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June 22, 2022updated 27 Jun 2022 11:05am

Kellogg’s radical playbook – a risk worth taking?

Kellogg is separating into three independent companies in a major restructuring plan – but will the move pay off?

By Andy Coyne

US food heavyweight Kellogg’s decision to split its business into three distinct entities might be interpreted as it making plays in both offence and defence.

One way to look at the move is Kellogg is letting its faster-growing snacking and international units off the leash while giving its mature and problem-hit North American cereal business the focus it needs to recover.

The Kellogg’s Corn Flakes, Special K and Pringles owner sprung something of a surprise on 22 June when it announced it was separating itself into three independent companies in a major restructuring plan.

Kellogg intends to spin off two groups of assets to form the three new entities. The company’s cereal operations in the US, Canada and the Caribbean are to form an independent, public company that’s for now dubbed North America Cereal Co.

Kellogg is also hiving off its plant-based business based around the MorningStar Farms brand, with that new business having Plant Co. as its working title.

These two sets of assets collectively represented approximately 20% of Kellogg’s net sales in 2021.

The remaining business will house Kellogg’s global snacking operations, as well as its international cereal and noodles assets and its North America frozen breakfast unit, in one distinct entity. This part of Kellogg – at this stage called Global Snacking Co. – represented 80%, or US$11.4bn, of the company’s net sales last year.

The plan has been approved by the company’s board of directors. It is expected to take until the end of 2023 to unravel the various parts of the business.

Kellogg’s rationale for spin-off

Kellogg is keen to explain the move in terms of it being an extension of an ongoing transformation process. But it is perhaps too radical a move by a company that dates back to 1894 to be viewed as a natural progression of the odd acquisition or divestment.

The company’s statement that the initiative will transform its portfolio to “further enhance performance and value” and “pursue their particular strategic priorities” would appear to be nearer the mark.

Emphasising the totality of the initiative, Kellogg suggested the proposed separations “create greater strategic, operational and financial focus for each company and its stakeholders and will build on Kellogg’s current momentum”.

Steve Cahillane, Kellogg’s chairman and CEO, said these businesses all have “significant stand-alone potential, and an enhanced focus will enable them to better direct their resources toward their distinct strategic priorities”.

But analysts who follow Kellogg see the initiative as a search for even greater growth in international and snacking – and to separate out those assets from the laggard that is the North American cereal business.

Erin Lash, a senior director at Morningstar, said: “Despite the enhanced focus that management claim this should afford, we don’t think this strategic action stands to enhance its competitive position or financial prospects.

“In our opinion, the motivation leads more towards unlocking a higher multiple for the fast-growing snacks business once it’s unencumbered by the more mature North American cereal brands.”

Analysts at US investment bank Stifel are most enthusiastic about the company’s prospects in snacking and overseas markets.

“We see strong underlying conditions in Kellogg’s business outside of US cereal and particularly for snacks, with strong retail sales trends for many of its top brands,” Stifel analysts led by Chris Growe wrote in a note to clients.

I wouldn’t phrase it as a problem we are trying to solve. Our portfolio is hitting its stride right now.

Kellogg chairman and CEO Steve Cahillane

Speaking to analysts after Kellogg made its announcements, Cahillane said the corporate overhaul should not be seen as a defensive move.

“I wouldn’t phrase it as a problem we are trying to solve. Our portfolio is hitting its stride right now,” he said.

North America cereal has been challenge for Kellogg

However, he admitted parts of the business need more focus. “Cereal will be solely dedicated to winning in cereals and in three territories, the US, Canada and the Caribbean. It won’t have to compete for resources with a high-growth snacks business,” Cahillane said.

Moreover, while the Kellogg chief stressed all three distinct arms start from “day one as a scaled business”, he emphasised where the real momentum is likely to lie by underlining how Global Snacking Co. is expected to be a higher-growth company than today’s Kellogg group.

It is then the relative performance of these three, soon to be, separate parts of the business and the territories they operate in that is at the heart of this move.

Looking at the company’s most recent financial results, in the first quarter of 2022, North American sales declined by “less than 1%” year-on-year whereas sales in Europe were up 2%, Latin America by 8% and in the combined territories of Asia Pacific, the Middle East and Africa (AMEA) by 12%.

It should be admitted Kellogg’s North American cereal business underwent something of an annus horribilis in 2021. A strike at four of its plants in the US lasted through most of the fourth quarter while there was a fire at the company’s Memphis plant in the summer.

