Kellogg shakes off volume drop in Q2 noting ‘lots of dry powder’ for growth in H2

By Elizabeth Crawford

- Last updated on GMT

Source: Getty/	R.M. Nunes
Source: Getty/ R.M. Nunes

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Executives at Kellogg Co. are neither surprised nor overly worried about the long-term effects of sharp volume declines and a slowdown in sales growth in the company’s second quarter, noting the company has “lots of dry powder … to drive real quality merchandising” in the back half of the year.

A 7.6% drop in volume in the second quarter and a 4.8% drop in the first half of the year over the same period last year was “in line with our expectations,” ​as was a deceleration of year-over-year sales growth to 14% in Q2 from 21% in the previous quarter, CEO Steve Cahillane told investment analysts yesterday during the company’s second quarter earnings call.

He attributed the declines to rising elasticities related to significant price hikes by Kellogg and others in recent years to offset inflation and lapping last year’s “sizable replenishment of trade inventories”​ in North America.

While not pleased with the declines, Cahillane noted both the volume drop and shifts in consumer behavior are “pretty much in line with our expectations”​ given “we’ve taken such significant pricing over the last several years and elasticities have been almost nonexistent. So, we’ve been forecasting their return for quite some time.”

The drop in volume reflects a broader shift in consumer behavior, which includes “consumers … really maximizing their pantries,”​ he said. “They’re closely managing their household inventories, their pantry inventories, zealously guarding against waste, as you would expect in this environment.”

He added he expects this trend to continue for the foreseeable future as consumers become “ever more conscious of the strains on their household budgets.”

On the bright side, however, he said the company has not seen meaningful moves to private label or shifts out of the categories in which it plays.

Executives are optimistic volume will rebound in H2

Cahillane said he is also “optimistic”​ about volumes going forward as Kellogg has a plan to drive sequential improvement.

“We’ve got lots of dry powder as we think about the second half of the year to drive real quality merchandising. I’m talking about display execution, brand building with significant advertising spend, really creating those connections with our consumers,”​ he said.

CFO Amit Banati added he also expects volume growth to improve as impact from an inventory lap eases in coming quarters.

“In quarter two, the inventory lap was the most pronounced … and I think going forward that will be lesser of an impact,” ​he said.

Kellogg raises guidance on sales strength

Despite a drop in volume and slowdown in sales growth, Kellogg executives were pleased to report a 7% increase in organic net sales growth in the second quarter, which Banati noted “paces us a little ahead of our previous full-year outlook.”

Operating profit also grew 14% on adjusted basis, which comes in on top of last year’s 10% currency neutral growth, which is also a little ahead of the previous full-year outlook.

Based on these results, the company raised its guidance for gross margin to “somewhere around 50 basis points of expansion year-on-year,” and it now expects adjusted operating profit growth of 9% to 10% on a currency-neutral basis, which is in the upper half of its pervious guidance.

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