Pringles will almost treble size of Kelloggs business outside US

Pringles will almost treble size of Kellogg's business outside US

Two weeks ago, Kellogg president and CEO John Bryant was fielding questions from analysts concerned about the company's outlook after a challenging 12 months for the US cereal giant.

Kellogg ended the year with a "strong" fourth quarter but, over 2011 as a whole, underlying operating profit fell and there were questions about how the company was going to deal with a competitive US cereal market and difficult trading conditions in Europe, particularly the UK.

A fortnight on and today (15 February) Bryant returned to face questions from Wall Street over a deal that raised eyebrows among industry watchers - its decision to buy Pringles.

In a flurry of announcements made within seconds of each other, Pringles owner Procter & Gamble and US snack maker Diamond Foods announced that their deal over Pringles, signed last April, had been "mutually terminated". Their statements came seven days after Diamond revealed US$80m of payments to suppliers had not been accounted for properly, a scandal that prompted the company to replace its CEO and CFO. The decision to rip up their agreement on Pringles did not come as a huge surprise, unlike Kellogg's announcement moments later that it was the new buyer of the global snacks brand.

US companies including General Mills, ConAgra Foods and Snyder's-Lance had been mentioned as potential buyers but it was Kraft Foods, which is splitting in two to create a North American grocery business and, more pertinently, a global snacks company, that was seen as the most likely acquirer. Kellogg sells snacks, notably in North America, but it was not seen by analysts as a likely suitor, with brands focused on categories like crackers and cereal bars.

Bryant, who described Pringles as a "truly iconic global brand" and said the deal was a "great transaction", pointed to Kellogg's $4bn of snack sales in North America. "We currently have a large snacks business and we have strong brands," Bryant said, listing the likes of Cheez-It, Special K snack bars and Keebler. "We anticipate that Pringles will be an excellent addition. This business has been growing at a strong mid-single-digit growth rate on average over the last few years as a result of excellent innovation, good brand-building support and strong sales execution and this is exactly the kind of environment that will suit Pringles." The brand, he said, will add $500m to Kellogg's sales in North America.

However, it is internationally that Kellogg will see the biggest change. Pringles will "triple" the size of its business in Europe, allow it to enter the snacks sector in Asia and build its scale in Latin America. Bryant insisted that the acquisition of Pringles would, more broadly, give Kellogg an additional "platform from which to grow" and he cited the possible benefits in terms of innovation.

Nevertheless, it cannot be argued that the acquisition of Pringles will not be a step-change for Kellogg. Sure, the company had a hefty snacks business, particularly in North America, but that focused on segments that are very different to a savoury snacks category dominated by PepsiCo (which has seven of the top ten brands globally).

No-one can deny Pringles' international reach but it faces a formidable competitor and one that is set to roll up its sleeves and spend heavily behind its core snacks portfolio after a bruising year from investors. In developed and lucrative markets like the UK, Pringles also faces competition from smaller but growing upmarket brands like Tyrrells and Kettle, which are sold across the supermarket channel (although perhaps it can be hoped that the troubles at Kettle owner Diamond will be a distraction for the business).

And there are signs that Pringles has found the going tough recently in some markets, a fact Bryant himself recognised, although he said that was not much of a surprise "given what the business has gone through". The Kellogg chief said the company would have to invest behind the business, although when pressed on Pringles' recent sales performance, he said: "I'm not going to get into detail on historical performance. We're looking to the future."

Of course, that future also includes challenges within Kellogg's core cereal business in Europe and the US. Questions remain about the health of the ready-to-eat cereals category on both sides of the pond and, although the Pringles deal will mean cereals no longer account for over half of Kellogg's sales, the company faces some hard work to revitalise the business. Not easy when digesting such an important deal.