Kellogg Q2 net profits slumped 16% with Special K and Kashi underperforming and ‘failed innovation’ across other parts of its US cereal portfolio.
The cereal major posted net profits of $295m, down from $352m in Q2, 2013. Net sales also dipped – down to $3.6bn from $3.7bn the previous year.
As a result, Kellogg has lowered its guidance for 2014 to anticipate an internal net sales drop of 1-2%.
John Bryant, CEO and chairman of the board, said Kellogg was disappointed by its performance with US cereal “a bit off the pace” of overall category growth.
Net sales for US Morning Foods dropped 4.9% for Q2, down to $820m.
There had been some “failed innovation” across Kellogg’s US cereal portfolio, Bryant told analysts in the Q2 earnings call.
One example was the failure of Mini-Wheats Crunch that had caused a drop in overall consumption of the Mini-Wheats brand, he said.
“We’ve also had an issue with some other failed innovation in Crunchy Nut and FiberPlus,” he added. Bryant said Kellogg would reduce investment in these brands.
“FiberPlus and Crunchy Nut are brands that, quite frankly, have not worked out for us.”
Special K and Kashi woes
Special K and Kashi were another two cereal brands of concern, but ones Kellogg was committed to investing in, Bryant said.
“Special K continues to be impacted by the evolving consumer trends affecting weight management brands in general,” he said. “…We’re seeing softness, not just in Special K, but diet sodas, reduced calorie, frozen foods, etc. Weight management programs are also under pressure. So, I think consumers are changing their views on weight management from reduced calories to nutritious foods.”
Kellogg would therefore continue to work on repositioning Special K to emphasize positive nutrition, he said, calling out protein, fiber and grains, for example.
“On Special K, we think this is a tremendous business with tremendous opportunity, however I think we need to change how we communicate the benefits.”
Kashi had also performed below expectations, predominantly due to lower distribution, Bryant said.
“We need to address the brand’s positioning and our ability to execute quickly enough in the evolving world of natural and organic foods,” he said.
“We haven’t kept Kashi focused enough on progressive nutrition.”
Kellogg would reinvigorate the natural food brand by making “dramatic changes”, Bryant said, including a new CEO – David Deholm who ran the business in the 2000s.
“This business requires an entrepreneurial approach, shorter development periods and a more agile decision-making process, and David is the right person to lead this significant change; although we know it will take some time,” he said.
Renewing interest in cereal
Bryant said Kellogg wanted to renew interest in breakfast cereal as trends for morning consumption evolved.
“…The breakfast occasion is growing, but unfortunately, there are more alternative breakfasts, and I think we need to change our communication to help people understand how cereal can better meet their needs at breakfast than some of those other alternatives,” he said.
Kellogg, for example, was investing in on-the-ground promotional programs, like its cereal and milk program in the US and Canada and kids’ brain and bone development in Australia.
These programs, he said, were not designed to immediately improve business, rather establish longer-term brand building with consumers.
Bryant said cereal would likely remain under pressure for some time, but there was hope long-term of reinvigorating the category.