View all newsletters
Receive our newsletter – data, insights and analysis delivered to you
  1. Analysis
February 23, 2018

The new Kellogg CEO’s quest for growth – CAGNY takeaways

There were a number of companies presenting at this week's CAGNY conference in the US that had recently-installed CEOs making their first appearance at one of the key dates in the investor calendar as chief executive. Among them was Steve Cahillane, the former Anheuser-Busch InBev and Coca-Cola executive who took the helm at Kellogg in October. His job is to get a business with a sluggish top line back into growth. Dean Best tuned in.

There were a number of companies presenting at this week’s CAGNY conference in the US that had recently-installed CEOs making their first appearance at one of the key dates in the investor calendar as chief executive. Among them was Steve Cahillane, the former Anheuser-Busch InBev and Coca-Cola executive who took the helm at Kellogg in October. His job is to get a business with a sluggish top line back into growth. Dean Best tuned in.

The new strategy at Kellogg – ‘Deploy for Growth’

Getting Kellogg’s sales growing again will prove a challenge for new chief executive Steve Cahillane.

The US-based cereal and snacks giant has seen its annual net sales slide four years in a row, in the main due to changing breakfast habits in its key developed markets – and, most enduringly, in its own backyard.

Announcing the 2017 numbers and 2018 forecasts, recently-installed CEO (and now chairman, too) Steve Cahillane said Kellogg was characterising this year as one of “transition” for the business, with net sales forecast to be flat on a currency-neutral basis and down 1-2% on an organic basis.

However, the ex-Anheuser-Busch InBev and Coca-Cola executive believes Kellogg has the credentials to once again enjoy growing sales and, addressing investors and analysts at the Consumer Analyst Group of New York investor conference, set out how he plans to get the Special K maker’s top line pointing in the right direction.

Cahillane set out a new strategy, which the company has dubbed ‘Deploy for Growth’, a programme the new Kellogg boss said would see the company “reorient ourselves against key growth elements that can help us exceed our current trajectory”. The strategy, he underlined, “can take us from the current trajectory to a long-term growth rate in the 1% to 3% range”.

‘Deploy for Growth’ has four elements. One, instead of Kellogg looking to “win” at breakfast, Cahillane wants the company to also look at other times when people eat and “win through occasions”.

Two, Kellogg has looked at its businesses in emerging markets as a growth “engine”. Cahillane is looking at the growth opportunities he sees laying before the company differently. “‘Emerging markets engine’ becomes ‘shape a growth portfolio’. Emerging markets are no less a priority for us as we’ve already discussed, but there are more pockets for growth out there and we had the chance to shift our portfolio to more of them,” he told CAGNY.

Kellogg’s previous mantra of developing “world-class marketing” has been given more prominence and made “a strategic priority”, Cahillane said. And, fourth, when before Kellogg wanted to “win wherever the shopper shops”, it now seeks to “deliver perfect service and store”.

Some of the language could be judged management-speak but the four-point plan is concise and some elements are particularly notable.

Kellogg’s pragmatism on cereal in developed markets

Perhaps the most significant moment of Cahillane’s first 100 days at Kellogg was, while talking to analysts about the company’s 2017 results, when he brought a dose of realism to the prospects of Kellogg’s core morning foods business in the US.

Where once Kellogg may have told the market it could get this part of its operation growing again, Cahillane told investors: “Morning Foods is not going to be the growth driver for us in the Kellogg Company.” And, the new aim to “win through occasions” is the strategic embodiment of that pragmatism.

Cahillane emphasised this change of tone at CAGNY. He insisted Kellogg was “confident” it could “stabilise” the sales it makes from cereal in its developed markets, pointing to the success it has had improving the performance of that part of its business in Canada, the UK and Australia, which represent three of its four biggest cereal markets (the problem child of the US being the other).

However, surveying the growth prospects for Kellogg as a whole, he added: “Even if [developed markets cereal] consistently declines slightly, we can still deliver top-line growth.”

Nevertheless, not every observer at CAGNY is content with the weight developed markets cereal has in the Kellogg business.

“We remain negative on the growth opportunity within cereal, and the fact that the cereal segment still represents one third of Kellogg’s total portfolio continues to be worrying,” Sanford Bernstein’s Alexia Howard remarked this week.

Faith in frozen

The frozen food sector, particularly in North America and Europe, is much maligned, with companies present in the market often quizzed by analysts about the industry’s growth prospects.

