Kellogg is among the major food manufacturers addressing the CAGNY investment conference this week and Simon Harvey reflects on the US giant’s presentation.
With a year having passed since Kellogg chief executive Steven Cahillane first outlined a new strategy to return the US food business to top-line growth, emerging markets, a key pillar of that objective, now account for just under a quarter of group sales.
Cahillane unveiled Kellogg’s Deploy for Growth strategy at the Consumer Analyst Group of New York Conference (CAGNY) in February last year, addressing the event for the first time as the Special K and Pringles maker’s chief executive, having been installed to the role in October 2017.
At its core, the streategy was an aim to change perceptions of Kellogg as a purely cereal-centric business, traditionally known for its Special K, Rice Krispies and Corn Flakes breakfast brands, and instead cater to consumers’ eating needs from morning through night. And the new strategy also encompassed a greater focus on developing markets, along with more aggressive marketing campaigns and brand building.
Back at the same event this week, the former Anheuser-Busch InBev and Coca-Cola executive revealed how emerging markets now account for almost 20% of the New York-listed company’s total group sales, which amounted to almost US$14bn last year.
Since the 2018 CAGNY event, Cahillane has made a number of inroads toward achieving the aims of Deploy for Growth and has invested heavily in the business, while reviewing a portfolio, currently also including snacks and frozen foods, that might be better served by other food organisations.
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In November, he announced the company was putting its Keebler, Famous Amos and Stretch Island North American cookies and fruit snacks brands up for sale (although no deal has yet been secured), describing the decision as a need to “make strategic choices about our business”.
“These brands have had difficulty competing for resources and investments within our portfolio”, the CEO said at the time.
At this week’s CAGNY gathering, Cahillane said: “We have work to do on several smaller brands including wholesome snacks, and our proposed divestitures will further focus our portfolio and our resources, but there’s no question we are doing the right things to get this business back in growth.
“In fact, we see no reason why we can’t get back to low-single-digit growth in our developed markets snack categories maybe even this year.”
In emerging markets, Kellogg’s announcements this year have already included the expansion of its operations in Poland to cater to rising demand for Pringles snacks. Last year, Kellogg increased its stake in a joint venture with packaged foods manufacturer Tolaram Africa Foods, giving it access to Nigeria and Ghana. And the company is also reportedly seeking a deal with Indian ethnic snacks maker Haldiram’s.
The Kellogg chief told CAGNY the company’s businesses in emerging markets grew at a high-single-digit pace in 2018, “with strong growth in both cereals and snacks”.
He also spoke more widely about the business: “We’ve asked you to endure several quarters of substantial investment and we still have a couple more to go. This is right for the long-term. And once these foundational investments are behind us, and we shore up what are some short-term margin drags, and that the top-line momentum that we’re seeing continues, then profit and cash flow will indeed follow.
“Most significant is how we’ve shifted our portfolio towards emerging markets. This is where the long-term growth of packaged foods will be most pronounced.”
Cahillane added he sees a long-term target of mid-single-digit organic growth in developing markets.
And he also sought to beef up developed markets vis-à-vis emerging economies.
“It surprises many to learn that developed market cereals account for less than a third of our portfolio today. Many seem to have the impression that this category is in a free-fall when in reality it is only declining about 1% to 2% in developed markets. We can and will stabilise this business.”
He also spoke about frozen foods – demand for which is seeing a renaissance in some categories in some markets – but one the CEO said accounts for less than 10% of Kellogg’s overall portfolio in terms of developed markets.
Cahillane added the company had been making efforts to “revitalise” its focus on frozen through renovating its brands and packaging, and launching new products.
“As a result, our developed markets frozen-foods business has been growing at a high-single-digit rate for us over the last couple of years. We think it’s realistic to assume that these categories and brands are settling into a low-single-digit growth rate, but we’ve shown obviously that we’re capable of even more than that.”
But he also acknowledged the company has more work to do to rejuvenate other categories such as its wholesome snack brands, snack bars like Nutri-Grain, and the cereal brands Special K and Kashi.
And that remains the case too on the financial front. Earlier in February, Kellogg reported its results for the year ended in December. Net sales increased 5.4% to $13.5bn but were flat on an organic basis. Operating profit climbed almost 23% to $1.7bn, although the equivalent adjusted figure for that metric was also flat at $1.9bn.
The earnings commentary stated the results “featured meaningful improvement in consumption and net sales performance, consistent with its stated strategy and goals”.
It continued: “Around the world, key brands are responding positively to increased advertising and promotional investment, as well as to new pack formats designed for specific occasions and channels. In addition, net sales growth in emerging markets has accelerated……..reflecting the company’s expanded presence and diversified product line.”
However, guidance for the current fiscal year does not envisage substantial improvement from the latest results, with reported net sales growth put at 3-4% and adjusted operating profit predicted to be flat on a currency-neutral basis.
Cahillane told the CAGNY attendees: “Having stabilised a multi-year decline in 2018, we are confident that we will return to organic growth in net sales this year right out of the gate.”
Meanwhile, chief financial officer Fareed Khan presented some actual figures of 1% to 2% in organic net sales growth for the year.
“That’s not far off our long-term algorithm which itself includes future M&A,” he said. “In 2019, we hope to augment our stable cash flow with proceeds from any potential divestiture. Our plan is to use these proceeds to reduce debt in order to retain financial flexibility for potential acquisitions.”
With top-line growth aspirations heading Cahillane’s to-do list, it remains to be seen what impact the disposal of the North American cookies and fruit snacks business will have, whether it be negative or positive, long term or short, and whether the company can, in fact, find a buyer – Italy’s Ferrero, and Hostess Brands and B&G Foods of the US have all been touted as potential candidates. All eyes therefore will no doubt be on potential acquisitions, perhaps in emerging markets, to fill the void.