanwhile, net sales of the company’s U.S. Morning Foods segment fell 5% on a currency-neutral basis in the fourth quarter and full year. Brand building and “constant innovation” are needed to reverse the decline, Mr. Cahillane said.

“...You’re hard-pressed to find businesses with the household penetration that are almost 100,” he said. “I mean, getting it into people’s pantries is not difficult; it happens. But getting people excited about it is our job to do. And we can do better in brand building in the United States.”

Kellogg pull quote
 

He pointed to success in three other developed markets where Kellogg recently stabilized its cereal business — Canada, Australia and the United Kingdom.

“...What I’ve seen in those three core markets has been an execution, a solid execution around, what we call here, the playbook,” he said. “And again, it’s nutrition, brand building, in-store execution and excellence in execution....

“So, for example, in the U.K., Corn Flakes has been a business that’s been around for a very, very long time, very mature business, and the team there put together a new brand-building idea, a program around what we internally call ‘versatility’ but what was really a reintroduction to consumers to reconsider Corn Flakes in various dayparts and a real fun way to talk about in a social media way how people enjoy the perfect bowl of Corn Flakes. It went viral. It became part of the dialogue. It became contemporary again. And Corn Flakes started growing double digits.”

Kellogg's corn flakes U.K.
Kellogg recently promoted its Corn Flakes in the U.K. as a food for every daypart.
 

He added, “...It’s up to us to really maintain a high standard of these things and execute with excellence because it’s not easy. It’s a competitive category. It does respond when it’s marketed too well. But if you stumble, you can lose some volume. So we’re bound and determined to grow the three markets that are stabilized to stabilize our North American Morning Foods business.”

Over the past five years, Kellogg has repositioned itself “from primarily a cereal business to much more of an innovative snacking business,” Mr. Cahillane said. This was underscored by the recent $600 million acquisition of RXBAR, a specialty protein bar brand.

“That’s a business that filled the white space for us and is doing incredibly well and really connecting with consumers and growing rapidly,” Mr. Cahillane said.

RXBars, Kellogg
Kellogg's acquisition of RXBAR underscored its movement to become more of a snacking business.
 

A major move made at the company last year was the transition out of a direct-store delivery distribution model for U.S. snacks.

“Our transition out of D.S.D. was well executed and sets us up to invest more behind our brands in order to get back to growth in that business,” Mr. Cahillane said.

Driving growth at the bottom line were Kellogg’s margin expansion initiatives, including the Project K multi-year restructuring effort and zero-based budgeting.

Net income attributable to Kellogg Co. for the year ended Dec. 30, 2017, was $1,269 million, equal to $3.65 per share on the common stock, up sharply from $694 million, or $1.98, in the prior year. Net sales dipped 0.7% to $12,923 million from $13,014 million. On a currency-neutral basis, net sales declined 2.6%.

Kellogg frozen foods
Highlights of the fiscal year for Kellogg included strength in U.S. frozen foods.
 

Fourth-quarter net income attributable to the company was $428 million, which compared with a loss of $53 million in the year-ago quarter, on net sales of $3,209 million, up 3.6% from $3,097 million. Sales fell 1.5% on a currency-neutral basis.

“We finished the year on sound financial footing,” Mr. Cahillane said. “Not only did we deliver on our guidance for all key financial metrics, but our second half net sales performance was vastly improved from the first half.”

Highlights of the fiscal year included strength in U.S. frozen foods, sustained growth in U.S. specialty channels and improving trends in emerging markets. Additionally, the company’s Pringles business improved in Europe in the second half of the year.  

“In any business that has the type of excellent portfolio spread wide that we do, there’s always going to be areas that are accelerating and doing well and areas that we're working on,” Mr. Cahillane said. “We’re not always going to have a U.S. frozen business that’s growing double digits. But when we do, we’ll invest wisely behind it, try and continue to push that. But we have to be cognizant of all the different portfolio pieces that we have, invest wisely so that we can grow the totality of our business.”
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