Why Kellogg is turning its back on Frosted Flakes and Froot Loops

Kellogg announced on Tuesday that it is splitting into three separate companies, separating its U.S., Canadian and Caribbean cereal businesses into one group and its plant-based food businesses, including Morningstar Farms, into another. The largest remaining business includes Kellogg’s global snack products such as Pringles, Cheez-It and Pop-Tarts, as well as international cereal and pasta and North American frozen breakfast products.

The snack business—not your business card cereal company—is the jewel in the crown. It is by far the largest of the three new companies and will keep current Kellogg CEO Steve Cahillane as chief executive.

“Cereal is Kellogg’s legacy business,” said Emilie Feldman, a management professor at the Wharton Business School. But that doesn’t mean it’s the most promising part of the company.

“Cereal is good,” she said. “The cereal is stable and there is a market for it.” But “other parts [Kellogg’s] portfolio… have better prospects for the future”, he added.

Kellogg’s (K) approach is not uncommon.
Kraft (DIFFERENT) made a similar move when it spun off its North American grocery business, creating a company we now know as mondelez (CDM). AND Johnson & Johnson (JNJ), toshiba (TOSBF) and GE (GE) announced similar plans last year. It is a way of clarifying the goals of each entity and, hopefully, allowing each to flourish.

In a statement discussing the three new deals on Tuesday, Callihane said they will be stronger on their own.

“All of these businesses have significant standalone potential, and an enhanced focus will allow them to better direct their resources to their distinct strategic priorities,” he said. “In turn, each business is expected to create more value for all stakeholders, and each is well positioned to usher in a new era of innovation and growth.”

But there are risks to spinning off a company Kellogg’s size, and some warn that the plan could backfire.

the fall of cereals

The cereal category has been steady for years (apart from a spike at the start of the pandemic when consumers sought out nostalgic goodies and had breakfast at home).

U.S. retail cereal sales have dropped from about $10.7 billion in 2016 to about $10.3 billion in 2021, according to Euromonitor International.

Kellogg’s cereal business also faced other problems. Last year, a strike and fire at its US cereal plants slashed production and affected margins.

The roughly three-month strike ended with a five-year deal that includes a ban on plant closures for the duration of the contract and an increase in the cost of living to protect workers from rising prices.

In a statement Tuesday, Kellogg said the cereal business “is expected to generate stable net sales over time.”

Snacks, on the other hand, are flying off the shelves.

In the United States, in the first quarter, retail sales of Pringles were up 8%, sales of Cheez-It were up 14%, Pop-Tarts were up 11% and Rice Krispies Treats were up 10%, according to the company.

Kellogg has been developing its snack business for years. Acquired Pringles in 2012 and bought RXBAR about five years ago.

In February, Cahillane summarized the company’s evolution at the CAGNY conference. “Kellogg’s transformation over the past decade has been dramatic,” he said. The company has gone from having “a cereal-focused portfolio to one today that is decidedly snack-weighted,” he said.

In a statement Tuesday, Kellogg said the new global snacks business, which has $11.4 billion in net sales, will be a faster-growing company than Kellogg as it exists today, with better profit margins.

Some experts applauded the news. Others are more skeptical.

Will it work?

The decision to split into three companies “is a logical move,” Nidhi Chauhan, senior food and grocery analyst at GlobalData, said in a statement, adding that doing so could spur growth for each of the separate businesses that might not have been possible. under an umbrella. “Restructurings like this are a way to find growth opportunities as economies have slowed and consumers are tightening their pockets,” she added.

But others were concerned that the company’s split could be a mistake.

“We do not think this strategic move improves Kellogg’s competitive position or financial prospects,” wrote Erin Lash, director of consumer equity research at Morningstar (financial services and research company, not Kellogg’s veggie burger brand). ) in note. In the news.

Kraft Macaroni and Cheese is changing its name

With its focus on snacks, Kellogg “was already looking for a playbook that created value,” Lash told CNN Business. “Management has talked about the fact that splitting the business provides opportunities for focus,” she added. “But we are a little skeptical that this could not have been achieved as a combined organization.”

Wharton’s Feldman noted that when large companies break up, they may lose some economies of scale.

“Now each of these entities has to start doing everything on their own,” she said, “from the mundane, like production and shelf space and distribution, to much more complex things.”

But, she noted, if Kellogg can pull this off, it could add value for shareholders. “Investors tend to respond very favorably to these types of announcements,” she said. “They see clarity coming.”

— Jordan Valinsky and Chris Isidore of CNN Business contributed to this report.

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