Kellogg’s weathers slower sales by streamlining internal operations

04 Aug 2017 --- Reporting its second quarter results, the Kellogg Company said that although its sales slipped 2.5 percent compared to last Q2, to US$3.19 billion, it’s on track to deliver full-year financial targets. Despite flat consumption in traditional segments, as consumers continue to move away from processed foods, Kellogg’s claims to be dealing with the drop off by streamlining operations. 

Although shareholders are being satisfied, questions are being raised over whether this strategy is sustainable as the market increasingly moves away from sugary breakfast cereals and processed foods in general.

Kellogg’s second quarter earnings per share increased by 1 percent from the prior-year quarter, as higher operating profit and a lower effective tax rate more than offset a higher level of restructuring charges. 

Non-GAAP, comparable earnings per share were up almost 7 percent from the year-earlier quarter, and non-GAAP, currency-neutral comparable earnings per share increased by about 8 percent year-on-year.

Net sales were down in the US market, as consumption of traditional processed foods is in general decline. Kellogg’s also saw lowers sales on morning foods, while sales in snacks stayed flat.

Exit from US snacks segment 
Quarterly reported operating profit increased by about 1 percent, and operating profit margin improved, as productivity savings more than offset the impact of higher restructuring charges related to the Project K restructuring program.

This includes this year's exit from its US Snacks segment's Direct Store Delivery sales and delivery system. 

Earlier this year, Kellogg overhauled the distribution model for its snacks business in America, no longer distributing snacks products – including Pringles chips and Cheez-It crackers – to stores directly. In a bid to cut costs, it changed to a warehouse model.

According to the results, currency-neutral comparable operating profit increased by nearly 7 percent because of efficiencies in Cost of Goods Sold and Selling General and Administrative expenses related to Zero-Based Budgeting and Project K, driving more than a full percentage point of currency-neutral comparable operating profit-margin expansion.

Company chairman and CEO, John Bryant, affirms the outlook for the rest of the year in a statement. 

“Our second quarter results keep us on track to deliver on our full-year financial targets, with sequential improvement in net sales performance and continued profit-margin expansion,” he says.

“More importantly, we continued to make progress toward the transformation of our company. For instance, during the quarter we made strong progress on our transition out of Direct Store Delivery (DSD) in the US.

Snacks, an enormously complex initiative that the team has executed exceptionally well. We remain committed to returning to top-line growth, as outlined in our 2020 Growth Plan.”

Business performance
Kellogg’s says its second-quarter net sales and operating profit performance improved sequentially from the first quarter, as anticipated. Year-on-year, broad-based consumption softness persisted in the US and Pringles sales in Europe were pulled down by merchandising lost in the aftermath of since-resolved price negotiations with retailers. 

These factors masked growth in nontraditional channels, in emerging markets, and in many core brands, it says. In the meantime, productivity initiatives continued to improve the company's profit margins.