MacKay 'fireside chat' gives perspective on Kellogg

by Eric Schroeder
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NEW YORK — Opportunities for bolt-on acquisitions, particularly in snacks, exist due in part to improving cash flows and relatively cheap financing, said David MacKay, president and chief executive officer of The Kellogg Co., Battle Creek, Mich.

Mr. MacKay, participating in a “fireside chat” dialog with Sanford Bernstein analyst Alexia Howard as part of the Sanford C. Bernstein Strategic Decisions Conference held June 4 in New York, touched on a range of issues, from acquisition possibilities to input costs to outlook for the cereal category.

Regarding acquisitions, Mr. MacKay said that although Kellogg is “very, very happy” with its portfolio, the company sees the current situation in financing as a good opportunity to make bolt-on acquisitions in snacks or cereal.

“We would have to say that prices are a little depressed, so that may be causing some potential smaller companies that could be required to resist that,” he said. “But I do think it’s probably a good time to buy. And we’re looking actively at what we might be able to add. I think you may see more consolidation as we go through the balance of this year and next, but it’s very hard to know.”

Mr. MacKay said any potential acquisition activity for Kellogg likely would be geared toward cereal and snacks, which make up more than 90% of the company’s portfolio, and would not be limited to the United States.

“We are looking everywhere in the world, and if the right opportunity comes up, clearly we would be very interested,” he said. “But on the cereal space there just aren’t that many opportunities. There are more in snacks, but we are going to be highly selective in that area, too. So it’s more global, but we will just see what opportunities might arise.”

Responding to Ms. Howard’s point that Kellogg’s focus over the past few years has been more on renovation and reformulation of existing products and less on bringing new products to market, Mr. MacKay agreed, but added the company’s focus, particularly in U.S. cereal, is again shifting.

“We’ve got good innovation coming in the back half,” Mr. MacKay said. “But really, as you look at innovation, reduction of negatives, addition of positives, we think was absolutely the right thing to do. It will play well for the portfolio in the long term.”

Open innovation and research, which Kellogg utilized several years ago through partnerships with Monsanto Co. and Bunge Ltd. to eliminate trans fats in cookies and crackers also is expected to play a larger role in innovation going forward, he added.

Sorting out spacing, input costs

As certain retailers have reshaped their shelves, Mr. MacKay said Kellogg has seen cookie stock-keeping units go down, a fact he said “probably had a pretty negative impact on our business and probably on a few others.” Meanwhile, cracker and cereal s.k.u.s stayed fairly stable, although the latter experienced a shift away from carrying multiple sizes of a given cereal.

“I think you’re now seeing some retailers who took a much more aggressive approach recognizing that they may have disenfranchised some of their consumer base and they are bringing some of those s.k.u.s back,” he said. “Some who started to deprioritize promotions on some of the categories, particularly cookies and a reduction in crackers, are starting to get a little bit more positive on merchandising those. There has been a real sort of swing, a lot of movement, which for manufacturers isn’t good, and ultimately, I don’t think, for retailers ends up being that good, either.”

Packaging stands as one of the most volatile input costs to watch moving forward, Mr. MacKay said, followed closely by transportation and energy.

“What you’ve seen in the packaging space is a huge amount of consolidation and rationalization to the point where they have closed enough plants such that capacity and supply and demand are pretty well balanced,” he said. “So that means that if there is a big growth or surge then you could see inflationary pressures come in packaging.

“And in transportation and energy, clearly the volatility in energy and transportation went through a huge period of inflation. It has moderated as the economy really slowed down. If there is a pickup in the economy you could see transportation and energy prices also become quite volatile. So I think you’re going to see more skewing up and down on those two spaces than probably basic food input costs.”

Fiber a plus for future growth

Ms. Howard also questioned Mr. MacKay on how Kellogg plans to launch new products, whether it be primarily through new brands or tucked into existing brands. Specifically, she drew the comparison between Kellogg’s recent strategy of using the Kashi portfolio to introduce a number of different brands with specific health needs versus General Mills’ strategy of using the Cheerios brand to deliver across a range of health benefits.

Mr. MacKay said Cheerios has done well in a down economy due in large part to its great utility value, but he reaffirmed his belief that over the long term Kellogg is well-placed to meet the needs in most major cereal markets that favor an adult portfolio.

“As far as new brands versus doing it under existing brands, clearly you have a synergy and a cost-effect benefit if you can tuck it under an existing brand,” he said. “But if it doesn’t fit well and you try and tuck something under there with a specific need you’re trying to address, you potentially doom it to failure.

“So Fiber Plus is a good example. We launched the bars about a year ago. It has been a huge success. We launched the cereal in June of this year. We think it will do extremely well. We pushed All-Bran for a couple of years. All-Bran is probably the best fiber alternative in the market. It is wheat bran-based, which is clinically proven as the most efficacious form of fiber that you can get. So Fiber Plus is a better tasting form of fiber. It just doesn’t deliver quite the same dietary benefit that you would get from a wheat bran-based cereal, but consumers are trading off some of the health benefits for some of the taste benefits.”

In general, Mr. MacKay said the demographic trends on the cereal category are positive over the long term. In addition to the aging of the population giving a boost to the cereal category, he said the growth of the Hispanic population should provide one of the bigger areas of opportunity.

“It’s a very big group, and it’s growing,” Mr. MacKay said of the Hispanic population. “We think there’s a real opportunity there for us. I’d have to say that we probably in the last couple of years have not been doing as much as we should. We’re going to address that, probably focus on lack of investment in the second half of the year, and we think we can pretty quickly rebuild anything we think we might have lost in the last couple of years.”

He continued, “They’re very familiar with our products. I think for that reason we may have just assumed that we didn’t need to directly communicate and influence them in the U.S., and we’re making sure that as we go forward, we more specifically communicate with them and rebuild a stronger presence with them.”

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