Although the company expected the quarter to be challenging given the timing of innovation launches and the need for additional activity, the Kellogg Co. nonetheless experienced “disappointing” growth in the cereal category during the second quarter ended June 29, said John Bryant, president and chief executive officer.
Weakness stemmed from the adult cereal category, Mr. Bryant said during an Aug. 1 conference call with analysts, but he said Kellogg is taking steps to reverse the trend through innovation and education, including a “healthy dividends” strategy.
“Healthy dividends is targeted at adult health-conscious consumers and focuses on bringing boomers into the cereal category,” he said. “For example, the campaign highlights the benefits that come from a balanced diet, including cereal and a healthy lifestyle.”
On the innovation front, Kellogg has introduced Raisin Bran with omega-3 fatty acids, Kashi Chia Heart to Heart, and multi-grain Special K.
Kellogg could use a boost within the Kashi brand, which has struggled a bit lately. Responding to an analyst’s question about the health of the Kashi business, and specifically the company’s move to Battle Creek from its previous headquarters in La Jolla, Calif., Mr. Bryant said the brand offers “a great opportunity for us to drive additional growth.”
“I think the opportunity with Kashi is to play its role within our portfolio,” Mr. Bryant said. “One of the benefits of having it viewed within the broader Kellogg portfolios, we can more clearly have some Kellogg brands play in some places and then Kashi play where it needs to play. An opportunity for Kashi is really in the area of pioneering nutrition, putting the value back in the food, whether it be G.M.O. or organic or new edge grains, etc.
“That is the opportunity that Kashi can play, and by having it viewed within that broader portfolio, we can actually more clearly define and articulate the job that we need Kashi to go out and achieve for us. Also, Kashi now is a very large business, and we can more effectively leverage the scale and benefits of the Kellogg Co. by putting it into the broader context of Kellogg’s. We feel very good about the longer term growth opportunity for Kashi and, if anything, we think this gives it the better opportunity to achieve its long-term growth potential.”
Mr. Bryant also was asked why innovation, and not stock-keeping unit rationalization, is expected to be the key to a cereal category turnaround.
“I think in a category like cereal, which is a high repertoire category, you always have a level of innovation and a level of ongoing rationalization on the shelf,” he explained. “The shelf is not growing and it’s not declining. It’s an element of bringing new news to the category and continuing to bring consumers in. In some parts of the business, such as say Special K, we need a high level of choices to keep people excited and interested in eating Special K each day. There’s a wider level of variety out there than we might have in some other brands.
“Also, when we talk about innovation, we are not just talking about another line extension. We are talking about beverages, we are talking about hot cereals, we are talking about breakfast sandwiches. So I think if you compared our innovation pipeline this year to say last year or the year before, there is a greater proportion of incrementality within the innovation pipeline.”
Mr. Bryant said it is Kellogg’s intent over the long term to get back to its sustainable growth model. To that end, Kellogg’s is investing to drive growth more aggressively in the cereal and breakfast occasion, he said.
“What I think you’re seeing within that investment model is we are using cereal equities to help drive our growth in some of the non-cereal spaces,” he said. “So, for example, leveraging the Kellogg master brands and launch the Kellogg to go beverages in the U.S. That enables us to have a more efficient investment model so we don’t need to add a significant amount of additional brand building in order to drive that growth as it hails back on the cereal business, as well.
“At the same time, within the advertising line, we continue to move money between digital, consumer databases and so on which make that spending even more efficient, which also enables us to free up investment. Also, we will continue to look within our company on the cost side to be more effective and efficient to identify opportunities to provide fuel for growth in our organization going forward.”