The Kellogg Company is scheduled to release its first-quarter 2019 results on May 2. Wall Street and industry analysts are anxious for Kellogg’s to report its earnings, as the provider of cereals and other food items has beat earnings estimates in three of the trailing four quarters, the average being 5.6 percent. Can Kellogg’s maintain the momentum?
Kellogg’s New Reality
Kellogg’s became a company in 1898 after founder W.K. Kellogg and his brother, Dr. John Harvey Kellogg, accidentally flaked wheat berry—a mistake that would result in the recipe for Kellogg’s Corn Flakes. The company, which is headquartered in Battle Creek, Michigan, now operates in 180 countries, providing ready-to-eat cereals and other food products. Its 2018 reported net sales totaled $13.5 billion, a 5.39 percent increase from 2017.
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Kellogg’s created some of the most well-known brands in the world: Froot Loops, Frosted Flakes, Special K, Rice Krispies, Pop Tarts, Eggo Waffles, Nutri-Grain Bars and, of course, Kellogg’s Corn Flakes, arguably the most popular cereal ever created. To state that millions of children grew up with a Kellogg product in the home is an understatement. Kellogg’s is America’s and much of the world’s breakfast provider.
Unfortunately for Kellogg’s, the brands which the company has relied on for more than 100 years have fallen out of favor with today’s more health-conscious consumer, resulting in decreased sales across Kellogg’s portfolio of products. Stated another way, the products that brought Kellogg’s to life as a company (cereal) now have the potential to severely weaken and even kill the company. The new reality for Kellogg’s is that being the best cereal company in the world no longer matters. To survive and thrive, Kellogg’s must transform. No easy task.
Kellogg’s Is Trying
To change the narrative of Kellogg’s from being a company that is struggling to a company with a future, Kellogg’s board of directors placed Steve Cahillane in the role of CEO in 2017. Cahillane was hired for the top job of the 113-year old cereal company and tasked with one mission: get the company growing again. Cahillane is the former CEO of Nature’s Bounty, the health and wellness company. Prior to joining Kellogg’s, Cahillane held executive positions at Coca-Cola and Anheuser-Busch InBev. I believe Cahillane has the courage to ask hard questions at Kellogg’s, and I believe the board of directors will be supportive. However, it remains to be seen just how far Cahillane and the board are willing to go.
I give credit to Cahillane as he has moved quickly since taking on the role of CEO. He has stabilized Kellogg’s sales and launched a turnaround strategy, ‘Deploy for Growth.’ 2018 was a year to ‘pivot for growth’ with a focus on the following key areas:
- Strategy—Implement ‘deploy for growth’ to align executives, associates and the corporation to grow with clear priorities and tangible action-items;
- Portfolio—Reshape the company through acquisitions, strategic investment; divest products that no longer meet the needs of the company or customers;
- Investment—Stronger ideas, improved ROI, revitalizing brands, enhancing capabilities; and
- Progress—Stabilize organic net sales trend, improve consumption performance.
Cahillane appears to be satisfied with the current progress of the company based on comments from the company’s last earnings report, which I relied on for the majority of information contained in this article:
Two Thousand Eighteen was an important year for us, in which we pivoted to growth after successfully reducing our cost structure in recent years. We launched ‘Deploy For Growth,’ a strategy that gives us clarity on priorities, and has us taking decisive actions to return our Company to sustainable top-line growth. We still have a lot of work to do, but we have made great strides toward reshaping our portfolio toward growth, revitalizing key brands, and developing capabilities. Our stabilization of a declining net sales trend and our improved in-market performance around the world are clear signs of this progress. This investment and progress will be evident again in 2019, setting us on a path for sustainable, profitable growth over time.
Kellogg’s has indeed made changes. To gain traction with consumers focused on health and nutrition, the company has made several acquisitions of more health-focused brands, like RXBAR, which Kellogg’s acquired for $600 million in late 2017.
