The morning breakfast segment has become one of the most popular segments in the U.S. People want convenient options which are easy to have in the morning. Moreover, it should be healthy and nutritious. Therefore, the breakfast segment is now flooded with a variety of options, from breakfast sandwiches to yogurts and smoothies, which does not require people to sit and have it but take it on the go.
But the direct effect of these changing tastes has led to problems for the traditional breakfast option providers, such as Kellogg (K, Financial). Kellogg is struggling hard mainly because of its dependence on cereals, which does not resonate much with customers now. Thus, it is witnessing declining sales and its second quarter results were not an exception. The lacklustre numbers led to a decline in its share price.
The problem with cereals
Declining cereal sales led to a drop of 0.8% in revenue over last year, clocking in at $3.69 billion. It failed to meet the estimate of $3.71 billion. The biggest problem for the company was the shift in consumer demand to other modes of breakfast. Organically, the top line actually plunged 1.5%, as sales in the U.S. were lower which was partially offset by the international market and favorable currency movements.
Revenue from North America stood at $2.35 billion, down 3.7% over last year. It was clearly the demand problem this time as volume dropped 4% during the quarter. Both the morning Foods and the Snack business registered declines. Also, the cereal maker suffered due to bad placements in grocery stores. For instance, product display at the back has been a factor in lower sales.
However, sales at the International segment were better as sales improved in Latin America. Sales in Latin America surged 6.9%, driven by new products and pricing gains. Also, Europe and Asia Pacific grew 0.7% and 0.5%, respectively.
Further, the snackmaker’s earnings dropped 15% to $0.82 per share. However, this decline was mainly because of lower sales and costs related to the Project K restructuring program. Also, costs related to Pringles acquisition in 2012 weighed on the bottom line.
Even peer General Mills (GIS, Financial) undergoing a similar phase, which led to a 3% plunge in its top line in its recently reported quarter. The volume also decreased 2% during the quarter. Thus, the company is planning to add new products to attract more customers.
Strategies formulated
Kellogg is indeed undergoing a difficult phase, wherein its sales have been on a continuous decline. However, it is trying to revive sales through innovation and aggressive promotions of its products. Promotions include advertisements which stresses on kids’ bone and brain development in Australia and cereal and milk program in the U.S. Also, it is trying to promote more occasions to have cereals, such as using it as snacks at night.
Also, the company has hired 150 new people for improving store displays and is cutting back on production capacity to lower costs. In fact, it has already closed factories of Pop-Tarts, Pringles, Eggo Waffles.
To end up with
The growing popularity of healthy breakfasts has overshadowed the traditional cereal breakfast. This has been the primary cause of concern for Kellogg. Although it is making efforts to revive sales through advertising its products and promoting it properly, it is difficult to say how successful the company will be. Moreover, it has lowered its guidance for the year, as it feels that lower sales and higher costs of its restructuring program, will hamper its performance in future. Therefore, it is better to stay away from this company.
