Announcing its financial results for the second quarter, Kellogg revealed net sales from its US snacks segment had fallen 4% year on year to $803m while sales in its Morning Goods segment, which includes breakfast cereals, had dropped 2% year on year to $727m.
“Obviously, we're still challenged as to our top-line growth,” Kellogg chairman and chief executive officer John Bryant told analysts. “Part of this is an industry-wide dynamic, and part of this is our exposure to a shift in weight management trends that affected one of our biggest brands, Special K.”
According to IRI data for the 12 months to 27 December 2015, Special K cereal sales fell 3% by value on volumes down 4% in an overall cold cereals category down 1% by value and 2% by volume.
Bryant added that “pretty much” all the sales loss in the company over the past few years had been from Special K.
'Share is stable'
“If you look back over the last three or four years, we've talked about the importance of stabilizing the large four core cereal businesses,” he said. “I'm happy to say that if you look at the US, Canada and Australia, you can see the categories are stable and our share is stable across those three businesses.”
Kellogg’s six core cereal brands had retained market share across all retail channels in the US, reported the company, adding that Pop-Tarts had enjoyed strong growth.
Kellogg said it expected to see improvement in top-line performance in the second half of the year, particularly through timing of promotional events such as the Olympics.
Kellogg Q2 2016 consolidated results
Net sales: $3.27bn
Net sales change: -6.6%
Reported operating profit: $449m
Reported operating profit change: +9.1%
The overall Morning Goods segment recorded strong growth in operating profit in the second quarter – up from $131m in Q2 2015 to $165m this year.
Sales in the US snack business had been impacted by the performance of the Special K brand, and Kellogg said it is overhauling its Special K snacks range to increase consumer relevance.
“We've done a lot of work over the last year renovating some of the Special K SKUs and launching on-trend foods like Special K Nourish Chewy Nut Bars, and we're seeing positive results,” said Kellogg Snacks Business Unit president Adrienne Deanie Elsner.
She added that Special K Nourish bars had been 80% incremental to the Special K bars line, and that their sales growth was three times greater than the rest of the Special K bar range.
“When we get the food right, this brand can grow,” she said. “The challenge is that there are food forms in this brand that are simply not as well aligned to how our consumers are eating today.
“Stabilizing Special K is mission-critical for us. In 2017, we will make a more aggressive portfolio change to the Special K brand, but we expect to continue experiencing some drag from Special K in the second half of 2016.”
Kellogg added core brands such as Cheez-It, Pringles, and Rice Krispies Treats had continued to post growth in consumption in the US.
“With Cheez-It, we re-evaluated the price point of our offerings across channels, from large sizes to on-the-go and single-serve,” said Elsner. This activity had helped increase year-to-date consumption by 5%, and increase distribution by more than 7%.
She added that the business had shifted investment to the brands that could give the strongest growth. In the case of crackers, this had been Cheez-It, Club and Town House, which had all grown consumption in Q2 and year-to-date.
Emphasis had been put on core Pringles flavours, which contributed to a 3% growth in year-to-date consumption, said Kellogg, adding that single-serve formats were growing at a double-digit rate.
North America Other segment
Kellogg’s North America Other segment - comprising US frozen foods, Kashi and its Canadian businesses - posted an 8% decrease in net sales. The company said the decline came as the segment was impacted by factors including price elasticity in Canada and portfolio rationalization.
“The good news is that we continue to see share gains in our renovated and repositioned Special K [in Canada],” added Bryant.
Overall Kellogg sales fell 6.6% year on year across the quarter, which the company attributed primarily to the effect of currency translation resulting from the remeasurement of its Venezuelan business last year.
Quarterly reported operating profit increased due to favorable one-time costs, as well as strong performance in Venezuela and cost savings in North America. The business this week announced it was closing one of its US snacks production plants to reduce capacity in its cracker manufacturing operations.
In summary, Bryant said Kellogg was “making good progress on our priorities”.
“We have continued to improve our foods to insure they are on trend; we've continued to expand the Pringles business worldwide; we're enhancing our sales capabilities; and we are designing and executing productivity initiatives that are contributing to more profit-margin expansion than we previously anticipated.”
Bryant added that the business had developed a strategy to boost profit margins “higher and sooner”.
Kellogg Europe segment performance
Sales fell 3% in the Kellogg Europe segment, which Kellogg attributed to currency translation as currency-neutral net sales were flat. The company said growth in the Pringles brand had helped offset weakness in UK cereal market.
“The category there remains very soft in a difficult economic and retail environment, and we lost share,” said Bryant, adding that work was ongoing in the UK to reposition and renovate Special K.
“The UK continues to be a work in progress,” he added. “That's one where we're not happy with its performance but we expect to see improving results in the back half of the year in the UK.”
“Our efforts to renovate Special K's food and new ‘inner strength’ positioning are ongoing,” he added. “And while new Nourish is doing well, this recovery may take some time.”
Kellogg said sales in other cereal markets, including France, Benelux, Southern Europe and Northern Europe, had improved, with the business seeing double-digit growth in Russia.
“As we look to the second half, we continue to expect sequential improvement in Europe in sales and profit, which will require progress in stabilizing UK cereal,” added Bryant. “We have plans in place to address this, including an exciting Olympics program.”