Crunch time: Will Kellogg’s spin-off and reshaped portfolio pay off?

22 Jun 2022 --- In a move to become more competitive and tap into higher-growth areas, the Kellogg’s Company is dividing itself into three independent public companies in a major shake-up that sees a renewed focus on snacks, cereals and plant-based products. The F&B giant is also exploring other strategic moves, including a possible sale of its North American plant-based food business, Plant Co.

During a conference call yesterday, Kellogg’s executives said the company has been contemplating a spin-off strategy for several years, citing major moves over the last decade, which have allowed Kellogg’s to grow and transform its portfolio.

These include acquiring Pringles a decade ago in 2012, turning it into a “global powerhouse brand”, adding approximately US$1 billion of net sales, and building brands like Cheez-It, Pop-Tarts and Rice Krispies Treats while also making moves in emerging markets like Africa.

Over this time, Kellogg’s also entered into the snacks space with the acquisition of RXBAR while divesting four businesses, cookies, fruit snacks, pie crusts and ice cream cones.

However, now is the time for change, says CEO, Steven Cahillane.

“The reshaped portfolio is working, but we believe it could work even better, particularly if our US and Canada cereal and plant-based businesses were independent. Hence our announcement to spin-off those two businesses. Our shareowners will own a trio of strong independent companies with iconic brands, attractive economics and improved outlooks,” he says. 

Kellogg’s  is exploring the sale of its plant-based food business.Uneven divide
The strategic division of Kellogg’s will be realized into three companies of differentiated sizes and sales capabilities.

“Each of the three companies is from day one a scaled business with strong brands and category shares, a solid supply chain and financial flexibility,” adds Cahillane.

Global Snacking Co. is the working name of the first independent company with a strategy focused on capturing the snacking, international cereal, noodles and North American frozen breakfast market.

The new snacking titan will comprise the part of the business that managed 80% of US$11.4 billion in sales in 2021.

Snacks will start by comprising 60% of the net sales of the newly formed company, expecting to grow at a faster pace than the actual Kellogg’s mother company as there are renewed opportunities for market expansion and double-digit sales growth, particularly in the Asia Pacific, Middle East and Africa markets.

North America cereal 
North America Cereal Co. will be the second nascent business after the strategic division. This new company will comprise the most established and mature cereal companies from Kellogg’s in the North America, Canada and the Caribbean – which include Frosted Flakes, Special K and Froot Loops, among others.

“As Kellogg’s indicates, the three businesses are on separate pathways,” Cyrille Filott, global strategist consumer foods, packaging and logistics at Rabobank, tells FoodIngredientsFirst.

“Most of current Kellogg’s is in growth mode, which is the larger chunk of the three businesses. The US cereals business needs to focus on margin improvements. And the plant-based business needs to accelerate growth,” continues Filott.Cereals, in general, have stagnated as consumers have been reaching for a greater variety of breakfast offerings.

As Filott explains, the US cereal numbers have become sluggish in recent years, signaling a mature market without great margins to surprise investors. While Kellogg Europe, Latin America and AMEA net sales grew in the first quarter of this year – 2%, 7% and 12%, respectively – North America sales declined by slightly less than 1%.

“Think of this transaction similarly to when Mondelēz was spun out of Kraft. Kraft was mostly domestic food which grew/grows slowly, and Mondelēz was faster-growing snacking with a clear M&A agenda (mergers and acquisitions). This split is about Kellogg’s trying to move swifter, with increased attention and focus on the three businesses,” Filott continues.

By singling out North America Co., the other business will be able to tap into higher growth strategies. In contrast, the new cereal business - the portfolio consists of brands like Kellogg’s Frosted Flakes, Froot Loops Mini-Wheats Special K, Raisin Bran, Rice Krispies, Corn Flakes, Kashi, and Bear Naked - will focus on improving existing profit margins and on delivering a solid dividend. 

Cahillane says that although the cereal company has been successful for over a century as a “pioneer innovator and leader in ready-to-eat cereal,” he also mentions some of the recent challenges. 

“You are well aware of the supply disruptions that have pulled down our North America sales and profit recently. Our priority this year has been to restore production and inventory across our SKUs and then to resume our playbook to get back to winning in the marketplace… We’ve already gained back four share points since the beginning of this year. This speaks to the importance of these brands in the store, and it demonstrates the strong foundation from which North America Cereal Company can build as an independent company.”

Cereals, in general, have stagnated as consumers have been reaching for a greater variety of breakfast offerings for several years now, indicating a move away from traditional breakfast-type cereal bowls. 

Plant-based aggressive growth
The plant-based company, Plant Co., will be born with an “aggressive stance toward future growth,” says Cahillane. 

“By spinning-off into its own company, resources that previously may have been diluted by priorities in other Kellogg’s businesses can now be directed toward these growth opportunities.” 

Cahillane says that Kellog's has been a “pioneer innovator and leader in ready-to-eat cereal” for over a Century.“This may include investing more in brand building to build consumer awareness and increase household penetration, investing more in emerging food technologies, new supply chain capabilities, extended distribution across channels and expansion into international markets” explains Cahillane.

Moves in the snack sector
Kellogg’s underscores that the snack sector is seeing particular growth even during a complex year for world markets. With Pringles, for example, tracking a 13% yearly growth during the 2019 to 2021 period. 

“Despite an unusually challenging business environment, in which economy-wide bottlenecks and shortages and high-cost inflation were exacerbated by the war in Ukraine during the quarter, the company sustained particularly strong momentum in snacks worldwide,” notes Kellogg’s in its 2022 first quarterly report. 

Competitors of Kellogg’s are on the move in the snack market, with Mondelēz International acquiring Clif Bars just yesterday for US$2.9 billion. Mondelēz has also dropped its chewing gum business – Halls, Trident, Dentyne, etc. – to narrow its focus on snacking; it did not opt for dividing its business, nonetheless choosing to sell these brands outright. 

Barry Callebaut has also recently made big moves in the sector by extending its plant-based chocolate manufacturing in Canada with a US$104 million investment. 

By Gaynor Selby and Marc Cervera