Kellogg, the world's largest cereal producer, has had a solid 18 months, managing to grow profits despite surging commodity costs, while also expanding in emerging markets. However, the US group has had issues in Australia, where intense competition hit profits last year. Now, with the acquisition of Specialty Cereals, a local natural cereals business, the company believes the future is looking up. Dean Best spoke to Kellogg Australia CFO Peter Goldsworthy for this month's just-food interview.

Kellogg is not a company that rests on its laurels.

The US-based food giant is synonymous with cereals from Michigan to Manchester and, with its position as the dominant player in the category, the company could be forgiven for doing little more than keeping the business ticking over and relying on the power of its namesake brand around the world.

To do so, however, would be as short-sighted as skipping breakfast. In the last 12 months, Kellogg has worked hard to maintain its leadership position in cereals and develop its position in emerging markets worldwide. In 2007, the company posted a 6% rise in annual profits to US$1.9bn despite the tumultuous conditions in the world's commodity markets. This year, Kellogg's strong performance has continued; in July, the group upped its earnings guidance for the year after again posting a 6% rise in profits.

Meanwhile, Kellogg has looked to expand in some of the key strategic global markets. In January, it snapped up Russian firm The United Bakers Group, and in July moved to buy Chinese biscuit maker Navigable Foods.

That said, it has not all been rosy in the Kellogg garden. With a company the size of Kellogg, there are always likely to be problem markets somewhere on the planet and, in recent months, one of those markets has been Australia.

Kellogg dominates the cereals market down under, accounting for 46% of sales but its business has suffered due to intense local competition, not least from rival Cereal Partners Worldwide and its brand Uncle Toby's. That competition, combined with rising commodity costs, hit Kellogg's earnings in Australia last year, which in turn pushed down its profits in Asia Pacific. Earnings in the region tumbled by 9.5% in 2007.

By the first half of this year, however, Kellogg's profits in Asia Pacific were up 1.5%, in spite of a double-digit increase in advertising spending. In Australia, the company saw cereal sales rise in the mid-single digits, driven by brands including Special K and All-Bran. And in a further bid to boost its business in Australia, Kellogg this month acquired Specialty Cereals, a manufacturer of natural cereals and a firm that had been a contract manufacturer and co-packer for Kellogg for 29 years.

For Peter Goldsworthy, Kellogg Australia CFO and now also general manager of Specialty Cereals, the move is a key one for the business, given the growth of natural foods in Australia. The acquisition takes Kellogg into new territory in Australia, buoyant territory, and sees the business take on brands including Vogel's and Wild Oats.

"That segment has been growing well over the last couple of years - probably in the order of around 15%," Goldsworthy tells just-food from Sydney. "While it is growing strongly, we still see opportunity from a penetration standpoint - new consumers are still coming into the segment all the time. Australians have a very high awareness of natural foods and a naturally inclined lifestyle."

The natural cereals segment in Australia remains fragmented, with the likes of Vogel's competing against other fledgling brands including Carman's. Indeed, Specialty Cereals' annual sales stand at around US$17m. But for Goldsworthy, when Kellogg was casting around looking for a natural cereals business to acquire, it did not look much further than its long-time partner.

"When we looked at fit and what we felt were the best opportunities in the market, we couldn't go far from what Specialty Cereals had to offer. We feel those brands fit very well in that segment; we think that Specialty make fantastic food and also it has an innovative culture," Goldsworthy says. "If we look at what Specialty does through the Vogel's brand, it brings great food and a brand that has heritage anchored in natural goodness."

Specialty also operates at the premium end of the category, selling "value-added muesli", Goldsworthy says, a factor that no doubt appealed to a Kellogg  business that has been facing a squeeze in margins on its mainstream cereal brands.

The company may have been searching for acquisition opportunities to break into new categories but it has also needed to work hard to revitalise its core cereals business. Kellogg's five "powerhouse" cereal brands in Australia, as Goldsworthy dubs them, account for 80% of the company's cereals business. He says Kellogg has looked to focus on the five brands - Just Right, All-Bran, Special K, Nutri-Grain and Sultana Bran - in a bid to increase its share of a stagnant category.

"From a category perspective, we've seen flat to slight growth over the last couple of years," Goldsworthy says. "Like any developed cereal market, we have a finite shelf. Ready-to-eat cereal has a very, very high penetration here in Australia and you have significant players in that market with significant resource behind it. When you have a market like that, the fight for shelf space is pretty tough. Not only do you have that competitive set, you also have that tough commodity pressure that doesn't help your margin structure."

However, Goldsworthy says Kellogg's focus on the top five brands is showing signs of paying off. "While we might be flat on share on a year-to-date basis, on these big five we've been able to grow share."

For all the optimism around the Specialty Cereals acquisition, the revitalisation of Kellogg's core brands in Australia will play a bigger role in the company's recovery in the market. Its strategy, so far, seems to be bearing fruit, according to Goldsworthy.

"We're well on track to meeting our objectives this year. We're happy about the execution of our strategy behind our big five brands. We're extremely excited about what Specialty Cereals will bring to us and where we're headed with that. The company is setting itself up for sustainable growth moving forward in 2009."