Nestle, for example, is often asked about the future of its US frozen food business within its wider portfolio, especially after selling off assets in the sector in Europe in recent years. At Nestle’s most-recent investor day in London in September, CEO Mark Schneider insisted the company had “a strong commitment” to the business, saying frozen can mean healthy. US group Conagra Brands has often talked up the growth potential of on-trend frozen lines.

And it was interesting to hear Cahillane at CAGNY speak positively about Kellogg’s own frozen-food businesses, perhaps overlooked by some focusing more on products like Corn Flakes and Pringles with it being predominantly located in the US and representing around 10% of the group’s total sales.

“[Kellogg’s] Developed markets frozen [business] is growing rapidly as it hits on so many of today’s consumer trends,” Cahillane said, pointing to a recent recovery on the back of reformulation and innovation after a couple of years of falling sales. “We’re seeing very strong growth in consumption, share and net sales for both MorningStar Farms and Eggo. And we have every intention and opportunity to continue to innovate and renovate emphasising simple ingredients, the versatility of our foods and plant protein. So it’s actually a bit conservative to assume a current trajectory of only a low-single-digit organic growth rate over time.”

Kellogg faces significant competition in the US frozen market but it was notable to hear another senior industry executive talk up the prospects of his frozen assets.

Emerging markets

The change in language around emerging markets under Kellogg’s new Deploy for Growth agenda might read to some as though the company is playing down their importance

However, even if Cahillane was right to change the tone and ensure the company is looking too at other of growth avenues – including those closer to home – the new CEO also correctly underlined emerging markets remain a focus area for Kellogg.

The purchase of Pringles boosted Kellogg’s presence in emerging markets and its profile has been subsequently bolstered by ventures in Asia and Africa (and acquisitions in the latter), as well as the more recent deal for Brazil-based biscuit maker Parati, not least because many of these inorganic moves have focused on the fast-growing area of snacks.

For all the risk involved, any multinational company’s growth agenda needs to have the possibility of expanding in emerging markets near the top of the list. And Cahillane suggested there will be more activity.

Underlining how M&A will form part of Kellogg’s growth agenda, he said deals would be in one of two “hunting grounds” – health in developed markets and snacks in emerging economies. He also highlighted what he called “white-space opportunities”, with the launch of “wholesome snacks” in markets in Asia and Africa as demand for healthier products grows.

What about margins?

New management, particularly in such a testing operating environment as US packaged food, are likely to want to emphasise how they can grow their new employer, even businesses that have seen their sales suffer in recent years (note, though, that Kellogg’s profitability has improved).

Cahillane’s presentation at CAGNY – and the ‘Deploy for Growth’ strategy as its heart – was refreshing to hear from a Kellogg CEO and perhaps it needed an outsider to make it.

That said, some in the audience wanted, understandably, to hear Cahillane’s views on Kellogg’s margin profile, even after the gains made in recent years.

Kellogg’s margins were described by one analyst as “substantially away from where the peer group is”.

Cahillane made no bones about what he saw as Kellogg’s number-one priority. “We believe the most important thing we need to do is return the company to top-line growth – that’s our sustainable future, getting there,” he said.

“Going forward, we will continue to improve on margins, we’ll continue to grow our operating profit margin. That will be a goal, but the most important word is ‘and’ – we have to do grow both. We have to grow our top line by investing and we have to continue to grow our operating profit margin and we see a path for that.

“We see opportunities to continue to do that. It will not only expand our operating profit margins but give us the fuel to invest in our brands to grow. The long-term algorithm that [Kellogg CFO] Fareed [Khan] showed is something that we believe is attainable and achievable. That drives double-digit TSR [total shareholder return] performance for us because it focuses on both. If we don’t get the top line back in growth, we can grow the OP margin all we want – we won’t create the right value for shareholders. It’s about ‘and’. It’s about doing both.”

Khan told CAGNY Kellogg’s “long-term sustainable growth” targets were, removing the impact of exchange rates, for net sales to rise 1-3%, the company’s adjusted operating profit to increase 4-6% each year and for its adjusted earnings per share to rise 6-8% per annum.

Related Companies

NEWSLETTER Sign up Tick the boxes of the newsletters you would like to receive. A weekly roundup of the latest news and analysis, sent every Friday. The industry's most comprehensive news and information delivered every other month.
I consent to GlobalData UK Limited collecting my details provided via this form in accordance with the Privacy Policy
SUBSCRIBED

THANK YOU