Kellogg's Core Four

by Eric Schroeder
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With a portfolio of products that includes ready-to-eat cereals, cookies, crackers, savory snacks, toaster pastries, cereal bars, fruit-flavored snacks, frozen waffles and vegetable foods, The Kellogg Co. already is one of the world’s largest food companies. The Battle Creek-based company’s products are manufactured in 18 countries and marketed in more than 180, providing a global presence that sets the stage for continued expansion.

Future growth is expected to come from four primary platforms: global cereal, global snacks, North American frozen foods; and emerging markets.

Over the past few months, company executives have described the avenues in which the company hopes to achieve such growth.

With a view toward greater opportunities in the cereal category, Kellogg is in the process of redefining cereal with products that will exist outside the traditional category. Two products include Kellogg To Go and Nutri-Grain Biscuits.

“We believe we can continue to grow cereal,” said John Bryant, president and chief executive officer, during a Feb. 20 presentation at the Consumer Analyst of New York (CAGNY) conference in Boca Raton, Fla. “The cereal category is much more versatile than people give it credit.”

Making its debut in 2013 will be Kellogg To Go, a breakfast beverage that has 10 grams of protein and 5 grams of fiber, Mr. Bryant said.

“It is a bowl of cereal in a beverage format,” he said. “We see it as an opportunity to bring consumers who may be skipping cereal back to the category.

“I don’t know how big this could be, but there is a breakfast beverage business in Australia that equals $2 billion for us.”

With regard to Nutri-Grain Biscuits, Mr. Bryant said they provide consumers with a cereal alternative without the need for milk.

“Consumption of milk is often a barrier to consumption of cereal,” he said. “And so we’re looking at products like Nutri-Grain breakfast biscuits in the U.K. to provide the benefits of cereal first thing in the morning without having to force milk consumption with it. We’ve been doing this for many years around the world with cereal bars and granola bars, but in some parts of the world, particularly continental Europe, a lot of cookies are actually consumed at the breakfast occasion. So here’s an opportunity for us, again, to leverage a food form that doesn’t require milk consumption and provide the benefits of cereal first thing in the morning.”

Mr. Bryant said Kellogg also will continue to look for ways to drive cereal consumption outside the morning day-part. He noted that about 30% of all breakfast cereal is consumed outside the breakfast occasion, up from 20% about 10 years ago.

“We can drive additional consumption of cereal in other day-parts, whether it be dinner replacement or snacks,” he said.

Pringles platform possibilities

Since acquiring Pringles from Procter & Gamble for $2.7 billion last May, Kellogg Co. has moved from what was essentially a large U.S. snacks business to a true global snacks player, satisfying another of its platforms for future growth.

Although Pringles has been more of a bolt-on acquisition in the United States, it is accelerating Kellogg’s growth in international markets, building snacking capabilities worldwide and speeding up the company’s reorganization in Europe to focus on stronger and more consistent growth for the future, company executives told participants at the CAGNY conference.

“We’ve been leaning into savory snacks for many years with Cheez-Its, Special K Cracker Chips, and now we’re stepping into savory snacks,” Mr. Bryant said. “And we’re seeing an immediate, very positive response from the Pringles business.”

Andy Jones, vice-president of snacks for Central and Eastern Europe, Middle East and Africa, said Pringles has a more balanced international footprint than the company’s core Kellogg’s business, and in some markets, such as Germany, has doubled the company’s size of its existing business in those countries.

“That provides a fantastic platform for changing our business going forward and for future growth,” he said.

Pringles’ performance has been strong in every region of the world.

“Over the last two years, Pringles has delivered mid-single-digit growth rates in Europe, in Asia and in North America, and double-digit growth rates in Latin America and some key emerging markets like Russia,” Mr. Jones said. “In fact, Latin America has just closed its third successive year of strong double-digit growth.”

One of the things that sets Pringles apart is its global appeal — the brand ranks as one of the top 10 Facebook brands, Mr. Jones said.

He said it’s also a brand in which Kellogg has been able to scale global innovation and global programs.

