Kellogg has been a staple in American breakfast for nearly a
century, but cereal consumption has been declining
the past decade as consumers become more health conscious.
Along with mounting lawsuits, a worker strike and a plant
fire, Kellogg's cereal business is struggling to gain
a footing.
In an attempt to rebound and restrategize, on June 21st,
2022, the company announced plans to split into three
separate companies.
Shares jumped as much as 8% in pre-market trading following
the news.
Right now is, I think, the opportune time to do this.
We are coming from a position of real strength and great
momentum.
So how did a company, mired in controversy, become the
nation's leading breakfast brand and can it successfully
reinvent itself?
The Battle Creek Toasted Cornflake company, later known
as Kellogg's, was founded in 1906 by W.K.
Kellogg. Its first product, Corn Flakes, was marketed as a
healthy, easy-to-digest meal.
Kellogg spent heavily on marketing campaigns, and the
company grew rapidly, selling more than 175,000 cases of
cereal within the first year.
By 1909, annual sales reached 1 million cases.
Over the next few decades, the company began marketing to
children with sugary cereals, such as Sugar Smacks and Sugar
Frosted Flakes.
Mascots like Tony the Tiger quickly became cult favorites.
Sugar Frosted Flakes are greeaatt.
Kellogg faced major competition in the breakfast category, so
it introduced new products like Pop-Tarts in 1964 and
bought smaller companies, including Eggo Waffles in 1970.
However, in 1972, the FTC launched a case against
Kellogg, along with rivals General Foods, General Mills
and Quaker Oats, for having established a shared monopoly
over the cereal industry and artificially inflating prices.
The big four cereal producers denied the claims, and the case
was dismissed.
Convenient, ultra-processed foods were all the rage in the
70s. At the same time, parents and consumer groups were urging
the FDA to limit the amount of sugar in ready-to-eat cereals.
By the late 1970s, sugared cereal sales began to fall.
Kellogg tried to fight slumping sales by beefing up
advertising and creating new products to appeal to health
conscious consumers.
The company brought three varieties of Nutri-Grain cereal
to market. It worked.
By 1988, Kellogg increased its sales from a year prior by 15%
from $3.8 billion to $4.3 billion.
However, the company began to lose sales to competitors and
cheaper knockoffs.
In 1999, Kellogg lost its leading market share for the
first time to General Mills.
At the same time, snacking between meals became
increasingly popular, and the company continued expanding
with acquisitions such as Pringles and Cheez-Its.
Nine out of ten Americans say they've had cereal in the past
year, according to 2017 data from Mintel.
But as Americans have become more and more health conscious,
cereal sales have suffered, according to Nielsen, a data
analytics company.
Back in the early 2000s, we were seeing the initial decline
of boxed cereal as we know it in the cereal aisle.
First, we were coming out of just beginning to come out of
that fat-free, low-fat craze where all of the sugar cereals
that were claiming fat-free started to have consumers sort
of question like, is this really that good for us?
And then also we saw consumers finding the lack of convenience
being an issue as more bars and other types of convenience
oriented breakfast foods were becoming more popularized.
From 2009 to 2019, domestic and international cereal sales at
the company declined by 21%.
While sales were declining, litigation against Kellogg's
nutritional claims was piling up.
Margo Wootan was the director of nutrition policy at the
Center for Science in the Public Interest at the time.
We threatened to sue Kellogg over their food marketing to
children because they were marketing a lot of high sugar,
refined grain, unhealthy options, especially to kids.
And so we ended up settling with them out of court, and
they agreed to a set of nutrition standards to improve
their marketing to kids.
Amid falling sales and consumers wanting less
processed food, the cereal giant announced in 2015 that it
would stop using artificial colors and flavors in its
cereal and snack bars.
By July of 2016, the stock reached an all-time high of
$86.98.
At the turn of the century, a number of studies were
published suggesting that consuming breakfasts and even a
sugar-filled breakfast had a positive effect on weight and
nutrition. Several were funded by Kellogg and other cereal
producers. The Associated Press reported that Kellogg had
been paying independent experts to positively promote
cereal. The company created a breakfast council to help guide
its nutritional efforts.
Experts were claimed to have been paid $13,000 a year and
not allowed to offer media services for products
competitive or negative to cereal.
Kellogg subsequently discontinued the Breakfast
counsel.
In 2021, the company also settled a $13 Million lawsuit
in California over its marketing.
Kellogg agreed to stop using terms such as healthy,
nutritious and wholesome to promote its products.
Despite its sugar content, many consumers still believe cereal
can be a part of a healthy breakfast.
Keith M Sedor is one of them.
He calls himself a cereal historian and is the host of
the podcast "Just Pour the Milk."
I don't think you're getting much more sugar in a bowl of
cereal than most of the other treats you're eating throughout
the day. Now, I do think in the 21st century, we are much
more prone to be nutrition conscious than we once were.
But I think coupled with other healthy choices throughout the
day, that a bowl of cereal can still be a decent way to start
the day.
The company has fought back in recent years.
In April of 2022, Kellogg launched legal action against
the U.K. government over regulation that would ban it
from promoting sugar-filled cereals with buy one, get one
free offers.
The company said it measures cereals dry when they are
almost always eaten with milk.
