Over the past ten years, Kellogg has moved to reduce its reliance on the cereal aisle, with the Keebler and Pringes acquisitions opening up the world of snacking. However, with 45% of sales still generated in cereal – and a sizeable bulk of this coming from the US – concern is mounting over the firm’s inability to turn around its fortunes in the market. Katy Askew reports.
Kellogg has been hit by ongoing pressure in US cereal. In its most recent financial update for the second quarter of the year, the company lowered its forecasts for annual revenues and profits after its second-quarter sales and earnings fell. Kellogg’s morning foods division in the US saw sales drop 5% in the period.
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The overall US cereal category has come under pressure from increasing competition from breakfast alternatives such as snack bars, seen as a convenient on-the-go option, or eggs, which have seen a renaissance in demand due to their high protein content. Less traditional options – such as Greek yoghurt and breakfast drinks – have also witnessed strong growth, alongside growing out-of-home breakfast consumption.
Consumption of US cereal has dropped by about 1% a year for the past decade and, within the category, growth has come from areas such as hot options – areas where Kellogg has a negligible presence.
According to market research provider Euromonitor International, the sector is expected to pick up somewhat in the coming four years. Between now and 2018 retail sales values are expected to “increase slowly”, rising by 3% overall to total around $11.7bn.
The researchers note: “This product type is likely to face more pressure than it once did… Numerous other areas of packaged food, most notably snack bars, are increasingly introducing products which can be used as a convenient substitute to a full breakfast.”
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By GlobalDataKellogg has done some work to mitigate the impact of its dependence on a declining category. Notably, over the past 14 years it has rebalanced its portfolio so that breakfast cereals and snacks now both account for an equal 45% of group sales, compared to a ratio of 70% and 20% respectively in 2000.
The company is also working to expand in higher-growth emerging markets. Last year, for instance, the firm announced plans to expand its cereals and snacks facility in Rayong, Thailand, by early 2015.
According to a report from Transparency Market Research, Kellogg, alongside US peer General Mills, is raising its spending in emerging markets in a bid to build a future growth platforms.
“Developed nations already have breakfast cereals as part of their regular course of meals. Increasing per capita income in developing countries is further giving the breakfast cereal industry a new dimension to look for,” the report notes. “Companies have been increasing their advertising spends in the emerging markets in Asia Pacific region to make consumers aware about the breakfast cereals and the health benefits associated with them.”
International snack sales are another avenue of increasing importance for Kellogg. CEO John Bryant has stressed that emerging market opportunities will be a key focus for the group.
Speaking at the Barclays Back to School Consumer Conference last week, Bryant said: “Today the Kellogg Company has got 15% of our sales in the emerging markets. Pringles has been a great acquisition for the emerging markets. It’s doubled or tripled the size of our business in some areas like south-east Asia and the Gulf, and gives us a whole new platform of growth in addition to cereal. So as we look at emerging markets, it’s an area that we want to keep investing in and driving even greater growth longer-term.”
However, with cereal sales in the US alone still generating around 16% of group revenue, Kellogg is also investing heavily to stabilise its core business.
The company is looking to innovation and brand building. It says it needs to find “new ways” to reach out to consumers – and broaden its appeal to include more consumers.
Bryant said: “Consumers and how they consume media is changing dramatically. So it’s no longer just about a 30-second ad. It’s about Hispanic, it’s about digital, it’s about mobile, it’s about social media, it’s about loyalty programmes, consumer databases, a whole range of new opportunities to engage with consumers in very different ways.”
While Bryant insisted cereal ticks all the health and wellness boxes, he also acknowledged Kellogg needs to address shifting consumer attitudes to diet and how its brands communicate those benefits. Kellogg, he conceded, has struggled to keep pace with US consumer attitudes.
“There’s no question the consumer in the US is changing the perceptions of food, and we need to change and increase the speed of change within our company in order to address those changes.”
In particular, Kellogg’s Special K and Kashi brands are struggling with sales down by around 10% and 16% respectively over the past year. Kellogg veteran Paul Norman, recently moved to a role of chief growth officer, revealed that over the past 52 weeks these two brands have been responsible for 50% of Kellogg’s total sales slide.
According to management’s assessment, Special K has been hit by changing attitudes to weight management as consumers focus more on “weight wellness”.
“What we need to do is switch the communication over to nutrient density to vitamins, wholegrains, fibre protein, whatever it may be, to re-engage the consumer back into the Special K, which require some innovation and some renovation, and again we have some exciting innovation coming up on Special K next year.”
Special K innovations will focus on “nutrient density”. The company is launching another protein variety, it is planning to roll out a GMO-free variant in the first quarter of next year and it intends to “lean on” the hot segments, like hot granola, where there is category growth.
The diagnosis of issues at Kashi appeared a little less clear-cut.
Norman alluded to some of the issues the brand has faced in losing core consumers to products with a GMO message.
“The whole point of refocusing Kashi is to get on the front foot and get forward back into progressive nutrition. We got a couple of things in the way of housework to do. First, to get our portfolio in shape, particularly our biggest brand, GoLean. By Q1 the entire GoLean cereal franchise will be non-GMO certified. So the base is set. The Heart to Heart business will fall into the Organic Promise portion of the brand, so the rest of the brand will be organic in nature,” he said.
Kellogg’s move to relocate the Kashi team back to La Jolla – reversing a former decision to move it to the main HQ at Battle Creek – and bring back former general manager David Denholm to a new position of Kashi CEO suggests the cereal giant is attempting to recapture some of the nimbleness and entrepreneurial spirit that was the foundation of Kashi’s early success.
Kellogg is stepping up its investment behind two of the brands that have proven top line growth drivers for the past 14 years. This, the company maintains, will help turn around its fortunes in US cereal. “We have an opportunity to invest back in the category, reinforce the benefits of the food form. It is a low-calorie, nutrient-dense food form and bring consumers back into cereal,” Bryant concluded.
However, Sanford Bernstein analyst Alexia Howard is less convinced of the merits of Kellogg’s strategy.
In a recent note to investors she wrote: “We remain sceptical that this is the answer, as Kellogg continues to lose share in the already declining ready-to-eat cereal category. A broader question is how much additional resource is warranted for some brands if consumer preferences are shifting more rapidly than the brands can adapt?”
Given the challenges that Kellogg faces in US cereal, rather than pouring good money after bad it could perhaps be more prudent to focus the group’s energies and resources on areas that offer greater growth prospects. Can Kellogg really do it all?
