Breaking down Kellogg’s rationale for the breakup

Battle Creek, Michelle. To hear from Kellogg’s executives, the rationale for the division of labor basically boils down to one word – focus. Kellogg’s current diversified portfolio of grains and plant foods does not allow its North American business to achieve its full potential because resources are focused on growing the global snack business.

Stephen A. Cahillan, Chairman, CEO, and President of Kellogg Co. , held a conference call on June 21 to discuss the deal, which was announced earlier today. “And (it won’t) have to compete for resources versus the high-growth snack business. So, Frosted Flakes don’t have to compete with Pringles for resources.”

Under the plan, Kellogg will be split into three independent businesses — Global Snacks, North American Cereals and Plant Foods — over the next 18 months. The global snack business will include the company’s portfolios of international snacks, cereals, pasta and frozen breakfast products in North America.

Brands included will be Pringles, Cheese It, Pop Tarts, Kellogg’s Rice Krispies Treats, Nutri-Green, Rx Bar, Frosties, Zocaritas, Special K, Tresor, Crave, Coco Pops, Crunchy Knot and Ego. The business accounts for approximately 80% of Kellogg’s sales.

“Based on its proven track record of sales and profit growth and leveraging of its portfolio of global brands, strong positions in attractive categories and geographic diversity, this will be a higher growth company than Kellogg’s today,” said Mr. Cahillan. “Net sales growth will be supported by more focused resources and attention to brand building, innovation, international expansion of world-class brands and scale building in emerging markets. Profit margins are expected to expand over time, driven by operating leverage, managing revenue and productivity growth and increasing volume in emerging markets.” “.

Cereal sales in North America will be approximately $2.4 billion and will include cereal brands in the United States, Canada and the Caribbean. The grain business portfolio will include Kellogg’s, Frosted Flakes, Froot Loops, Mini-Wheats, Special K, Raisin Bran, Rice Krispies, Corn Flakes, Kashi and Bear Naked.

“Our priority this year was to restore production and inventory across our SKUs and then restart the rules of the game to get back to winning the market,” said Mr. Cahillan. “We are well on our way with total distribution points and participation to recovery sequentially. We have already regained four points of participation since the beginning of this year. This indicates the importance of these brands in the store, and demonstrates the strong foundation that the North American grain company can build from as a business. independent.”

Mr. Cahillan said the independent grain company will be able to boost its business through investments in its portfolio, packaging capabilities and throughput.

“With this enhanced focus, North American cereals are expected to generate stable net sales over time, consistent with the long-term trend of the category with improved margins that will drive dividend growth, increased cash flow, and increased return on invested capital,” he said. . .

The initial plan for MorningStar Farms, the plant-based foods company in Kellogg, is to separate it, but Mr. Cahillan said the company is looking at other strategic alternatives, including selling.

“Kellogg’s Morningstar Farms has grown steadily since its acquisition over 20 years ago, and the brand has the highest family penetration share in the frozen vegan/vegetable ingredient category,” he said. “This is clearly a world-class brand, backed by innovative and proprietary processes and technologies in a world-class manufacturing network, with huge long-term growth potential in a category that benefits from increased consumer interest in plant-based foods, both for nutritional needs and for environmental reasons. “.

Returning to the topic of focus, Mr. Cahillan said the plant-based split would allow resources that might previously have been weakened by priorities in Kellogg’s other business to be directed toward growth opportunities.

“This may include increased investment in brand building to build consumer awareness and increase family penetration,” he said. This may include increased investment in emerging food technologies, new supply chain capabilities, expanded distribution across channels and expansion into international markets.

“We see this business accelerating its sales and earnings growth over time, while an unencumbered balance sheet will give it the financial flexibility to pursue investments.”

When asked about the potential for a plant-based business selling off the spin-off, Mr. Cahillan said: “We’re committed to spinning, but we’ll also be assessing other strategic alternatives, if they present themselves. And that could happen at any time. And so I would say the clock begins in This call is now, because this has become public.”

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