A judge dismissed the claim, finding that the addition of
milk would not affect the fact that the cereal was high in
sugar. As a result, the company expanded its wheat
cereals with three variants to comply with the UK's HFSS
guidelines.
As nutrition guidelines have gotten more stringent, so has
Kellogg's effort to fight them.
Kellogg is claimed to have spent about $13.5 million in
lobbying efforts from 2011 to 2021.
And USDA is about to announce the first updates to the WIC
foods since 2009.
One of the expected changes is to strengthen the whole grain
requirement for cereals, and Kellogg has been very
aggressively lobbying against that.
Following decades of disappointing sales, cereal
boomed during Covid-19.
March of 2020 saw the biggest month-to-month increase of
cereal consumption in US history.
Kellogg net cereal sales increased in 2020 by 8.5% year
over year.
Studies show that consumers are more likely to purchase cereal
with claims like reduced sugar, added protein or added
fiber. So in 2021, Kellogg released a new cereal called
High Happy Inside, featuring prebiotics probiotics and
fiber. Nostalgia may be another reason behind the surge
in cereal consumption.
Mintel research shows that 58% of consumers say that cereal
flavors they enjoyed as a child are still their
favorites.
One of the things that was very important for all of us who
were shut in was to have some measure of comfort.
So you've got your Lucky Charms, your Fruit Loops, you
know, whatever your favorite childhood cereal is, it gives
you that bit of nostalgia that's going to give some
comfort and making a challenging time a little
easier to deal with.
Despite the company riding on a high from surging sales, it
still suffered some setbacks.
In October of 2021, 1400 workers went on strike to
demand better pay and enhanced benefits.
After two months, Kellogg said it would be permanently
replacing the 1400 workers who had been on strike.
Following the news, politicians, including
President Biden, stepped in to condemn the move.
The company gave in to demands, and on December 21st,
2021, Kellogg workers ended their nearly three month strike
and agreed to a new contract.
The contract included a $1.10 per hour raise for all
employees. The cereal giant also had a three alarm fire at
its Memphis facility that year.
The company's North American cereal net sales dropped by
10.3% in the first quarter of 2022, compared to 2021.
For the year, net sales dropped by 14% in the region.
Kellogg's has gone through a lot of change and a lot of
turmoil lately.
They had a huge setback with the fire and strike on the
cereal business. You could see that in the data.
Their sales were awful last year.
They've lost a ton of share to both General Mills and to Post.
At the end of 2021, Kellogg announced plans to invest $45
million in restructuring its North American supply chain
over the next three years as it meets demand for cereals.
Under CEO, Steve Cahillane, the company has made a few other
changes, including transitioning its snack
business out of direct store delivery and acquiring American
nutritional bar brand RXBAR for $600 million.
It also pulled back commercial support for cereal in order to
harmonize its pack sizes across brands.
Cahillane has noted the sales declines are only temporary as
the company recovers from its various changes, as well as
2021's strike and fire.
Kellogg's has gotten better.
It's not gotten better as quickly as we would have
thought. But the category has really taken off because
Kellogg's is getting back in the game with its production
capacity and because consumers are looking for the convenience
that comes with cereal as they get back to work.
On June 21st, 2022, Kellogg announced plans to split into
three separate companies, Global Snacking, which will be
a leading snacking company, North American Cereal, which
will house its North American and Caribbean cereal portfolio,
and Plant, which will include its plant-based products.
Shares jumped as much as 8% in premarket trading, but closed
up only 1.9%.
Right now is, I think, the opportune time to do this.
We are coming from a position of real strength and great
momentum. We have completely turned the business around from
a top line and a bottom line perspective, and we see the
next step in unlocking our full potential in unleashing
three new companies.
The company said all three businesses will be better
positioned to focus on their distinct strategic priorities.
The cereal business arguably is being spun off at the right
time because it has such depressed margins coming out of
fire and strike.
And because of that, you're going to have a period where
their top line recovery can fuel reinvestment, which will
give that that portfolio a fighting chance, even though
that is a business that longer term has been challenged.
Snacking, including frozen breakfast, and international
cereal and noodles, accounts for 80% of its portfolio.
In the first quarter of 2022, snack sales grew by 5% compared
to a drop of 10.3% for cereal.
Kellogg said that the cereal business is expected to
generate stable net sales over time.
Particularly the U.S. cereal business, which they're
spinning off, is one that is weighed on the sum of the parts
of this company.
The value of the company has been held back and the growth
has been held back by this business.
So the company's thinking is that it can free up the company
to focus on snacks and its other expandable franchises,
the ones that could be stimulated for growth and it
could help investors focus as well on this business as one
that has sustainable, profitable growth.
Over the past few years, cereal companies, including Kellogg,
repositioned the branding of cereal away from a pure
breakfast option to a dessert or snack.
Most of the cereal I eat these days is probably during what we
like to call a fourth meal, late at night watching TV.
After the kids are in bed and you're just looking for a
snack, instead of going for cookies or chips, I'll have a
bowl of cereal.
Nostalgic brands are being revamped.
Kellogg partnered with Little Debbie on a Nutty Buddy Cereal
collaboration, and in September of 2022, Kellogg
released a line of cereal that only needs water to up the
convenience factor.
While the cereal segment seems to be making a comeback.
Only time will tell if Kellogg's cereal business will
have the resurgence it so desperately is looking for.