Milling & Baking News - November 16, 2010 - 16

Financial Results 

Kellogg seeks to regain momentum
amid 'difficult, disappointing year'
BATTLE CREEK, MICH. - Net income and sales at the Kellogg Co. fell
6% and 4%, respectively, in the third
quarter ended Oct. 2, continuing what
David Mackay, president and chief executive officer of Kellogg, described
in a Nov. 2 conference call with financial analysts as a "difficult,
disappointing year" for the
Battle Creek-based company.
"I know there are many
questions about what has
happened to Kellogg, and
why, and when we expect better performance," Mr. Mackay
said. "We're confident that we
can regain momentum as a
company, and this confidence
comes from an understanding
of what has happened in our
business over the last two years,
and a conviction that we're well
positioned for the future."
For the quarter ended Oct. 2, the
company had net income of $338
million, equal to 91c per share on
the common stock, which compared with $361 million, or 94c
per share, during the same quarter of the previous year. Sales for the
quarter were $3,157 million, down
from $3,277 million during the same
quarter of the previous year.
In the conference call, Mr. Mackay
pointed to four major issues that have
taken Kellogg off course in 2010: supply chain issues; significantly less innovation; tough comparisons following a strong 2009; and deflation in core
cereal categories.
Expanding on the cutback on innovation in 2009 and 2010, Mr. Mackay
said Kellogg instead chose to renovate
across its portfolio, such as was the case
with adding fiber to children's cereals.
"The renovation has set up our portfolio for the future, but did not drive
short-term sales performance," he
said. "The lower level of innovation,
combined with the (stock-keeping
unit) rationalization, has weighed
on our top-line growth. It's always
difficult to quantify the impact of reduced innovation, but as a guide, we
launched about $800 million worth of
innovation in 2008. In 2009 and 2010,
our innovation was roughly 25% lower than in 2008. The good news is that
we are moving forward into 2011 with
a weight of innovation that is going to
increase significantly."
Discussing the tough year-over-year
16 / November 16, 2010 Milling & Baking News

the recall-impacted brands."
Mr. Bryant did note that the recall
masked some underlying strength
in Kellogg's cereal business. Specificomparisons, Mr. Mackay said the cally, he said the Special K franchise
past two years have reinforced several remains healthy, and Fiber Plus and
key truths regarding the U.S. cereal Cinnabon cereals, introduced at the
end of June, gained 0.5 share points
category.
"For most retailers to do well in and 0.3 share points, respectively,
the category, the key branded players during the third quarter.
Looking ahead to 2011, Mr. Bryant said Kellogg plans
to leverage proven ideas
from around the world,
and in January will launch
Crunchy Nut cereal in the
United States. Crunchy Nut
is the company's second
largest brand in the United
Kingdom with nearly an 8%
share of the market, he said.
'The recall hit us at the worst
Additionally, Kellogg will introduce a Special K Oats and
possible time as the three
Honey line extension and conbrands impacted by the recall
tinue to innovate through its
- Froot Loops, Corn Pops
Mini-Wheats franchise.
and Apple Jacks - were the
"This represents the strongest
innovation pipeline for
cornerstone of our back-toNorth America cereal in the last
school program.'
five years," Mr. Bryant said. "It
- John Bryant,
also reflects our belief that the
chief operating officer
only sustainable way to grow the
cereal business is by exciting the
need to excite consumers and, most consumer through innovation, health
importantly, the category is driven by news and strong brand building."
Kellogg's North America retail
health news, innovation and brand
building," he said. "Promotional ac- snacks business, meanwhile, posted
tivity has not proven to grow the cat- flat sales during the third quarter as
the company achieved broad-based
egory over time."
In the North America segment, the growth across the snacks portfolio,
company posted operating profit of with the exception of cookies.
"Our store-door cracker sales were
$404 million, down 3% from $415 million during the same quarter of the up low single digit in the quarter,"
previous year. Sales in the segment for Mr. Bryant said. "Our share gain of
the quarter were $2,130 million, down 0.2 points in the quarter was driven
by strength in our Cheez-It, Wheat3% from $2,187 million.
Within its North America business, ables and Town House brands. Town
Kellogg said internal net sales for its House Flatbread Crisps, launched in
retail cereal business decreased 6% late June, continue to perform well.
in the third quarter. John Bryant, We are excited about our 2011 innovachief operating officer, said during tion, which includes Special K cracker
the conference call that 75% of the chips. We believe healthier snacking
decrease in cereal consumption was alternatives represent a significant
growth opportunity for the company.
related to the recall.
"The strong performance across
"The recall hit us at the worst possible time as the three brands im- our snacks business was masked by
pacted by the recall - Froot Loops, a weaker performance in cookies in
Corn Pops and Apple Jacks - were the quarter. This business has been
the cornerstone of our back-to-school adversely impacted by several retailprogram," Mr. Bryant said. "Follow- ers rationalizing assortment. We are
ing the recall, we tried to rework our starting to see a reverse in this trend,
promotional plans. However, com- as it has not helped the category. Also,
petitors were more aggressive than while our cookie sales were down in
we expected. Our share declined by the quarter, this was largely due to
approximately one point in the third lower incremental sales; our base sales
quarter, all of which was a result of were relatively flat." MBN
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Milling & Baking News - November 16, 2010

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