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Snacks: Kellogg’s Q2 cereal killer?

By Kacey Culliney , 03-Aug-2012

As Kellogg posted its Q2 results, the spotlight was on its snacks dedication with key brands soaring as cereal sales dipped slightly.

The US firm pulled in $3.5bn in net sales for its second quarter (Q2), up 2.6% from the same period last year, and recorded a gross profit of $1.4bn.

North American net sales surged by 5.9% up to $2.4bn for the quarter – representing nearly two-thirds of overall sales. International operating profits dropped to $1.1bn, including Asia Pacific (down 31.6%), Europe (down 19.9%) and Latin America (down 15.2%).

As cereal sales dipped, Kellogg’s snacks business (includes cookies, crackers, cereal bars and fruit-flavoured snacks) surged with $803m net sales for the quarter, up from $729m for the same period last year. Cheez-It, Special K, Keebler and Pringles were identified as the core brand heavyweights.

John Bryant, president and CEO of Kellogg Company, made clear that while Kellogg remains a global cereal firm, it is also now a US snacks company.

“We’re building a global snack business, and the addition of Pringles is an important part of that,” Bryant said in the Q2 earnings call.

Once it pops…

One month on from its hefty $2.7bn buy of Pringles, the $27m in losses from hedging costs of this acquisition can be seen in diluted shares - down 10.6% to $0.84.

However, Bryant said that integration is progressing well and there is hope that the takeover will drive European business.

Ron Dissinger, CFO at Kellogg Company, revealed excitement at the brand’s potential.

“This is a big, iconic brand, and it’s one that allows us to leverage our strengths – brand building, innovation and strong in-store execution. It also provides us with access to another aisle in the store,” Dissinger said.

The hungry number two

As Kellogg pushes its snacks focus, Todd Penegor, president of US Snacks at Kellogg, admitted that it remains second in line across the global snacks sector and will have to work hard.

Euromonitor analysis shows PepsiCo's Frito-Lay remains way ahead of the snack pack.

Despite this, there is a lot of potential, Penegor said. “We have to embrace our position and act as a hungry number-two.”

“It also means that we have to drive our execution and innovation that much harder, and we have,” he said.

Investments have been made in flavour enhancement of Pringles, advertising investments for Special K and there has been a push on wholesome snacks. Special K is also set to launch a popcorn variety this month and Pastry Crisps later in the second half of 2012.

Cheez-It posted a compound annual growth rate (CAGR) of 9% and Special K more than 22% CAGR.

The Keebler cookie brand remains one of the firm’s strongest, accounting for $1bn of sales across the cookie and cracker categories.

Global grasps?

Europe net sales were slow at $613m, down $21,000 from the same period in 2011. Kellogg said that sales in the region were “in line with expectations and… reflected the difficult operating environment in the region.”  

“Economic conditions in Europe continue to be difficult, but we’re optimistic that we’ve begun to take the right actions across the region and that we will see further improvement,” Bryant said.

Internal sales for Asia Pacific were also down and represented the lowest net sales for the entire business at $224m - a drop Kellogg said was due to “continued weakness in Australia”.

Brand-building investments are set to be injected into Asia Pacific, primarily in cereals, to boost business, Bryant detailed.

While the snacks focus is strong in the Kellogg's headquarters, the CEO noted that cereals will not fall at the way-side, as long-term opportunities are to be had in light of a global health and wellness focus.

Just today it was announced that US gymnast Gabby Douglas, who won gold in the women's all-round at the London 2012 Olympics, will be featured on a special edition of Kellogg's Corn Flakes in the Autumn.

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