The wisest move made by Kellogg’s in 2018 was to exercise an option to acquire a stake in packaged food manufacturer Tolaram Africa Foods—a subsidiary of Singapore-based Tolaram Group—for $420 million as the company seeks to expand its presence in the African market. (Much of my work experience is in Africa and other international locations like China, India, Asia Pacific, Brazil and Latin America, Europe and Russia. International growth must be a priority for Kellogg’s. I rank Africa, India, Brazil and Russia as priorities.)
Is It Enough?
Kellogg’s recently proved how serious it is about divesting brands by agreeing to sell its cookies and fruit snack brands, including Keebler and Famous Amos, to Ferrero SpA for $1.3 billion, as the cereal maker refocuses on the fast-growing parts of its business.
I applaud the decision to divest cookies and fruit snacks. Kellogg’s must divest brands and cut costs in order to grow stronger. The worst thing the company can do is retain a form of blind loyalty to the past as it relates to brands or categories. I’m not convinced Cahillane believes in this as strongly as I do. In an interview with Fortune, Cahillane stated, “If cereal is flat, we can live with that.” I disagree. Kellogg’s must not waste capital and resources on low-margin and low-growth categories, like cereal in the U.S., when there are high-margin and strategic areas of growth that Kellogg’s can invest in. Cereal demand in the U.S. fell to about $9 billion in 2018 from $9.9 billion five years earlier, according to data from Euromonitor. A silver lining is that this trend is reversed on a global scale. Worldwide, cereal sales hit $24.6 billion last year, up from $23.2 billion in 2013, according to the Fortune article.
In order to grow, Kellogg’s must minimize its focus on cereal in the U.S., while increasing demand for its cereal (and other brands) in the global locations it operates. Just as Campbell Soup may have no choice but to divest its entire line of soups to grow and become a more competitive company, Kellogg’s may have no choice but to eventually come to the realization that divesting the majority of its cereal brands is the most strategic and intelligent decision it can make.
A less drastic option, and one I believe Kellogg’s should consider, is to take the cereal business private. Taking Kellogg’s cereal business private would save the company millions of dollars on securities filings, controls and accounting. In addition, it would give Kellogg’s the ability to make changes and test new strategies away from the probing and demanding eyes of Wall Street and industry analysts. Kellogg’s could conduct extensive supply chain network optimization studies to design and implement a low-cost yet efficient supply chain, manufacturing and sourcing strategy capable of meeting demand cost-effectively. The goal should be to maximize cash flow while minimizing capital investment and improving working capital.
What Kellogg’s Must Do
Reshaping Kellogg’s portfolio to better align with consumer trends is a must-have. In my role as a global consultant, I continuously find one truism in business—demand for a company’s products isn’t everything; it’s the only thing. If a brand isn’t selling, if demand is low for specific products or an entire category, the best move strategically is to divest the products and brands to become stronger as a company.
Companies fail because their product portfolios are not set up for success. (Case in point once again, Campbell Soup, which foolishly veered into fresh food, even going so far as to own a carrot farm, only to see the company lose customers and billions in revenue.) The decisions made by Campbell’s CEO at the time, Denise Morrison, failed at every level to leverage Campbell’s differentiating capabilities or to provide the company with a strategic advantage. Under no circumstances can Kellogg’s afford to make such catastrophic mistakes. Instead, to last another 100 years and to remain relevant to consumers, I believe Kellogg’s will have to do the following:
► Place a Premium on Innovation and Strategic Partnerships
I’m confident that as CEO, Steve Cahillane is meeting and speaking with executives from many companies. However, I recommend that Cahillane meet with Elon Musk, founder of Tesla, and Dara Khosrowshahi, CEO of Uber. Why? A strategy I use as a consultant is to visualize and analyze how CEOs from one company would run another company. For example, if Musk or Khosrowshahi, became the CEO of Kellogg’s, what would they see and what would they do? When I completed this exercise as part of a research project, I concluded that Musk, Khosrowshahi and Cahillane would mutually benefit from meeting. Tesla has the potential to apply its differentiating capabilities to food production and agriculture. Uber can leverage its platform to design revolutionary vehicles and business models to deliver food and groceries. Kellogg’s has differentiating capabilities in global food manufacturing.
