Kellogg this week welcomed a new CEO. Former Anheuser-Busch InBev, Coca-Cola and The Nature’s Bounty Co. executive Steve Cahillane took the hot seat at the US cereal and snacks giant on Monday (2 October). The 52-year-old replaces Kellogg veteran John Bryant, who oversaw a challenging period for the business but made progress in some areas. Dean Best reports.
Outgoing Kellogg CEO John Bryant leaves the US cereal and snacks group having made some progress – but with the company appearing to face similar challenges to when he took the helm more than six years ago.
In December 2010, when Kellogg announced the promotion of then COO Bryant to the position of CEO, the Special K maker was coming to the end of what had been a problematic year.
A significant product recall had dented sales, Kellogg had faced supply-chain issues and the company was doing battle in weak cereal markets at home and abroad.
Bryant’s retirement after almost two decades with Kellogg was announced last week. Headway had been made in parts of the Kellogg empire. In 2012, the company bolstered its snacks business with the acquisition of Pringles. In recent years, Kellogg has moved to increase its exposure to emerging markets, always risky endeavours but, if you get it right, prudent moves for the longer term.
In 2013, Bryant announced the Project K restructuring programme to cut costs and, Kellogg said, allow the company to invest in its core markets. And, in the last year, Kellogg has also demonstrated the stomach to shake up its direct-store snacks distribution (DSD) network in the US.
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However, under Bryant, the company has been unable to get its US morning goods sales moving upwards. There is no question the US breakfast market has become an even more competitive place in which to do business during Bryant’s tenure with cereal ceding share to snack or protein-packed options. But Kellogg’s continuing issues in its core business has weighed on its overall sales, which were only 5% higher in 2016 than in 2010, the last year under Bryant’s predecessor David Mackay.
The challenges in US breakfast have also acted as a drag on Kellogg’s underlying sales, with growth not always guaranteed in recent years.
After promoting Bryant from within, Kellogg has turned to an outsider for his successor. Former Coke and Anheuser-Busch InBev executive Steve Cahillane started as Kellogg CEO on Monday. When his appointment was announced seven days ago, he insisted “tremendous growth opportunities” lay before the business.
Cahillane joins after three years as CEO of The Nature’s Bounty Co. He joined the US vitamins and supplements group after seven years within the Coca-Cola system, having moved to the soft drinks giant after eight years working for what is now AB InBev as the brewing giant expanded through M&A.
The 52-year-old brings experience from Coke of balancing a core product portfolio while aggressively looking to expand its range, as well as a record in health and wellness from his most recent job at The Nature’s Bounty Co.
He joins a Kellogg business facing continued pressure on its domestic breakfast cereal operations and one that has just completed an overhaul of how it distributes snacks in the US.
There remain concerns about Kellogg’s sales trajectory. When the company reported the financial results for the first half of its financial year in August, it booked second-quarter profit numbers that exceeded Wall Street forecasts, with recent cost-cutting efforts supporting its margins. However, questions remained over Kellogg’s top line, which, to be fair, Bryant recognised.
“Q2 was on track for both a transformation and a financial standpoint. But make no mistake, getting back to top-line growth is our top priority,” he told analysts.
In the investment community, opinion is divided about whether an outside appointment could lead to significant change in the company’s strategy.
“With the recent appointment of a new CFO as well, Fareed Kahn, coming from outside the company, Kellogg is clearly seeking more significant change in the management and strategic direction of the company, in our view,” equity analysts covering Kellogg for US investment bank Stifel Nicolaus wrote last week.
However, at Morningstar, equity analyst Erin Lash, argued: “At first blush, we don’t expect this leadership shift to prompt a change in Kellogg’s strategic roadmap. Beyond abandoning direct-store delivery (which we still think stands to free up resources to reinvest behind brands), Kellogg remains committed to driving efficiencies, which we believe should lead to 200 basis points of operating margin gains to more than 19% over our forecast.
“However, unlike the bulk of its peer set, which strike us as laser-focused on driving pronounced margin improvement even at the expense of sales gains, we think Kellogg sees the importance of chalking up profitable top- and bottom-line improvement longer term.”
Under Bryant, Kellogg was one of the food manufacturers that chose to use zero-based budgeting to try to boost margins and the company has been making progress there, as shown by the year-on-year growth seen in its operating margin when it announced its first-half results in August. However, as Sanford Bernstein analyst Alexia Howard wrote at the time: “Top-line growth remains elusive.”
Growing sales will likely be at or near the top of Cahillane’s to-do list. But how to achieve that is the central question. The new Kellogg CEO is likely set to see the fruits of Bryant’s work on costs and margins but he will also likely face the same challenges on sales as his predecessor.
“We believe the risk associated with the continued DSD transition, where weak sales continue to prevail, as well as the weak conditions in its US cereal business in particular continue to pressure its overall sales,” the Stifel Nicolaus analysts wrote last week.
Could Cahillane look again at Kellogg’s target for underlying operating margins and choose to be more flexible here in order to give him more room to invest to grow the company’s top line?
Or, could, as at Nestle, a new CEO mean a more assertive Kellogg when it comes to M&A? Possibly. Cahillane will be looking at all the levers he can pull to try to grow Kellogg’s top line. There is little doubt the company’s core breakfast business will remain a challenge.