The results from Kellogg’s 2015 Q2 were nothing out of the ordinary, but confirm a long-term reality facing many US packaged food companies. This reality is that sales from the centre of the supermarket aisle are eroding. This is being caused by a phenomenon known as perimeter shopping – where consumers, particularly millennials, avoid the centre aisles where ‘processed food’ resides. The idea is not to be tempted by products that have ‘high sugar, low nutrition’ reputations. As a company, Kellogg’s product portfolio is almost entirely based in those aisles, and those products are losing their appeal despite recent pledges to remove artificial flavours and colours from ingredients lists. Take breakfast cereals as an example. The average US consumer used to buy 5.6kg of breakfast cereals back in 2005, but the figure has dropped by 19% to just 4.5kg. The question that remains is whether Kellogg is doing enough to reverse its direction.
Kellogg: Net Sales and Operating Profits by Division
Source: Kellogg Quarterly Financials
With further declines seen across its US Morning Foods division (where breakfast cereals reside) the emphasis from Kellogg has been very much focused on damage limitation and maintaining profitability in a shrinking environment. Ordinarily this reduced risk strategy would makes sense for a company in its position. It does, however, rely on other parts of its business offsetting that sales slowdown. For Kellogg, this has not been the case, and more worryingly the company’s US Snacks division, also its largest by sales, is also continuing on a downward trend – something that is definitely not in line with market performance.
US: Performance of Selected Snack Categories, Retail Value Sales
Source: Euromonitor International
Within biscuits Kellogg has shed sales to Mondelez, in snack bars it has lost out to Kind, and in pastries Kellogg has surrendered share to McKee Foods. In each of these cases Kellogg has been slow to react to new trends sweeping the industry, such as the breakfast biscuit craze created by Mondelez with Belvita, or the clear label trend upon which Kind has capitalised. The consensus appears to be that Kellogg is a trend-follower rather than a trend-setter, which may be fine for stagnating categories such as breakfast cereals, but is dangerous in the impulse food environment. Kellogg is often criticised for not doing enough to reverse the direction of its breakfast cereal brands, but turning around the performance of its snack brands is perhaps more crucial at this stage.
2015 Q2 operating profits were adversely affected by a currency hit on its Venezuelan operations, but the lack of any significant strategic shift away from the US breakfast cereals category is a long-term hurdle for the company. Kellogg can only continue to cut operating costs so much without affecting either the quality or reputation of the brand. In the not so distant future Kellogg’s breakfast cereal sales could hit a point where they start to ‘lose distribution’, and sales will then fall dramatically. The US breakfast cereals category is predicted to shrink by another US$1 billion over 2015-2020, but expected growth in key markets such as China, Japan and India could mitigate this
Breakfast Cereals: Top and Bottom Growth Markets
Source: Euromonitor International
It’s not all bad news for the world’s largest breakfast cereal producer, however. Kellogg has successfully transitioned Special K away from ‘diet’ positioning towards a more holistic ‘wellness’ standpoint, and this is starting to pay dividends. Whilst Kashi hasn’t quite achieved this turnaround yet, there are promising signs that the company is on track with this brand.
Despite the challenges Kellogg faces, it remains home to a large number of iconic global brands, and this will continue to make it a powerhouse in the world of packaged food for years to come. Yet with the industry still figuring out the implications of the Kraft-Heinz merger, could we see something along the same lines for Kellogg – [General Mills/PepsiCo/Post…]?