US food giant Kellogg said it will continue to invest and plans to revitalise its brands as its seeks to “pivot” back to growth.
But it has warned operating profits are likely to remain flat for some time and has also cautioned about increased costs linked to Brexit.
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In an analysts’ call after reporting a 16.5% year-on-year reduction in its operating profit for the fourth quarter of 2018 to US$326m, CEO Steve Callihane said Kellogg is “building a long-term foundation for growth” based on its Deploy for Growth strategy introduced last year.
“That gives us very clear priorities and has resulted very quickly in tangible, often bold actions for pivoting us back to growth,” he said.
“Our portfolio is more shaped toward growth today. We acquired [bar company] RX in late 2017 and in 2018 we expanded its distribution, doubled its small brand awareness and extended its product line. This is a new growth platform for us.
“In early 2018, we increased our stakes in our west Africa operations, moving emerging markets up to almost 20% of our company’s sales. Emerging markets will be a growth driver for years to come and in 2018 we accelerated our organic growth in these markets to a high single digit rate.
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By GlobalData“We also invested heavily in our brand and capabilities in 2018. Our brand building investment was increased at a high single digit rate in 2018 and it was invested behind better commercial ideas at higher ROIs.
“We are not just spending. We are revitalising brands and even launching some new ones. We also invested in capabilities from e-commerce and digital social marketing to new pack formats to execution in high-frequency stores. All of these are investments in building a long-term foundation for growth.”
But Callihane warned Kellogg, known for its cereals as well as brands such as Pringles crisps and Pop-Tarts, is likely to see a decline in operating profit in the short term.
“Our guidance for 2019 incorporates a plan to continue increasing our investments through the first half, “he said. “This, on top of some unfavourable cost comparisons with last year, means operating profit will decline in the first half before returning to growth in the second half. This translates into flat operating profit for the year but it drives a solid return to organic net sales growth almost immediately.”
He added: “The reason we are willing to continue investing in this turnaround is because we are confident it’s working.”
Kellogg has struggled in recent years from pricing pressure from retailers and growing consumer preference for healthier, fresher food rather than shelf-stable items.
The company, which saw its shares slump after its fourth-quarter results were released on Thursday (7 February), said it had also suffered from the effects of a strong dollar and told news agency Reuters that it is also having to spend money on preparation for Brexit, the UK’s departure from the European Union on 29 March, which potentially could happen without a trade deal in place.
Callihane told Reuters: “Brexit is a very, very uncertain geopolitical situation. Probably the most uncertain geopolitical issue that companies are facing right now.”
