Kellogg profit improves; company looks to redirect resources

by Eric Schroeder
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Kellogg's cereals
Kellogg gained share in its six core ready-to-eat cereal brands.

BATTLE CREEK, MICH. — Fourth-quarter earnings that helped Kellogg Co. exceed its expectations boosted fiscal 2016 earnings at the Battle Creek-based company.

Net income at Kellogg in the year ended Dec. 31, 2016, was $694 million, equal to $1.98 per share on the common stock, up 13% from $614 million, or $1.74 per share, in the same period a year ago. Net sales eased to $13,014 million from $13,525 million.

In a Feb. 9 conference call with analysts, John Bryant, chairman and chief executive officer of Kellogg, attributed the stronger earnings to a variety of factors, including the company’s ability to gain share in its six core ready-to-eat cereal brands, steady improvement in U.S. Snacks performance, global growth in the Pringles brand, expansion in emerging markets and gains on delivery on productivity initiatives such as Project K and zero-based budgeting.

Areas where work remains to be done include U.K. cereal, Special K snacks and Kashi snacks, he said.

John Bryant, Kellogg
John Bryant, chairman and c.e.o. of Kellogg

“We have made good progress overall, and we did what we said we would do,” he said. “This kind of progress will continue in 2017 toward our 2018 goals.”

Mr. Bryant said during the call that Kellogg will continue to look for ways to transform the business, and to that end he discussed the company’s decision to exit the direct-store delivery model from U.S. Snacks and shift to a warehouse distribution system.

“This is a significant move,” he said. “And obviously a decision like this does not come easily or quickly. The D.S.D. organization has been at the heart of our crackers and cookies business from its start. But times have changed. In the form of consumer habits and customer landscape. And we believe that this shift from D.S.D. to warehouse will allow us to compete more effectively in today’s market environment.

Special K and Kashi snacks, Kellogg
Areas where work remains to be done include Special K snacks and Kashi snacks.

“Simply put … as we closely added to the U.S. Snacks business, it became clear that moving to a retail warehouse distribution system offered the best path (and) more profitable growth going forward. This is a difficult decision in light of this new-term impact on the organization, but it is the right long-term decision.”

Currently, Kellogg only utilizes D.S.D. in its U.S. Snacks business, where it sells cookies, crackers, wholesome snack bars and fruit-flavored snacks. More than a third of U.S. Snacks, including Pringles, already are distributed through Kellogg’s U.S. warehouse system.

Paul Norman, president of Kellogg North America, expressed confidence in the company’s ability to make the transition, especially given it’s a system Kellogg has been able to use at scale with high effectiveness.

Paul Norman, Kellogg
Paul Norman, president of Kellogg North America

“The shift out of D.S.D. allows us to take advantage of a warehouse distribution system in which we already have scale and in which our retailers already have sophisticated technology and replenishment capability,” Mr. Norman said. “By improving margins for our customers and freeing up resources ourselves, we can invest in the activities that take us from a push model to a pull model that is more effective in today’s environment for the packaged foods like the ones we make.”

Mr. Norman said list prices will be adjusted, reflecting the elimination of D.S.D. services that Kellogg is providing to its retail customers today. As a result, the company expects there to be a bit of a reset to U.S. Snacks net sales in 2017 and 2018 before the company begins to see acceleration in growth.

Pringles Loud, Kellogg
Pringles already are distributed through Kellogg’s U.S. warehouse system.

“Between the impact to net sales and the shift of distribution costs into cost of goods sold, there will also be a reset to U.S. Snacks gross profit margin,” he said. “These impacts will be offset by a reduction.”

Mr. Norman said the shift in distribution models demonstrates how serious Kellogg is about creating “a more competitive and faster growing snacks business.”

“We can generate more growth by shifting resources to brand building, whilst improving margins for both our retailers and ourselves,” he said. 
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