Kellogg has said its core cereal business will be a key focus of the reinvestment from its four-year cost-cutting programme.
The cereal and snacks giant yesterday (4 November) revealed plans to cut around 7% of its global workforce as part of a new four-year cost-cutting programme – Project K. The initiatives is designed to strengthen existing businesses in Kellogg’s core markets and increase growth in developing and emerging markets.
Kellogg has been struggling to boost cereal sales in its flagship North American market as it faces increasing competition from General Mills and private-label cereal brands. Consumers are also increasingly opting for foods on-the-go.
Indeed, sales at Kellogg’s US morning foods business, which includes cereals, fell 2.2% in the third quarter, results of which were published alongside the cost-cutting announcement yesterday.
Speaking on the firm’s analyst call following the announcement, CEO John Bryant said pre-tax cash savings from the plan are expected to reach an annual run-rate of between US$425m and $475m by 2018.
“Project K is an opportunity to step back from our business and identify larger structural efficiency and effectiveness opportunities. Our goal with this programme is to reinvest back in our business and to gain momentum in our business and get back on our sustainable growth model, and we’ll continue to reinvest back in the business until we see that happen.”
The reinvestments, Bryant said, will be focused on its core cereal business, as well as making some investments in emerging markets.
“We haven’t set reinvestment for 2015, ’16 and ’17. Obviously, as we go along, we’ll determine the best place to make those reinvestments. But at this stage, the primary focus of our reinvestment is to stabilize and rebuild momentum in our core businesses. We believe we do that through brand building, innovation, nutrition over time. That’s where we’re focusing. So we would expect to continue to improve our brand building as a percent of sales as we go forward.”
Bryant said this will mean a focus on brand building and innovation, including traditional advertising, increasing levels of digital engagement, and driving better in-store execution.
He used its Kashi cereal as an example, a cereal he said has been “a great source of growth” over many years, but a product that had become ” a little bit too mainstream”.
“Our opportunity on Kashi is to push it back towards that pioneering nutrition. We are innovating more towards forward-leaning nutritionists, the people who are on the edge of the nutrition, forward thinkers, forward leaners. And so parts of our portfolio will do that, and other parts of our portfolio will be more mainstream.”
The CEO, however, emphasised that the investment would take place over the next few years and therefore could not say to what extent it would boost the bottom line.
“It’s very hard for us to predict today what might be happening in 2017, 2018. We haven’t given 2014 guidance yet. We’ll do that in the fourth quarter conference call. It is fair to say, because these are structural cost changes, they take time to execute and see the savings come through, so the 2014 savings will be meaningfully lower than the normal run rate of savings that we’ll achieve in later years.”
Of the cost-cutting programme, Janney analyst Jonathan Feeney commented in a note: “While the program appears a rational response to poor volume performance (-4% 5-yr stack), and we think increasing marketing spend and adult-targeted innovation could improve cereal category performance, prolonged softness in Kellogg’s core business segments continues to hamper earnings visibility and growth (which won’t be helped by lumpy restructuring charges).”