This resulted in low inventories and even out-of-stocks in stores for many of its brands. It pulled back on commercial activity and reduced its in-store merchandising.

And Kellogg has had to put up with the same inflationary pressures as other food companies. Speaking in February, Cahillane described the effects of rising costs in the 12 months to 1 January as an “extreme challenge”.

But, even allowing for these irregular events and headwinds, the US cereal category generally is uninspiring.

In a report published in May by research and intelligence company GlobalData – Just Food’s parent company – revealed the value of the US breakfast cereals category increased from $10.3bn in 2016 to $11.7bn in 2021, registering a CAGR of 2.5%.

However, in volume terms, the category grew from 1,627.2 million kg in 2016 to 1,730.7 million kg in 2021, registering a CAGR of just 1.2%.

GlobalData expects the value of the category to grow and reach $13bn by 2026, increasing at a CAGR of 2.2% between 2021 and 2026. However, in volume terms, it is expected to reach 1,742.8 million kg by 2026, registering a CAGR of 0.1% during that period.

In summary, what growth there is will be through dearer products with volume growth pretty anaemic.

Kellogg suggests it can improve its outlook in North American cereal, which had net sales of about $2.4bn in 2021.

Some of this will come from recovering from the supply issues it faced in 2021 but the rest will be from a more intense focus on the business following the three-way split, it suggests.

“As a stand-alone company, North America Cereal Co. will have greater strategic focus and operational flexibility and will direct capital and resources toward unlocking growth, regaining category share, and restoring and expanding profit margins,” the company said.

Cahillane added in the analysts’ call: “We are very much focused on bringing that business back [following 2021’s troubles]. We are determined to continue the momentum.”

The renewed focus will also likely come from a new management team. Cahillane will head Global Snacking Co. but no announcement has been made as yet as to who will head up North America Cereal Co.

But it is certainly the prospects for Global Snacking Co. that are the most exciting element of yesterday’s announcement.

Nearly 60% of Kellogg’s sales come from international markets and its three international regions – Europe; Latin America and AMEA – will remain “almost entirely intact” within Global Snacking Co.

However, less than a quarter of the entity’s net sales come from cereal in international markets and Cahillane was asked whether that was likely to be a drag on the rest of the snacks-heavy business.

He reiterated what Kellogg had said earlier in the day that the “international cereal business provides scale, continuity, and growth for the company’s Europe, Latin America, and AMEA regions”.

About 10% of this entity’s net sales come from noodles in Africa, which Kellogg describes as “a rapidly expanding business”.

So while, Kellogg is presenting this three-way split as a continuation of its Deploy for Growth transformation plan, launched in 2018, its genesis can probably be found in the acquisition of the Pringles snack brand in 2012.

Since then Kellogg has sought to build a snacks portfolio with acquisitions such as that of better-for-you snack bar brand RXBAR in 2017.

And future deals activity is likely to be in these faster-moving and on-trend areas. Asked by an analyst in February where it was looking for possible acquisition targets, Cahillane said: “Think snacking, think wellness, think emerging markets.”

At the same time, Kellogg has disposed of assets it sees as no longer core, such as its cookies, fruit-flavoured snacks, pie crusts, and ice cream cones businesses, which were sold to Italian confectioner Ferrero for U$1.3bn in 2019.

What might future hold for Plant Co.?

This part of Kellogg’s business is a much smaller concern with about $340m in net sales last year.

Post-split, it will be a pure-play plant-based foods company, anchored by the MorningStar Farms brand but Kellogg said that it will also explore “other strategic alternatives, including a possible sale”.

Cahillane admitted to analysts this could happen before the split and his comments may well be interpreted as meaning Kellogg has lost its appetite for the category and the decision to sell has already been made.

“MorningStar is clearly a world-class brand and has tremendous growth potential. We believe it will thrive more as a stand-alone company,” he said.

“It can be more aggressive when not part of a global operation.”

The plant-based meat category has had a difficult few months in North America.

Canada’s Maple Leaf Foods is adjusting its investment plans for its plant-based meat business to align with a drop-off in sales. In May, meanwhile, Beyond Meat reported its largest quarterly loss since going public three years ago.

Speaking to analysts yesterday, Cahillane described US plant-based meat as a category with “players coming in very rapidly that were not profitable and playing a different game”.

It might soon be a game that Kellogg is unwilling to play.

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