Kellogg‘s US business weighed on its results in 2015 but the company insisted its troubled US cereal business was seeing signs of improvement. However, the group’s domestic snacks arm is under pressure. Hannah Abdulla reports.
Reporting its annual results for 2015 this week, Kellogg sounded a little more optimistic despite another fall in sales led by weakness in the cereal and snack maker’s US arm.
Kellogg yesterday (11 February) reported its net sales fell 7.2% in 2015 to US$13.52bn. On a comparable basis, stripping out the effect of restructuring costs and one-off items, sales fell 6.3% to $13.47bn.
Sales in Latin America and Asia Pacific were up for the year. In Europe, sales were marginally down but it was clear once again Kellogg’s US business weighed heavy on its overall results. Sales in Kellogg’s domestic morning foods and snacks divisions were down for the year.
However, on an investor call in the wake of the results, CEO John Bryant was insistent Kellogg had shown “improvement” and was continuing to “build momentum”. He added the group’s overall performance had met its expectations.
Looking specifically at the US cereal business, Bryant argued the year ended with the Kellogg brand seeing fourth-quarter consumption rise more than 2% for the Kellogg brand and an increase in its share of the category of 70 basis points.
Kellogg’s US morning foods annual sales were down but, in the fourth quarter, they were up 1.5%. The company put the quarterly performance down to “improving trends” in cereal. Over the last year Kellogg has taken a number of steps to get its cereal business back on the road to recovery. Much of that has leaned toward a repositioning of Special K to try to change the perception of it as a “diet brand” and instead bring it into the wider, on-trend realm of wellness.
Kellogg has launched Special K Nourish in the US (and Canada), a range of cereal and bars with “real ingredients” and no artificial colours or flavours. The cereal contains rice, quinoa, granola, almonds and real fruit. It also launched a granola version of its Special K cereal and a Special K Nourish hot cereal as well as introducing Kellogg’s Origins: a line of six cereals, granolas and muesli that are “prepared simply”, with no artificial flavours or hydrogenated oils.
All are moves Kellogg believes are starting to pay off.
“Last quarter, our base sales performance was even better, with growth all year and growth of 4% in the fourth quarter,” Bryant said, reflecting on Kellogg’s US cereal sales. “Importantly, our core six brands led this growth: Raisin Bran, Rice Krispies, Frosted Flakes, Mini-Wheats and Special K all saw consumption growth in the quarter with Special K posting high-single-digit growth. This was driven primarily by changes to messaging and the renovation work we did last year.”
Bryant pointed to a graph which detailed consumption trends improving from the second quarter of 2015. For example, he highlighted how Special K Red Berries consumption rose 12.1% in the fourth quarter.
“We invested where we needed to and worked hard to improve the fundamentals. We improved our brand building and the new products we launched. The hard work is having significant impact. And we’re optimistic about this business as we enter 2016. We said last year that we would improve the performance of Special K, and we have,” asserted Bryant.
David Driscoll, an analyst at Citigroup Global Markets, wanted Kellogg’s management team to drill down into the detail of how the US sales team was positioned to drive growth in cereal. He requested the team demonstrate the impact of the US sales force structure, “the head count increases” and their impact on cereal.
Bryant said while performance had been lifted by some of the renovation programmes surrounding Special K Red Berries and Raisin Bran, there was “no question” that additional investments made in the sales organisation as part of Project K reinvestments helped the performance of US cereal.
“In-store execution this year has been significantly better than in the past…the US sales reps, sales teams have done a tremendous job of improving the in-store execution and driving the performance of that business.”
Over 2016, many of the 40 new products Kellogg announced last year it would launch will hit US shelves including Harvest Delights Mini-Wheats, Disney Dory-themed cereal and Orange Crush Pop-Tarts.
“We’re excited about the plans we have for 2016, and expect continued improvement. Given the strength of US cereal across 2015, we’d actually expect our US cereal business to grow slightly, a couple of percent in 2016,” said Bryant.
But while moves in US cereal appear to be delivering positive results, the weakness in US snacks cannot go ignored. US snacks sales fell 1.6% in the year and 1.9% in the quarter.
Bryant said Kellogg was “making progress in the snacks business”, with increased investment focused around its largest brands and expansion of on-the-go offerings. However, Alexia Howard, analyst at Bernstein Research, said she believed there “wasn’t much colour on [snacks] in the presentation.”
“The operating profits looked to be down pretty sharply. What’s going on there? It’s been weak for some time. When do you think you’re going to get better traction on that side?” she asked.
Bryant pointed out that while much of the past trouble in cereal stemmed from the Special K brand, the same was true for snacks. He assured Kellogg was working on resolving the issue.
“You’re right. We’ve had a disappointing couple of years in US snacks,” he admitted. “We’ve talked a lot in the context of our cereal business about Special K. Special K has also had a fundamental impact to our snacks business. We’ve had a headwind from Special K in snacks over the last couple of years. You’ve seen that come through in our cracker business with Special K cracker chips. It’s come through in our wholesome snacks business with Special K Bars. The good news is where we have renovated those foods similar to what we’ve done in cereal, we’re seeing the business stabilise.
“That headwind is still there to a degree but to a much less degree. And as we go forward, we expect some of the tailwinds in the business to become more evident. So we’ve had strong growth in Cheez-It over the last several years. We’re seeing good growth in Pringles; we’re seeing good growth in Rice Krispies Treats and wholesome snacks. Our cookie business is stable the last couple of quarters. So we’ve actually seen better trends within the business.
“So as we go forward into 2016, we expect to return this business to top line growth, although modest, and we absolutely expect to return the business to bottom line growth.”