Other companies Cahillane should meet with includes Facebook, Instagram, Google, Microsoft, Schwan Foods, JBS and Fleat Networks. I also advise Cahillane to meet with the CEOs of the leading health care insurance providers to ascertain what Kellogg’s must do to become the go-to provider of healthy food and meals to insured consumers. Insurance companies have come to the realization that nutrition, and not just pharmaceuticals, should be their focus. Kellogg’s has an opportunity to become a leader working with insurance companies to identify the optimal strategy for providing consumers with meals and other nutritional products.
The bottom line is that Kellogg’s must think big. I would make it mandatory that every executive and associate working at Kellogg’s be required to read Jeff Bezos’ 1997 Day One Shareholder Letter in which Bezos outlines his philosophy regarding the importance that Amazon remain a “Day One” company, always focused on results rather than on the process. As stated by Bezos:
The outside world can push you into Day 2 if you won’t or can’t embrace powerful trends quickly, if you fight them, you’re probably fighting the future. Embrace them and you have a tailwind.
I argue that Kellogg’s is a “Day Two” company losing relevance and is in decline. To survive, the company must place personnel into executive roles with the courage to embrace trends. Kellogg’s must also create a “Day One” culture, where associates and managers are focused on customers and outcomes and not ROI. Amazon is Amazon because of its ability to enter categories and reimagine sectors for over a decade. I believe Kellogg’s “burning platform” is to identify its 10-year strategy and Cahillane should take the lead. The vision I have for Kellogg’s 10 years into the future is a company that looks completely different than it does today.
► Capabilities-Driven M&A
Like many companies, Kellogg’s has amassed a portfolio of products over the years driven by short-term financial thinking. As performance and sales decreased from one year to the next, the company tried brute force strategies to fit around its portfolio of products with little success. When consumer trends shifted to healthy food choices with higher protein content and nutritional value, Kellogg’s acquired RXBAR. RXBAR has provided some value to Kellogg’s; however, acquiring CytoSport and Quest Nutrition would have propelled Kellogg’s into a leading nutrition company with extensive revenue and expansion potential. Big difference.
Kellogg’s should identify acquisitions that are aligned with its strategic capabilities, as well as make acquisitions of smaller companies with disruptive potential. I advise Kellogg’s to assess acquiring online brands focused on baby food, with Little Spoon, Raised Real and Yumi leading the list of candidates. Additional acquisition targets include online meal companies like Factor 75 and ICON Meals. Schwan Food should also be assessed for a possible acquisition due to its differentiating capabilities that can be scaled in meals and groceries.
I also recommend that Kellogg’s assess acquiring Overstock.com and leveraging the platform as its e-commerce and cross-border commerce engine. Overstock’s new corporate headquarters and campus located in Midvale, Utah (30 minutes from Park City) is an ideal base for Kellogg’s to locate all digital and supply chain functions. A challenge I’ve encountered with many of my clients located in the Midwest is that they cannot attract the best talent. For Kellogg’s, winning the war on talent is critical. Digital and supply chain operations located in the heart of a resort and entertainment mecca like Midvale would greatly help Kellogg’s recruitment efforts. Other options include opening an office in Seattle, Washington or Austin, Texas, as both cities are highly sought-after work locations.
Established 100-year-old companies aren’t supposed to be able to innovate outside of their core competency, but Kellogg’s must find a way to do so. The next big trend in food will be the ability of companies to cook and deliver food at a price point cheaper than going to a grocery store and buying the ingredients to cook a meal at home. Kellogg’s is one of the few companies with the capability to partner with Tesla and Uber (or other companies) to design and implement an entire new supply chain for growing and processing food; opening commissaries and industrial kitchens powered by machine learning and AI; providing consumers with the option to order meals from thousands of recipes eliminating the need to order higher-priced food from restaurants; and utilizing autonomous vehicles capable of cooking food as vans drive to the consumer, ensuring the meal is delivered with the same characteristics of a dish just removed from an oven or a stove top.
