BOSTON — While pleased with productivity programs that are driving strong profit growth, operating margin expansion and cash flow generation, Kellogg Co.’s top executive said the company has been less than impressed with top-line performance. In an effort to address that performance, the Battle Creek, Mich.-based company is focused on four key areas, John A. Bryant, chairman and chief executive officer, told analysts during a Sept. 6 presentation at the Barclays Global Consumer Staples Conference in Boston.
First, Kellogg must do a better job of delivering on-trend food and packaging, Mr. Bryant said.
|John Bryant, chairman and c.e.o. of Kellogg
“There’s been a number of changes in the beliefs around health and wellness for the U.S. consumer over the last few years,” he explained. “Unfortunately, some of those changes were unhelpful to some key brands that we have, and stabilizing and getting those key brands back to growth is a critical element to driving long-term growth for the Kellogg Co.”
Specifically, Mr. Bryant cited challenges facing Special K. The brand flourished in the 2000s behind a weight management positioning supported by low-fat, low-calorie foods, but in recent years consumers have shifted direction and in many cases aren’t counting calories anymore, Mr. Bryant said. As a result, he said Kellogg has changed its positioning from weight management to inner strength. The company also has renovated its products.
“Some of the Special K foods like Special K cracker chips have largely declined in the marketplace,” Mr. Bryant said. “Other businesses … actually can continue to do well under the current definition of health and wellness, and we’ve launched new foods like Special K Nourish with more evident fruits and nuts and grains. Stabilizing and driving Special K back to growth is priority No. 1 for our company, and that’s where our focus is. It has been a big area of change for the company, and we demonstrate that we can do this.”
A second area of focus involves increasing Kellogg’s exposure to snacking in its portfolio. Mr. Bryant said Kellogg’s snacks sales — which represent just over half of total company sales — are about the same size as total company sales were back in 2000.
“What has transformed our snacks business has been the Pringles acquisition,” Mr. Bryant said. “Pringles has been growing 6%, 7%, 8% a year since the date of acquisition, and we still are in the early days of the growth story around Pringles. We are under-indexed in certain channels in the U.S. We are under-indexed in single-serve within the Pringles business. So we think we have significant opportunity and runway for continued growth. Then the other big transformation going on in our snacks business is the D.S.D. (direct-store delivery), about setting up that business for long-term growth.”
As Kellogg continues down the path toward becoming more of a snacks company, Mr. Bryant said a third focus area will be on making sure the company’s products are available in a lot more channels than they currently are. He mentioned high-frequency stores, mom-and-pop stores, convenience stores, vending channels and e-commerce as outlets of importance.
“We recognize that e-commerce is going to transform the retail environment over the next decade,” he said. “We’re seeing it around the world. We’re rapidly approaching the situation where over half of our sales in China are direct-to-consumer, where we have markets in Europe, with over 10% of our sales coming through click-and-collect type programs, or buy-online, pick-up-in-store programs. And while the e-commerce in the U.S. is only around (2%) of the food industry, it is growing significantly. Our e-commerce business grew 70% in Q2 in the U.S. and will continue to grow over the next few years. So, preparing ourselves for that change, being in a position to win in the e-commerce environment, is a big part of our strategy. It’s worth pointing out that where we go through click-and-collect programs in Europe, our market share is generally higher and our margins are also very good as well.”
The fourth focus area for Kellogg is emerging markets.
“There’s no question that the emerging markets is the defining event in our lifetimes, and the food industry is a macro megatrend that will continue to provide growth for large food companies like Kellogg,” Mr. Bryant said.
Describing the extent to which Kellogg has made its mark in emerging markets, Mr. Bryant said the company has approximately 80% more volume in 2017 than it did five years ago in emerging markets.“Big investments here include buying the largest cookie cracker company in Egypt, buying a leading cereal business in Egypt, buying a leading regional cookie cracker player in Brazil and making a significant investment in Nigeria,” he said. “To give you a sense of the set — the scale and size of the Nigerian business, it’s one of the largest food businesses in Nigeria. It’s several hundred million dollars in sales depending upon where the exchange rate is from day to day, and it’s growing around 20% to 35% a year. So if we were to consolidate that business, it will obviously impact dramatically the overall growth algorithm of the company.”