Brand investment pays off as Kellogg profits rise

Kellogg, the US-based breakfast cereal and snack food group, has reported a strong finish to the 2002 financial year, in line with expectations.

Net profits for the year were $720.9 million (€670.5 million) compared to $473.6 million in the previous year, with the 2002 figures boosted by one-off gains from a successful lawsuit.

In the fourth quarter, net profits were $191.0 million, up from $124.6 million in 2001.

"Significant changes to our business in 2001 were followed by a year of acceleration in 2002,"​ said Carlos Gutierrez, Kellogg's​ chairman and chief executive officer. "By focusing on execution and adhering to our Volume to Value and Manage for Cash financial models, we achieved all our goals for the year: we boosted our sales growth, improved our profitability, invested behind our brands, generated more cash flow than we anticipated, and reduced our debt."​

He continued: "Throughout the year, we saw broad-based acceleration in our sales growth, driven by investing in brand-building and innovation, and by a favourable mix shift."​

Sales for the year were 10 per cent higher at $8.30 billion, but even on a like-for-like basis, excluding the impact of acquisitions and divestitures and the cost of integrating the Keebler snack foods business bought a year earlier, sales increased by a respectable 4 per cent, ahead of the company's long-term target of low single-digit growth.

Fourth quarter sales rose by 4 per cent to $1.98 billion, dropping to 2 per cent on a like-for-like basis, although this latter figure compared to a particularly difficult period in the previous year.

Domestic cereal sales were up 6 per cent on a comparable basis in 2002, while the 1 per cent rise in the fourth quarter compared to a strong 13 per cent gain in the previous year. The business posted its third consecutive year of increased share of the ready-to-eat cereal category in the US, Kellogg said.

As far as snacks were concerned, US sales increased by 1 per cent on a comparable basis, led by the successful launch of new wholesome snacks products; sales for the division slipped 4 per cent in the fourth quarter, however, as a result of the elimination of certain sales force incentives which pushed down biscuit sales.

Kellogg's other US operations posted sales growth of 5 per cent for the year and 4 per cent for the quarter, again on a like-for-like basis, led by its frozen food brands Eggo and Morningstar Farms and by Pop-Tarts.

Outside the US, Kellogg International posted currency-adjusted sales growth of over 3 per cent in the full year and the fourth quarter. Latin America led this growth, while Europe and the other international regions also posted gains for the quarter and the year.

Kellogg products are manufactured in 19 countries and marketed in more than 160 countries around the world.

"Key to sustaining our growth is our underlying profitability and investment behind our brands,"​ Gutierrez continued. "Improving our gross profit margin enabled us to invest significantly in brand-building and still post operating profit growth that exceeded our long-term target."​

Operating profit increased 29 per cent in 2002 to $1.51 billion. On a comparable basis, the figures were up 8 per cent. In the fourth quarter, operating profit rose by 26 per cent year-on-year, or 6 per cent on a comparable basis.

An improvement in gross profit margin helped by higher revenues, an improved sales mix and cost savings related to the Keebler integration allowed the company to increase advertising and consumer promotion investment by 9 per cent for the year and 8 per cent for the quarter, on a comparable basis.