I’m convinced that if Kellogg’s came up with an idea for meal delivery, it would only be focused on breakfast as that has always been a core focus of the company. But breakfast isn’t enough.
See where I’m going with this? Kellogg’s has distinct capabilities in manufacturing; designing new food products; food-specific logistics and supply chain management; and meeting customer demand for food. Thinking big and placing a premium on capabilities-driven innovation has the potential to transform Kellogg’s into a global leader in food, meals and possibly groceries.
To assist Kellogg’s, I recommend that Cahillane visit Tel Aviv, Israel. I have written articles and given speeches over the last two-years about how Israel is the new powerhouse of innovation. Kellogg’s would be wise to make Israel a priority in scouting out technology and meeting with executives from strategy firms capable of bringing new insight on how Kellogg’s can identify the optimal business model for the company.
Kellogg’s is trying very hard as it relates to sustainable business practices. I like the idea of Kellogg’s taking a leadership role in finding innovative solutions for using its packaging. An interesting idea the company should explore is adding kale to the materials used in its boxes and packing materials. Kale reduces gas inside the stomachs of cows, a major contributor to global warming, by over 50 percent. Grinding and mixing discarded boxes and packing material with feed for cattle and other livestock could prove revolutionary and beneficial on an international scale. Another idea related to sustainability that Kellogg’s should consider is setting up a program whereby consumers can receive replacements bags of cereal in pouches. Customers can remove the empty cereal pouch from the box of cereal and replace the pouch with a full one. Such a method would reduce the need for packaging, as boxes would be reused for much longer periods of time. The idea could be easily tested by Kellogg’s e-commerce team.
► Digital and Supply Chain
An error I see frequently as a consultant is that corporations mistakenly divide consumer demand for products into e-commerce, cross-border commerce, physical retail and B2B. To manage the needs of all channels, companies partner with an endless stream of vendors and enter a never-ending cycle of bolting on one application after another. To make matters worse, companies fail to meet demand due to extensive levels of complexity across supply chains globally.
I recommend that Kellogg’s focus its efforts on identifying its 10-year strategy and working backwards to determine the optimal global digital platform required to recognize demand from consumers and B2B customers, and determine the optimal channel for meeting the demand. Kellogg’s should design, build or acquire a platform, instead of relying on third parties. Kellogg’s should also ensure that it retains and controls all data generated from its global operations.
I can’t stress this point enough—investing in the supply chain must be a priority for Kellogg’s, as I believe Kellogg’s can leverage an optimized global supply chain to enable growth and achieve a competitive advantage. I recommend the use of AERA to take Kellogg’s supply chain to the next level, along with machine learning and AI to automate demand planning, forecasting, capacity planning, transportation planning, last-mile delivery and continuously optimize the supply chain to reduce costs and complexity. Kellogg’s should strive to achieve an automated supply chain globally.
In Conclusion: Will Kellogg’s Succeed?
To survive and thrive, Kellogg’s must transition from a “Day Two” company to a “Day One” company, willing to embrace and implement new trends. The fact that Kellogg’s is a company with a heavy focus on cereal and snacks doesn’t mean that Kellogg’s must only be a cereal and snack company in the future.
Will the Kellogg Company succeed? Cereal created Kellogg’s. But unless the company can think much bigger than the breakfast aisle, cereal will ultimately kill Kellogg’s.
(Full Disclosure: As of the date this article was written, I do not have a financial or business relationship with any company I recommend or refer to in this article. These are my opinions only. I have often written and spoken publicly about Kellogg’s since 2000, and I have been extensively quoted. I was contacted in 2017 by Kellogg’s seeking my opinion on the best brand for Kellogg’s to acquire. I did not recommend RXBAR for a myriad of reasons, primarily, the difficulty of a family-run business coming up with products to expand into different categories. Instead, I recommended that Kellogg’s acquire Quest Nutrition, now one of the leading nutrition companies globally and the leader in the protein bar category. I also recommended Kellogg’s should acquire CytoSport, the maker of the leading protein shake, Muscle Milk. Kellogg’s was a client of Deloitte when I worked for Deloitte as a consultant, and I supported several sales engagements.)