BATTLE CREEK, MICH. – To listen to Kellogg Co. executives, the rationale for breaking up the business basically boils down to one word: focus. Kellogg’s current diversified portfolio does not allow its cereal and plant-based foods businesses in North America to reach their full potential because resources are focused on growing the global snacks business.
“If you just look at the grain business, grains will be exclusively dedicated to earning on grains in all three geographies: the Caribbean, the US and Canada,” said Steven A. Cahillane, chairman, CEO and president of Kellogg Co. , in a June 21 conference call to discuss the deal, which was announced earlier in the day. “And (it won’t) have to compete for resources against the high-growth snack business. So Frosted Flakes don’t have to compete with Pringles for resources.”
Under the plan, Kellogg will split into three separate businesses – global snacks, North American cereals and plant-based foods – over the next 18 months. The global snacks business will include the company’s North American portfolios of snack foods, international cereals, noodles and frozen breakfast items.
Brands included will be Pringles, Cheez-It, Pop-Tarts, Kellogg’s Rice Krispies Treats, Nutri-Grain, RXBAR, Frosties, Zucaritas, Special K, Tresor, Krave, Coco-Pops, Crunchy Nut and Eggo. The business accounts for about 80% of Kellogg’s sales.
“Building on its track record of sales and earnings growth and leveraging its portfolio of world-class brands, strong positions in attractive categories and geographic diversification, this will be a higher growth company than the Kellogg Co. of today,” said Mr. Mr Cahillane. “Net sales growth will be aided by more focused resources and attention to brand building, innovation and international expansion of world-class brands, and building scale in emerging markets. Profit margins are expected to widen over time, driven by operating leverage, revenue growth management, productivity and emerging markets’ increased scale.”
The North American cereal will have about $2.4 billion in sales and will include cereal brands in the United States, Canada and the Caribbean. The cereal business portfolio will include Kellogg’s, Frosted Flakes, Froot Loops, Mini-Wheats, Special K, Raisin Bran, Rice Krispies, Corn Flakes, Kashi and Bear Naked.
“Our priority this year has been to restore production and inventory in our SKUs (stock keeping units) and then resume our playbook to win back in the marketplace,” said Mr. Cahillane. “And we’re well on our way with full distribution points and sequentially shared recovery. We have already regained four participation points since the beginning of this year. This speaks to the importance of these brands in the store and demonstrates the strong foundation on which the North American cereal company can build as an independent business.”
An independent cereal company will be able to strengthen its business through investments in its portfolio, packaging capabilities and productivity, Mr Cahillane said.
“With this enhanced approach, the North American cereal is expected to generate stable net sales over time, consistent with the category’s long-term trend of better profit margins driving earnings growth, a increased cash flow and a higher return on invested capital,” he said. .
The initial plan for MorningStar Farms, Kellogg’s plant-based food business, is to spin it off, but Cahillane said the company is looking at other strategic alternatives, including a sale.
“Kellogg has grown Morningstar Farms steadily since its acquisition more than 20 years ago, and the brand has the highest share of household penetration in the frozen vegetable/vegan component category,” he said. “This is clearly a world-class brand, and is supported by innovative and proprietary processes and technology in a world-class manufacturing network, and has tremendous long-term growth potential in a category benefiting from growing consumer interest. consumers in plants. food-based foods, both for nutritional needs and for environmental reasons”.
Returning to the subject of focus, Mr Cahillane said the plant-based spin-off will allow resources previously diluted by priorities in other Kellogg businesses to be directed towards growth opportunities.
“This may include investing more in branding to create awareness among consumers and increase household penetration,” he said. “It may include investing more in emerging food technologies, new supply chain capabilities, extended distribution across channels, and expansion into international markets.
“We see this business accelerating its sales and earnings growth over time, while an unlevered balance sheet will give it financial flexibility to make investments.”
Asked about the likelihood of a sale of the plant-based business versus a spin-off, Mr. Cahillane said: “We are committed to a spin-off, but will also evaluate other strategic alternatives, should they arise. And that could happen at any time. And so I would say the clock starts on this call right now as this has been made public.”