Kellogg CEO David Mackay today (2 November) attempted to look ahead to 2011 after admitting the US cereal giant had had a “disappointing year”.
Speaking after Kellogg booked falling sales and earnings for the third quarter of 2010, Mackay said the company would “regain momentum” after a year marked by fierce competition in the US and the UK and a product recall that affected domestic sales.
“We’ve had nine years of great performance and clearly 2010 was disappointing for all of us,” Mackay told analysts. “We do believe we will regain momentum going through 2011 and that will get us back to our long-term targets as soon as possible.”
Mackay and Kellogg COO John Bryant outlined the company’s plans to revitalise sales next year, including plans for product launches in the US.
Mackay and Bryant said Kellogg’s plans for product innovation in the US would boost its domestic business. Mackay said Kellogg had scaled back its innovation programme during 2009 and 2010, which, combined with moves to rationalise its SKUs, had affected sales.
In recent months, the US cereal sector has been characterised by fierce price competition and falling prices – and Kellogg’s sales have suffered.
Mackay insisted innovation was vital to inject growth back into the category. “The last two years have reinforced several key truths regarding the US cereal category. For most retailers to do well in the category, the key branded players need to excite consumers,” Mackay said. “The category is driven by healthy news, innovation and brand building. Promotional activity has not proven to grow the category over time.”
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.
As Kellogg looks to push more new products, commodity costs are starting to put pressure on food manufacturers, with grain prices in particular rising in recent weeks.
Mackay said retailers had proved willing to accept price increases during past periods of commodity inflation, which could ease the impact falling prices have had on the category.
“Managing through this deflationary cycle has been much more difficult than we had anticipated,” Mackay admitted. Through pricing, mix and trade spend, Kellogg could see a “net price realisation” of “200 to 300 basis points” in 2011, he added.
However, the Kellogg executives admitted they had been “pragmatic” when setting the company’s financial targets for 2011.
Next year, Kellogg expects growth in internal net sales – which excludes the effect of foreign exchange – to be in the “low single-digits”. The company sees international operating profit being flat or, at worst, down 2%. Kellogg’s 2011 earnings per share target is for growth at “a low single-digit rate”
News of Kellogg’s third-quarter results and its guidance for 2011 pushed the company’s shares down 1.8% to $49.85 at 11:48 ET.
Mackay said it would “take time, focus and effort to regain our momentum”. Key tasks for Kellogg included stabilising its supply chain and ramping up innovation, he explained. “We believe that we can do all this but it will not be done overnight.”