Special K is set to undergo a huge revamp during 2015

Special K is set to undergo a huge revamp during 2015

"There is no quick fix in this business," Kellogg CEO John Bryant conceded last week after reporting another challenging quarter for the US group's breakfast cereal business.

However, with sales still under pressure, analysts are asking why Kellogg should be investing more in cereal than it is in snacks.

On Thursday (30 October), Kellogg reported a 2.1% drop in net sales for the quarter to 27 September, a decline of 1.7% when stripping out the effects of acquisition related costs and foreign currency translation. Once again, the unpopularity of breakfast cereal in two of its key markets was predominantly to blame. In the US alone, its morning foods division reported a 4.7% drop in sales.

Weakness in cereals is proving a bit of a pattern for Kellogg. In August, the firm slashed its annual sales and earnings forecasts. The news came after its US morning foods division experienced a 5% drop in sales in the second quarter.

Kellogg has insisted it has identified where the problem is and is handling the issue. For some time now, the company has noted problems in its weight management brand Special K, as consumers move away from products promoting their "skinny appeal". Bryant agreed the brand, as well as its cereal portfolio in general, has not been helped by the latest "protein push" from dietitians and athletes, warning folk against all-things carbs and gluten.

"There's a lot of fads and trends that go through the food industry at any point in time. Clearly, some of those items out there right now are not helpful to the cereal category. What we need to do is to continue to provide foods that are more on trend with some of those beliefs, and also to communicate to people some of the great benefits that our foods have," he said.

Going into 2015, he added, Kellogg would continue its recent efforts in pushing the "simplicity of the foods" message and talking about the "healthy elements" and the benefits. With Special K, Kellogg has been looking at repositioning the brand and emphasising the presence of "positive nutrition" such as protein, fibre and grains. Through 2015, Bryant said the firm is "reinventing all aspects of the Special K brand" including new packaging and advertising, new innovation such as Special K protein and Special K food and treats - that "directly appeal to consumer trends".

Again, Bryant reiterated, for the repositioning to have the desired effect, time is needed - as well as money too no doubt - with the company looking at revamping communications, promotions and packaging of the lines. But is Special K - or in fact any of the other cereals in the Kellogg portfolio - actually worth the hassle, investors mused last week.

In a conference call with Kellogg's management, Jason English, analyst at Goldman Sachs, said Kellogg has "assembled a pretty formidable snack business over the years". With a softer cereal performance across a number of markets coupled with a better showing from its snacks division - helped strongly by the growth of Pringles - English questioned whether Kellogg was taking the right decisions in rolling out a majority of its initiatives across its cereal portfolio in 2015. 

"I see your slide on plans for 2015. It looks like around 90% of these initiatives you detail adhere to breakfast. And I hear you talking about curtailing brand building overall, but ramping at high single digits in morning foods. So my question is why are these the right investment priorities? I'm not suggesting you put cereal in outright harvest mode? But why isn't every incremental dollar going to your snack portfolio to turn that around and ride the wave that's in front of you now?" English asked.

Bryant assured Kellogg was making a "balanced investment in growth across the portfolio," both in snacks and cereal. In addition to these investments, he said Kellogg was looking to meet the demand for convenience through the continued development of adjacent items such as breakfast drinks. Probed further as to whether its strength in snacks and weakness in cereals would eventually see a "portfolio shift", Bryant said while snacks "is an important growth priority", Kellogg should not have to choose one over the other's growth to prioritise.

"Clearly, it's not the right thing to do, to only invest disproportionally in one versus the other," he said.

It is reasonable to question why Kellogg is planning new activity for brands like All-Bran and Froot Loops. In a note to clients published after Kellogg's third-quarter results were published, Sanford Bernstein analyst Alexia Howard described Kellogg's US cereal portfolio as "structurally challenged".

However, Barclays Capital analyst Andrew Lazar believes Kellogg is making the right move in focusing its energies on its cereal business for the time being.

"We continue to think that 2015 will again be a sizeable reinvestment year...In fact, we are hopeful the company uses 2015 to get the base business in a more stable place from which to grow, and would frankly be disappointed if it did not go down this path".

Bryant once again maintained Kellogg is taking the right decisions to secure its future growth and warned that it may be a while before the fruits of its labour are seen.

"Remember that this is an ongoing initiative," he advised. "We've got some exciting ideas planned. We remain confident that the category will return to growth over time."

This afternoon in the UK, the owners of a local biscuits business linked to Kellogg announced it had agreed a sale. Turkish food group Yildiz Holding - the owner of the Godiva chocolate brand - has snapped up United Biscuits. Financial details were not disclosed but reports say Yildiz agreed to pay over GBP2bn (US$3.2bn).

Kellogg never publicly confirmed its interest in United Biscuits but Yildiz, in statements announcing the deal, highlighted it had beat off interest from the US group and from another UK biscuit maker Burton's Biscuit Co.

Ever since Blackstone Group and PAI Partners, the owners of United Biscuits, first tried to sell the business in 2010, Kellogg had been touted as a possible buyer, with some on Wall Street suggesting it would be a good move for the business.

The fact a snacks business like United Biscuits has gone elsewhere could frustrate some Kellogg investors, especially with the performance of its cereals business. However, it appears Kellogg found the price for United Biscuits too rich - and there were claims in the UK this weekend the company had concerns over the amount of investment needed at some of the biscuit maker's plants.

Shares in Kellogg have barely moved today since the United Biscuits deal was announced, dipping 0.2% earlier this afternoon but up 0.08% at the time of writing, an indication perhaps the market is not concerned the Special K owner has not added McVitie's to its portfolio.

That said, there remains plenty of questions about whether Kellogg really can breathe fresh life into its cereals business.