Kellogg’s rationale for breaking up

BATTLE CREEK, MICH. — To listen to Kellogg Co. executives, the rationale for breaking up the company basically boils down to one word: focus. Kellogg’s current diversified portfolio does not allow its North American cereal and plant-based foods businesses to reach their full potential, as resources are focused on growing the global snacks business.

“If you just look at the grain business, grain will be solely dedicated to grain victory in all three geographies: the Caribbean, the United States and Canada,” said Steven A. Cahillane, president and chief executive officer. general and chairman 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 with the high-growth snacking business. So Frosted Flakes doesn’t have to compete with Pringles for resources.

Under the plan, Kellogg will be split into three independent businesses – global snacks, North American cereals and plant-based foods – over the next 18 months. The global snacks business will include the company’s snacks, international cereals, noodles and North American frozen breakfast product portfolios.

The 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 company 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, it will be a company with more strong growth than Kellogg Co.,” Mr. Cahillane said. “Net sales growth will be aided by more focused resources and attention to brand development, innovation and international expansion of world-class brands and building scale in emerging markets. Profit margins are expected to grow over time, driven by operating leverage, managing revenue growth, productivity and increasing scale in emerging markets.

North American cereals will have sales of approximately $2.4 billion 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 get back to our playbook to start winning in the market again,” Cahillane said. “And we are on track with total distribution points and sequential stock recovery. We have already regained four points of share since the beginning of this year. This speaks to the importance of these brands in the store and demonstrates the solid foundation from which the North American grain company can build as an independent business.

An independent grain company will be able to strengthen its business through investments in its portfolio, packaging capabilities and productivity, Cahillane said.

“With this increased focus, North American Grains is expected to deliver stable net sales over time, consistent with the category’s long-term trend with improved profit margins that will drive growth in earnings, cash flow higher and higher return on invested capital,” he said. .

The original plan for MorningStar Farms, Kellogg’s plant-based foods business, is to spin it off, but Cahillane said the company is considering 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 vegetarian/vegan component category,” he said. “It is clearly a world-class brand, and it is backed by innovative and proprietary processes and technology in a world-class manufacturing network, and it has tremendous long-term growth potential in a category. benefiting from the growing consumer interest in plants. food-based diets, both for nutritional needs and for environmental reasons.

Returning to the theme of focus, Cahillane said the plant-based split will allow resources that may previously have been diluted by priorities at other Kellogg businesses to be directed to growth opportunities.

“This may include investing more in brand building to raise consumer awareness and increase household penetration,” he said. “This may include investing more in emerging food technologies, new supply chain capabilities, expanded distribution across all channels and expanding into international markets.

“We see this company accelerating sales and earnings growth over time, while an unleveraged balance sheet will give it the financial flexibility to continue investing.”

Asked about the likelihood of a sale of the plant-based business versus a spinoff, Mr Cahillane said: “We are engaged in a rotation, but we will also evaluate other strategic alternatives, should they arise. . And it could happen at any time. And, so, I would say the clock is ticking on this call right now, because it’s been made public.