|Kellogg's wellness brands drove declines during the quarter.|
BATTLE CREEK, MICH. — Like many companies, Kellogg Co. in recent years has focused heavily toward growing consumer demand for better-for-you foods. But in the most recent quarter, Kellogg products geared toward this segment were the company’s weakest performing in both the ready-to-eat cereal and snack categories.
As previously reported, Kellogg net income during the three months ended Sept. 27 was $225 million, equal to 63c per share on the common stock, down 40% from $452 million, or 90c per share, in the third quarter last year. Sales were $3,639 million, down 2% from $3,716 million in the third quarter of 2013.
In an Oct. 30 conference call, John Bryant, chairman and chief executive officer, offered detail into the operating performance of the company’s various U.S. segments, including its large U.S. Morning Foods and U.S. Snacks business, which sustained significant sales declines in the quarter of 4.7% and 4.2%, respectively.
In both cases, the declines were driven by Kellogg products oriented toward the health and wellness segments. By contrast, its other cereal, snack and cookie brands held their own or even enjoyed good growth. While Mr. Bryant attributed much of the weakness in the category to challenges specific to the company’s Special K and Kashi brands, some of the difficulties were related to category-wide softness in wellness products.
“Consumption in the wholesome snack category declined by almost 2% in the period, and Kellogg lost share,” Mr. Bryant said.
The wellness share loss was experienced despite modest share gain in the company’s Nutri-Grain line and a wider share gain for Rice Krispy Treats (which the company counts in its wellness line). The latter product was helped by the launch of new Rice Krispy Treat Blasted, Mr. Bryant said.
The snacks business decline was led by Special K bars, Special K cracker chips and Keebler Right Bites 100 calorie cookie packs.
By contrast, mainstream brands did well, with growth of 2.9% for Cheez-It, 4.9% for Townhouse and 6.5% for Club.
Similarly, Mr. Bryant cited good growth in cookies for the company’s Chips Deluxe and Fudge Shoppe brands.
Strongest of all in Kellogg’s snack business was the company’s Pringles brand.
“The Pringles business posted net sales growth of approximately 7% in the quarter, with good results in non-measured channels,” Mr. Bryant said. “Growth was driven by the Pringles core can, Grab and Go, and the new Tortilla Pringles. We’ve got activity planned for both the fourth quarter and the first quarter of next year, and are optimistic regarding future growth of this great brand in the U.S. and around the world.”
In ready-to-eat cereal, Special K and Kashi accounted for all of the decline in Kellogg’s category share. The company saw improvement in consumption trends in children’s cereals.
Mr. Bryant’s description of the brands’ woes appeared even worse than a presentation a month ago by Paul Norman, who is running the Morning Foods business on an interim basis. At the time, he said Special K and Kashi were responsible for about 50% of the consumption decline in the cereal business.
“It goes to point out that when you come off a trend of health and wellness, you slip to the side, it can be quite painful,” Mr. Normal said at the Barclays Back-To-School Conference in Boston.
In describing plans to revive the two brands, Mr. Bryant said a shift in approach for Special K will move the brand away from a weight-loss focus.
“We have communicated Special K around dieting, ‘lose weight over a two-week period,’ and we really need to move that to a weight wellness discussion,” Mr. Bryant said. “(We need to) move away from reduced calories and to the food itself having tremendous nutrient benefits. That requires us to change the communications to focus on that, but also to make some food improvements, which is what we’re doing in cereal, in Special K bars, in cracker chips.”
Mr. Bryant said new packaging and advertising will highlight “simplicity and goodness.”
“We have consumer promotions that will help people meet their goals, and we have innovation, including Special K protein, and Special K Gluten-Free that will directly appeal to consumer trends,” Mr. Bryant said. “And we’re also extending the innovations beyond the traditional cereal category, with more hot cereals planned.
“Also, the relaunch of Special K goes beyond cereal, and captures all of the elements of the brand in the U.S., including Special K cracker chips, and Special K bars.”
Kashi was described by Mr. Bryant as “a great brand in a category that’s on trend.”
“We’re targeting more progressive nutrition innovation such as sprouted grains, chia granola and others,” he said. “On Bear Naked, we’re experimenting with new blends of granola, and we’ve got some great new Bear Naked bars.”
More broadly, Mr. Bryant said Kellogg must adapt more effectively to shifting consumer views of what constitutes healthy foods.
“Consumer trends are continually evolving, and we have to better appeal to changing views on health and wellness,” he said.
He cited plans for products with characteristics/ingredients such as organic, sprouted grains, chia, high and gluten-free as ways the company is looking to offer cereals that are more on trend.
Responding to a question during the call, Mr. Bryant acknowledged that still more will need to be done to fully reenergize Kashi and Bear Naked.“I don't think renovating the food alone is going to be enough,” he said. “I think we're going to need to bring out some new innovation, bring out some new foods and truly get on the front edge or the leading edge of pioneering nutrition. We have a new team that’s tremendously excited to do that.”