2010 has been something approaching an annus horribilis for cereal giant Kellogg.
The US-based food group has had a difficult year. A significant product recall has dented sales, Kellogg has faced supply-chain issues and the company has operated in weak cereal markets at home and abroad (notably the US).
In the US and in the UK, the Special K maker has faced fierce competition with cereal manufacturers using price to grab market share. The price war, combined with less innovation from Kellogg, strangled sales in both markets.
In October, Kellogg was forced to issue a profit warning for 2010 on the back of the US recall and what CEO David Mackay labelled a “tough operating and deflationary environment”.
After issuing falling third-quarter sales and earnings last month, Mackay said: “We’ve had nine years of great performance and clearly 2010 was disappointing for all of us.”
That day (2 November), Mackay and the Kellogg management team looked to the year ahead and, perhaps unsurprisingly, set conservative targets for 2011.
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Mackay acknowledged it would take “time, focus and effort to regain our momentum” and admitted: “We believe we can do all this but it will not be done overnight.”
Speaking to analysts, Mackay and COO John Bryant said innovation and improved trading conditions in the US cereal market – the executives said they expected less promotional activity and prices to rise – would drive improvement at Kellogg in 2011.
However, as Kellogg announced yesterday, only one of the two men will be at the business next year. In a surprise move, Mackay has decided to leave Kellogg after 25 years with the business. He said this year he became eligible to retire and had “made a commitment” to spend more time with his family.
Replacing Mackay will be Bryant, who has spent over a decade with Kellogg after joining the company in 1998 to develop its global strategy.
Bryant said he was “honoured and humbled” to have been appointed to lead Kellogg – but what did analysts make of the move?
Morningstar‘s Erin Swanson said Mackay’s departure could have been prompted by the “struggles” Kellogg is facing. The Frosties maker, she said, had been “challenged by intense competitive pressures”.
She added: “What has concerned us, however, is management’s seeming inability to get its hands around these issues. Under Bryant, we anticipate that Kellogg will place an increased emphasis on product innovation to drive revenue growth, but we don’t expect these investments to yield measurable improvements overnight.”
On Kellogg’s third-quarter call, Bryant did emphasise the importance of innovation to the company’s plans for 2011. Kellogg plans to launch products sold in overseas markets – including UK cereal brand Crunchy Nut – into the US and Bryant said he expected Kellogg’s sales from new products to grow 25% in 2011 on the level seen in 2010. “We expect it to be one of the strongest years of innovation,” Bryant said.
Kellogg’s planned strategy for the US – to take brands successful in one market and launch in another – has had success in the UK in the last year (think the launch of the French Tresor brand as Krave in the UK). However, that strategy, as with any product launch, is inherent with risk and the company has had its misses on NPD in recent months (think Nature’s Pleasure in the UK).
Stifel Nicolaus analyst Chris Growe admitted he was “surprised” at Mackay’s announcement but said Bryant would follow a “business-as-usual” approach; the new CEO, Growe explained, would not make any “radical adjustments” to the business.
“John and his team will continue to forge ahead and we continue to have reason for optimism for the business – while cost inflation is looming, Kellogg is pushing prices up and reducing its promotional spending (mostly by the end of January) particularly in cereal, cookies, and crackers,” Growe said. “The company compares against a period in 2010 beset by the cereal recall in the US – we believe this factor along with the strong new product activity will support our estimate of over 3% revenue growth in 2011.”
Growe’s estimate on 2011 sales tallies with Kellogg’s own estimates. The company has said it expects “internal net sales” to grow in the “low single-digits” next year, in line with the group’s long-term targets.
However, Kellogg has predicted that internal operating profit will be flat or, at worst, down 2%, reflecting the company’s need “to reset incentive compensation levels”. Kellogg is also targeting 2011 earnings per share on a currency-neutral basis are expected to grow by low single-digits.
Kellogg is looking to 2011 cautiously. For all the upbeat noises about, for instance, new products adding 25% to sales in the US next year and for all the belief that the worst of the promotional dogfight in US cereal was over, Kellogg has publicly acknowledged that business on both sides of the Atlantic would remain difficult.
The cereal categories on both sides of the pond may see less promotions but, with consumer confidence still fragile, will shoppers be prepared to pay more for their bowls of cereal? Amid volatile grain costs, Kellogg’s margins are likely to remain under pressure.
2011 promises to be just as challenging for Kellogg’s new CEO as 2010 has been for its outgoing boss.