Kellogg today said that high commodity costs led to a one per cent decrease in operating profit during the third quarter, despite a six per cent increase in sales.
For the third quarter ending 29 September 2007, net sales reached $3bn (€2.1bn), a 6.4 per cent increase from the year before, Kellogg said. Operating profits hit $492m (€342m), a one per cent increase from the third quarter 2006. However, operating margins went down 0.9 percentage points to 16.4 per cent, the company said, blaming the fall on rising commodity prices and increased marketing spend. "We continue to lay the groundwork for future growth and reinvest into the business," said David Mackay, Kellogg's chief executive officer. "Our third quarter advertising investment rose at a double-digit rate and we're planning another increase in the fourth quarter." Total costs of $2,512m (€1,745m) were recorded for the quarter, a seven per cent increase from the same period in 2006. "In addition, we are now expecting increased investment in up-front costs," Mackay said. Net sales in the North American division increased four per cent to hit $1,960m (€1,361m), driven by growth in the snacks and frozen foods businesses, but sales of cereal products remained unchanged. In the Kellogg International division, overall net sales grew 12 per cent to $1,1044m (€167m), led by strong sales of cereals and snacks in both the Latin America and European markets. Unusually for the booming Asia Pacific region, Kellogg sales fell one per cent in this area.
The company still envisages long-term internal sales growth in 2008, as well as an increase in internal operating profit, Mackey said. "Despite ongoing inflation challenges, we will continue to invest in our business through advertising and cost-saving initiatives which give us increased visibility for future growth," he added. Like many food companies, Kellogg is struggling to maintain margins as the cost of commodities, particularly sugar and wheat, continue to rise. Earlier this month, the company tried to pass on some of its costs to consumers. However the strategy failed when Germany-based retailer Metro consequently pulled all Kellogg products from its shelves. Metro spokesman Martin Bruening told BakeryAndSnacks.com at the time that the company had decided to stop buying Kellogg products because the prices increases were "absolutely not justified".
"The Metro Group has negotiated with Kellogg's for several months," he said. ""In the course of this negotiation an agreement could not be reached, and so after the failure of the negotiations we have not purchased Kellogg's products since October 1."