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December 16, 2013

Best bits: Kellogg may have to be more radical

The first significant impacts of Kellogg's plan to free up resources to boost its faltering business in mature markets (and invest in emerging economies) were revealed last week. However, the US food group may have to make bolder moves to shore up its long-term growth prospects.

By Dean Best

The first significant impacts of Kellogg’s plan to free up resources to boost its faltering business in mature markets (and invest in emerging economies) were revealed last week.

The US food group said it would close plants in Australia and Canada – and expand a site in Thailand – as part of Project K, a four-year plan to lower costs while investing to bolster areas like its breakfast cereal business in the US, as well as strengthen in developing markets.

“We have a compelling business need to better align our assets with marketplace trends and customer requirements,” Kellogg CEO John Bryant said.

When Kellogg announced Project K alongside its third-quarter results last month, Bryant indicated its core cereal business would be a key focus of the cash it hopes to generate from the cost cuts. It’s not hard to see why: breakfast cereal sales in markets like the US and the UK are under pressure as consumers look for more convenient or healthy options.

Cereal sales in the US were flat last year, although Kellogg gained market share. Europe has been challenging, particularly southern Europe, although Kellogg claimed some improvement further north in the UK as 2012 progressed.

Kellogg’s business in Europe continued to improve in 2013, with sales in the first nine months of the year higher than 2012.  

Nonetheless, the performance of Kellogg’s US cereal business has been below expectations in 2013.

Speaking last month, Bryant acknowledged Kellogg had “faced some challenges in the last couple of years” in the cereal sector and said the company would focus on “proven ideas, investment in our brands and good in-store execution” to drive the business forward. Kellogg, Bryant said, needed to “re-engage” consumers “on why cereal was such a good benefit at the breakfast occasion”.

However, some industry watchers have argued the challenges facing the breakfast cereal sector are well-entrenched and, for all the investment the likes of Kellogg could make in innovation, for example, it will need to make more radical moves to bolster long-term sales growth.

Last week, Post Holdings, the number three breakfast cereal manufacturer in the US, announced two acquisitions – its fifth and sixth in the last 12 months. Post is to buy a private-label peanut butter firm and a sports nutrition business, adding to operations it has in these sectors following previous deals this year.

It would, perhaps, not make too much sense for Kellogg to make similar moves in those categories but there are plenty of targets to go after in the parts of the cereal sector that are growing – like gluten free, for example.

Kellogg has, in markets like the UK, identified areas of growth and acted. The launch of Nutri-Grain breakfast biscuits in the UK – and in markets in Europe – is one example. Its investment in the UK convenience channel is another.

However, such initiatives are unlikely to really move the sales dial at a corporate level.

Almost years ago, Kellogg made the bold move to acquire the Pringles snacks business from Procter & Gamble. The acquisition has boosted Kellogg’s top line and added to its presence in emerging markets. Perhaps the company should look to make similar moves in 2014.

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