Innovation and Enhanced Snack Operations Deliver Kellogg’s Positive Results for 2012

Despite the relatively high maturity of Kellogg’s core breakfast cereals, especially in developed markets, which still account for some 70% of the company’s sales in the category, Kellogg has reported strong revenue and profit growth for 2012 and updated 2013 earnings guidance.

Kellogg has reported a 7.6% net sales growth, reaching US$14.2 billion, and reported operating profit up by 9.5%. However, full-year comparable internal operating profit, which excludes the impact of items such as merger and acquisition, integration costs and pension changes, was down 5.9%. The company claims this decline resulted from continued high levels of inflation impacting input cost, a minor product recall in the third quarter of 2012, and the double-digit increase in investment in brand building.

North American performance strongly boosted by innovation

North America is the second fastest growing region, with 3.6% internal net sales growth for the full financial year, only exceeded by Latin America. The US Snacks and US Specialty Channels divisions grew particularly fast, with 12% and 11% growth, respectively.

The company has rolled out a wide range of new products under its snack brands and announced plans to relaunch some old favourites from the Pringles stable, which was fully integrated in June 2012. It has launched snacks – including cereal bars, crackers, crisps and cookies – under the Pringles, Cheez-it, Special K, Keebler and Nutri-Grain brands.

Over the forecast period of 2012-2017 Kellogg’s core North American categories are expected to grow at modest rates, at less than 1% CAGR in breakfast cereals and just above 2% CAGR in sweet and savoury snacks. In this operating environment, Kellogg’s strategy of heavy investment in scale and innovation, albeit eating into its net profitability, has ensured stronger than market level revenue growth.

This intense product development should continue to be the focus for long-term sustainable growth. The company has already launched mini-versions of Pop-Tarts and Eggo. It has also expanded Special K into sweet and savoury snacks. But still greater potential exists in this category. Morningstar Farms in frozen processed food and Kashi both have potential to cater to the demand for snacks with a stronger health profile. An expansion of snack sized appetiser products within Morningstar Farms, which target vegetarians, as well as further flavours within the Kashi biscuits range are all possible options.

Mixed results in international markets

Kellogg’s International Markets reporting segment delivered mixed results, with Latin America achieving internal net sales growth of 6.7% and Europe declining by 3.8% for the full year. Kellogg’s sales growth in Asia has also been relative low, at 2.7%, underperforming its mature domestic market.

Kellogg’s Asia Pacific market exposure is still weak; only 5% of its packaged food value sales are derived from the region, with stagnating Japan being its largest market in the region. However, it also has an established foothold in a number of attractive markets – India, for example has significant potential in sweet and savoury snacks, it is expected to expand by 13% CAGR over 2012-2017, which is equal to a US$1.3 billion market value gain.

PepsiCo and local player Haldiram Foods International hold strong positions in Indian snacks but under the Pringles label a number of local flavour developments could be a successful route to market, given Kellogg already has established operations in India in some adjacent categories.

Long term growth prospects

Kellogg has restated its 2013 earnings guidance to 7% net sales growth. Particularly through 2012, Kellogg has addressed some growth limitations in its domestic and core developed markets through innovation. But in addition to this, it will have to map out opportunities in fast growing international markets in order to meet 2013 targets and sustain its growth momentum.