WSJ -- Kellogg’s Plans for Stranded Cereal Unit Look Soggy ................................
MARKETS
HEARD ON THE STREET
Aug. 9, 2023
Kellogg’s Plans for Stranded Cereal Unit Look Soggy
In its eagerness to focus on snacks, Kellogg hasn’t provided a convincing growth plan for its cereal spinoff
By Aaron Back
Kellogg’s plan to ditch cereals makes no more sense today than when it was first outlined a year ago.
The company hosted an hourslong investor presentation on Wednesday giving more details on its plan to spin off the North America cereal business, home of Frosted Flakes and Froot Loops, into a new unit to be called “WK Kellogg Co.” The remaining company will be renamed “Kellanova” and focus on the global snacks business, including brands such as Pringles and Eggo waffles.
The snacking category is growing fast while cereal has been in long-term decline, driven by shifts in consumer breakfast habits toward protein and away from sugar and carbohydrates. It is understandable that Kellogg wants to focus on snacks, but its case for why the cereal business would also be better off on its own remains deeply unsatisfying. Since it announced the spinoff plans in June of last year, Kellogg shares have declined around 6% compared with a roughly 10% gain for the S&P 500 consumer staples subindex.
On Wednesday, Kellogg executives spoke again and again of the benefits of having a stand-alone sales team solely focused on cereal and not distracted by snacks. But their target through fiscal 2026 is merely to maintain flat sales for the unit by gaining share in a declining category.
Earnings growth for WK Kellogg is to be achieved through margin improvement: The company sees margins based on earnings before interest, taxes, depreciation and amortization rising by around 5 percentage points to the “midteens” by end-2026, compared with around 9% now. It detailed plans to modernize its supply chain, requiring upfront investment now to reset margins down the road.
There are a few problems with this model. A Morgan Stanley analyst asked one obvious question: If the sales outlook is merely flat, where will long-term profit growth come from after 2026 once margins are normalized?
Gary Pilnick, who has been designated chief executive of WK Kellogg, replied that the company is focused for now on the “first horizon” of margin improvement through 2026. After that, he said growth could come from “looking beyond cereal.”
Another analyst present at the event asked if he had heard that reply correctly given all the focus during the day on the merits of a cereal-focused organization. Pilnick replied that the company’s iconic brands could travel beyond cereal to occasions such as snacks, and that over the long term it would look at acquisitions as well as joint ventures and licensing opportunities to achieve this. (Of course Kellogg is already doing this with products such as Rice Krispies Treats, which are to be part of the new snack business). He also said later that there is room for further margin expansion beyond 2026, and that the midteens target isn’t necessarily an endpoint.
Another issue is that even maintaining share in cereal will require investment in product development and marketing to keep brands relevant. For instance, one hopeful bit of innovation flagged during the event was a new zero-sugar, high-protein version of Special K, a dieters’ cereal that has looked rather dated for a while now.
But keeping this up will require continuous investment, not the one-off sort envisioned for the supply-chain upgrade. That would likely be at odds with the overriding mandate for margin expansion.
WK Kellogg can try to do more with less: It touted initiatives to streamline the number of advertising agencies it works with and to focus more on high-return social media. But it is unclear how any of this will be easier as a smaller company with fewer resources. And the marketing messages it highlighted on Wednesday didn’t inspire much confidence. One was a recently launched “cereal for dinner” campaign that encouraged busy families to “give chicken the night off.”
They will have to do a lot better than that to turn cereal around.
Write to Aaron Back at aaron.back@wsj.com
Copyright © 2023 Dow Jones & Company, Inc.
.
.
. |
