Kellogg Hit By Cost Of Adjusting To Changing Consumer Tastes

Kellogg Co. yesterday issued a third-quarter release that sent its shares tumbling after it cut its earnings outlook, reporting a decline in both its snacks business and breakfast foods even as it has increased spending on advertising and promotions. 

“Cereal consumption and share were impacted by the June recall of Honey Smacks, which masked improving performance elsewhere in the portfolio,” the company said. The cereal had been linked to an outbreak of Salmonella Mbandaka, according to the Center for Disease Control and Prevention. An infection can lead to diarrhea, fever and abdominal cramps, but most people recover without treatment. 



“Higher distribution and transportation costs also had an impact. The company said it was offsetting these with productivity improvements,” Bloomberg’s Leslie Patton writes. But on a grand-scheme-of-things level, the results “[underscore] the difficult road that packaged food companies are facing as consumer tastes change,” Patton writes.

“In a stunning admission earlier this year, Kellogg conceded that it can no longer hitch its future on the sales of its once iconic, albeit sugar-loaded cereal brands, which include Corn Flakes and Fruit Loops,” Pan Kwan Yuk observes for the Financial Times

But “Kellogg has been spending more on advertising and promotions in order to drive sales of its cereals, a difficult feat as consumers seek out healthier, low-sugar options including protein bars and yogurt,” writes CNBC’s Sarah Whitten. Cereal sales declined 1.3% for the quarter.

“The company cut its earnings outlook and said it now expects full-year adjusted earnings per share to rise 7 to 8%, down from its prior outlook of 11 to 13%. In addition, Kellogg also sharply cut its outlook for operating profit from a 5 to 7% increase to flat,” Whitten adds.

“Kellogg’s U.S. snacks business -- whose brands include Pringles chips and which is now the company’s biggest unit -- fared even worse, with sales dropping 3.5% to $737 million during the period. The U.S. speciality channels, which sells Bear Naked Granola, saw sales drop 1.3% to $288 million,” the FT’s Yuk reports.

The company recently introduced single-serve packages for products such as Cheez-Its and Pringles to boost sales.

“Higher-than-expected expenses for single-serve packages, however, created a loss on profit instead of the prior projected 5-7% growth. The company uses a third party for these products, but it is working on installing in-house packaging capacity,” Breana Noble reports for the Detroit News.

“Chief executive Steve Cahillane said he chose to sacrifice profit for now,” reports Annie Gasparro for MarketWatch. 

“Consumers generally speaking are more on-the-go and we weren't competing in that historically,” Cahillane tells Gasparro, referring to its investment in single-serve packages. “This puts us on the path toward sales growth.”

But consumers are also keeping an eye on their wallets.

“Kellogg said companies have to get creative with pricing, using new package sizes and new flavors to justify price increases, because people don't want to pay more for the same product,” Gasparro writes. “The days of straight list price increases are gone. It would lead to a decrease in consumer demand,” Cahillane tells her.

“For instance, in September, Kellogg said that it recently came out with a new flavor of Eggo waffles that was priced 12% higher than similar items,” Gasparro continues, indicating that more price increases like this are on tap in 2019.

On a morning call with analysts that was transcribed by Seeking Alpha, Cahillane was upbeat from the get-go.

“We said we would increase our investment in brands and capabilities, and we did. We continued to improve consumption trends worldwide across most of our categories in the United States and in other developed markets around the world. We sustained our accelerated organic growth rate in our emerging markets. And we continued to expand distribution and consumption for single-serve pack formats, which are outpacing our categories,” he said.

“Now, I recognize that the first thing many of you will notice about our third quarter results is that our operating profit came in short of our guidance,” he then said.

Indeed, many did. Kellogg’s share price was down 8.88% on the day.

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