Kellogg has announced a cut in profit targets. Earnings projections have been lowered as Kellogg prepares for the acquisition of Keebler, the US cookie maker. While buying Keebler helps to reduce its dependence on cereals, it won’t be enough. A combination of revitalizing cereal sales and further product diversification will be needed to get Kellogg back on track.
Kellogg has cut earnings projections for the next three years, now expecting growth in the “mid-single digits” compared to earlier estimates of 8-10%. The company is undergoing a major restructuring as part of their general refocusing plan. One aim of the plan is to reduce dependence on cereals, the product with which they are still synonymous, but a category expected to see flat growth in the next year.
The upcoming acquisition of Keebler, the second largest US cookie producer, will help reduce this reliance, bringing down cereals to less than 50% of sales. The deal was agreed last October to buy the cookie company for $3.6 billion and assume $800 million debt. The acquisition is due for completion in March, and will have the added benefit of providing access to Keebler’s delivery system. This system is expected to help Kellogg in the launching and testing of new products, delivering them directly from warehouses to stores. Kellogg will take related restructuring costs in the first part of this year.
But the company needs real refocusing to make significant headway. The first step, according to Kellogg, is to reevaluate its current position. Kellogg has been adamant that it leads the US cereal market in terms of market share. However this is volume market share only, after General Mills assumed value leadership in the mid-1990s, following its successful international partnership with Nestle. Kellogg has now decided to measure its market share in dollars and accept the second place position in the hope that this will reduce complacency within the company.
The company has needed a boost for some time now, and this overdue restructuring should steer it towards a faster growth future. The plan to increase focus on core business markets, with reduced efforts in secondary areas, is a defensive move but necessary to prevent its cereals from being undermined by rival products and from people skipping breakfast. The transition to a more diversified product range will not be easy but is necessary for the company to get back on track.
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