Hannah Abdulla

On the money: Success lies in the brand, believes Kellogg

By Hannah Abdulla | 7 February 2014

Kelloggs notes it has a tough year ahead but believes its brand is enough to see it through to success

Kellogg's notes it has a tough year ahead but believes its brand is enough to see it through to success

Kellogg is set to focus its energies on boosting the profile of its namesake "master brand" in a bid to regain market share.

Following a 1.7% drop in fourth-quarter sales to US$3.5bn, 0.5% worse than Wall Street analysts were expecting, the company said it would look to improve its relevance and build audience affiliation to the Kellogg's "master brand" and its associated products.

CEO John Bryant suggested that the group would be able to leverage the strength of the Kellogg's brand to drive sales growth across its portfolio. "We've not plugged it yet. It is a strong brand. We think it will work," he insisted. 

As Kellogg looks to get the top line moving, North America will be the firm's primary target. Internal sales in this region fell by 2.8% during the fourth quarter and 0.9% for the full year, Kellogg said. In North America, Kellogg was hit by downward pressure on sales in both the snack and cereal aisles. 

The company has now turned its attention to reviving breakfast as an "occasion" and placing cereal at the forefront of consumers minds, Bryant said during a conference call with analysts. 

At present, the cereal sector is losing consumers to alternative breakfast options, including eggs or toast, Bryant revealed.  "We need to move to focus on explaining the benefits of cereal to consumers. The challenge however is [for us] to own the outcome, own the growth in that category. And we think we can do that by activating the strongest brand we have, which is the Kellogg brand," he said.

The investment needed to strengthen Kellogg's master brand will be generated by the Project K programme, CFO Ron Dissinger suggested. "We expect that brand-building will increase faster than sales growth, including the reinvestment of savings from Project K."

Project K, a four year efficiency and effectiveness initiative, resulted in $208m in costs during fiscal 2013. The company expects to spend as much as $1.4bn by the end of 2017 to bolster production lines and integrate global internal business services. Project K has also included the closure of a number of facilities: the firm axed a snack plant in Charlotte this week and is set to divest of a further two production lines at its snacks plant in Cincinatti by the end of the year. At the end of last year it announced closures of the Ontario plant and Charmhaven in Australia.

Bryant has been quick to insist that the high initial costs associated with Project K will pay off in the longer term. "Our expectations are that, over time, Project K will begin to provide us the fuel we need to drive growth in our categories, and across our businesses, in the years to come," he insisted. 

An analyst pointed out that Kellogg's weaknesses were in some of the key franchises, in particular Special K and Mini-Wheats.

Bryant admitted there had been "some softness" in the company's promotional approaches for Special K. He added that it had some key sell points as a weight management proposition. "We need to re-amp that", he said.

This attempt is in line with the firm's objective to push healthier and more nutritious products during 2014, including Raisin Bran with Omega 3 and Special K Nourish with quinoa. Bryant said Raisin Bran "grew strongly" during the last year thanks to a marketing campaign highlighting its benefits.

"If you look at brands like Raisin Bran, you're actually seeing good growth when we get behind a healthy dividends-type messaging. So when we have clear insights, good messaging, we can absolutely drive these businesses."

He added more activity like this was needed for this category, especially pushing its line of GMO-free cereals.

Innovation in wholesome snacks, part of the overall snacks business, had paid off to a certain extent, Bryant said. However, the firm was disappointed with the overall performance of the sector. Bryant added Nutri-Grain and Rice Krispies Treats were still doing "reasonably well" but there were "some weaknesses specifically around Special K and FiberPlus."

"As we look at 2014, we expect this business to continue to be a challenge," he said. "We have a good core business. We probably had some innovation in that business that hasn't stuck in the marketplace. It's a bit of a drag on us, and we need to focus back on the core, improve some of the core food and improve the in-store execution as well."

Targeting those with time-constraints, Bryant said "this category [wholesome snacks] can grow if positioned as a portable breakfast solution."

One significant plus for the company was Pringles. Acquired in early 2012, the snack product experienced global double-digit growth.

"Pringles had a very strong year in 2013 despite some difficult comparisons, and we remain optimistic given the early results from the launch of new products and a strong commercial calendar. While we don't expect continued double-digit growth, we are excited by the potential growth of this great business."

Bryant added capacity had been constrained since the acquisition but was being addressed in Europe, Asia and China.

Kellogg's expect 2014 growth of +1-3% underlying EPS growth and organic EBIT of +0-2%.

Barclays Andrew Lazar commented: "The very modest EPS growth forecast should provide Kellogg with some flexibility to spend behind the weak points of cereal and snacks, not to mention set a more reasonable EPS base."

Bryant said: "It was a difficult environment in 2013 in the developing regions. We expect this to continue over 2014. We've got plans in place to resolve this.

"We recognise the challenges that we have, and we're taking meaningful actions that will begin to address them. This will be a journey and will require a lot of work, so I'm sure that we're making the right decisions now to drive growth in the future."

Sectors: Cereal, Emerging markets, Financials, Health & wellness, Snacks

Companies: Kellogg, Pringles

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