“Our biggest product innovation last year, the renovation of our core chip, shipped to 85% of our business around the world in a matter of only a few weeks from the first launch,” Mr. Jones said. “And we were able to do that with marketing that was qualified across three regions of the world, and, as you can see, executed in multiple languages all around the globe.”

Foothold in frozen foods

Anchored by strong brands that are growing in attractive, on-trend categories, Kellogg’s frozen foods business in the United States is one of the company’s fastest growing segments, and forms the third platform in which the company expects to build growth off of.

“Eggo is the second-strongest brand in the Kellogg portfolio, second only to the Kellogg main brand itself,” Mr. Bryant said. “We can keep growing the Eggo business. There is a bit of a trend toward hot breakfast, and this is our opportunity to take advantage of that trend. And it’s driving the growth of Eggo.

“There’s also a trend out there toward avoiding meat, or going for meat alternatives. And our Morningstar Farms business, as the clear leader in that category, is well-positioned to take advantage of that growth. And also, we see a trend toward frozen entrees — a desire within frozen entrees for people to have more natural, better-for-you frozen entrees.”

In a Feb. 5 conference call with analysts to discuss fiscal 2012 financial results, Michael Allen, president of U.S. Frozen Foods at Kellogg, highlighted a number of factors that contributed to full-year sales growth of nearly 11% in the company’s frozen foods business.

In the frozen breakfast category, which includes waffles, pancakes, breakfast sandwiches and entrees, Kellogg posted consumption growth of 3.4% in fiscal 2012, Mr. Allen said.

“These products provide convenience, and, in the case of our new Special K flatbread sandwiches, protein and relatively fewer calories,” he said. “Our flatbreads have only recently been introduced, but we’ve seen great retail acceptance, and strong velocity.”

Production innovation remains a key for the category, and several new products on tap for 2013 include S’mores Eggo waffles, Special K Red Berries waffles and Egg Drizzlers in blueberry and strawberry flavors. Additionally, the company plans to introduce a Mediterranean Chicken Burger.

Mr. Allen pointed to Kashi as a brand that “plays very well” in the natural and organic foods space of the frozen aisle.

“It’s a brand that consumers know and trust, and we’ve added innovations to our existing pizza and entree businesses,” he said. “In 2012, we launched Kashi steamed meals, a convenient and easy way to get delicious, natural meals.”

Evolving in emerging markets

The fourth and final platform for future growth at Kellogg is emerging markets.

Mr. Bryant described this platform at CAGNY as “the defining event in the food industry.”

“How do we position ourselves as a company to take advantage of the development of these markets?” he asked.

Emerging markets have been a boon for Kellogg, with the company tripling its emerging market business over the past decade — it now generates $2 billion in sales. Going forward, Pringles will play a major role in moving this platform to greater heights, but there is “even more we can do and need to do in these markets,” Mr. Bryant said.

“What we think about is in terms of three different groups,” he said. “One is businesses we’ve been in for a long period of time, where we have wonderful infrastructure, very strong brands, and we can keep growing organically. India, South Africa, Brazil — growing these businesses 10%, 20%, 30% a year.

“Now if we find an acquisition that accelerates that growth, we’ll obviously do it in these markets, but these markets are not acquisition-dependent. There are other markets out there where we have done acquisitions or joint ventures, such as Russia and Turkey, and our recently announced joint venture in China with Wilmar.

“And then there’s other parts of the emerging markets where the next few years, you’ll see us take actions, whether it be Eastern Europe, most of Africa, and parts of Asia, which is still relatively white space for The Kellogg Co.”

Income at Kellogg Co. increased 11% during 2012 as the result of improving revenue in North America, more brand investments and cost-saving efforts, including supply-chain initiatives. The Pringles acquisition also is helping growth.

For the year ended Dec. 29, 2012, the company had income of $961 million, equal to $2.68 per share on the common stock, which compared with income of $866 million, or $2.39 per share, during fiscal 2011. Sales for the year were $14,197 million, up 8% from $13,198 million.

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