Tainted packaging recall hits Kellogg profits

By Rory Harrington

- Last updated on GMT

Related tags Kellogg company

Kellogg has said the massive recall of breakfast cereal due to tainted packaging was a major factor behind it posting a 15 per cent drop in profits for the second quarter.

The company also cited weakness in demand for cereal and lower Eggo sales as also contributing to the year-on-year fall in net earnings to US$302m. Last year, the company had to shutter an Eggo waffle site in the US after Listeria monocytogenes were discovered at samples taken from the facility.

Recall fallout

The food giant yesterday announced that the recall of 28 million boxes of cereal at the end of June was responsible for almost all of the 14 per cent cut in the amount it planned to pay out to shareholders for the three month period.

Kellogg said the earnings per diluted share had decreased by $0.13 from just under $0.92 to $0.79 – with the recall costs and subsequent lost sales accounting for more than three quarters of this. The firm warned that the incident would also damage full year profits.

“The estimated impact of the recall, including lost sales, reduced earnings per share by approximately $0.10 in the quarter and will reduce earnings per share by approximately $0.12 for the full year,”​ said a company statement.

Last month, Kellogg Company issued a voluntary nationwide recall of four types of breakfast cereal after customers complained of off-tastes and flavours that had caused sickness and nausea. An investigation revealed elevated levels of hydrocarbons – including methylnaphthalene - in the packaging liners had leached into and tainted the product.

Listeria

The company also highlighted a general weakness in the cereal sector and lower sales of its Eggo line – which includes waffles, pancakes and maple syrup - as factors in the weaker figures.

Last September, production of Eggo waffles was halted at its Atlanta plant after officials from the Georgia Department of Agriculture (GDA) found Listeria monocytogenes in a food sample. In February 2010, Kellogg faced criticism from the US Food and Drug Administration (FDA) over hygiene conditions at the Bucknell Drive site.

In a letter to the company, agency officials detailed a raft of “significant deviations from the current Good Manufacturing Practice (CGMP) regulations” ​including leaving uncovered rubbish just inches from raw materials, allowing potentially tainted water to drip onto food lines, and a number of unsatisfactory cleaning methods by employees.

Yesterday, Kellogg Company CEO David Mackay summed up the reasons for the fall in profits.

"Our second quarter results reflect the deflationary environment in the cereal category, particularly in the U.S. and UK, softer Eggo sales, and the voluntary cereal recall,” ​he said. "The second quarter performance was weaker than expected, and we have lowered our full-year guidance to reflect the cost of the recall and the difficult business environment.”

Mackay added that the company expected to recover in the second half of the year thanks to more innovation, reinvestment in the business and a gradual improvement in category trends.

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