Kellogg Co. (K, Financial), the maker of well-known and ubiquitous household brands such as Frosted Flakes, Pop-Tarts and Pringles, increased its earnings estimate for the full year after reporting a stronger-than-anticipated second quarter last week. Excluding adjustments for foreign currency translations, revised estimates call for annual revenue to increase by 4% to 5%, up from an earlier projection of 3% to 4%. New earnings per share estimates are for an increase of 11% to 13% compared with a previous estimate of 9% to 11% growth.
While sales in the U.S. have diminished because Americans are eating less cereal, the company has benefited from rising sales in emerging markets. The results are an indication that Kellogg is beginning to reap the rewards of its revamped business strategy of increasing its presence in the emerging markets, reinvigorating its biggest and well-known brands and diversifying through acquisitions of companies whose products have attracted a stable customer base.
Kellogg, like other food companies, has had to adopt and readjust its traditional strategy of generating revenue by selling its signature brands exclusively. Consumers' tastes have evolved and shifted toward new brands and foods that are starting to erode sales of the traditional companies’ longtime products. Kellogg has addressed the integral business component of diversification by its purchase, for $600 million, of RXBar, a natural ingredient protein bar.
The company’s earlier foray into making its cereals appealing to a more health-conscious group of consumers was too focused on weight loss rather than on the benefits of more healthy ingredients and nutrients. The company has tried to correct its misinterpretation of that target market by introducing new products, such as Special K with probiotics.
Kellogg’s acquisition strategy doesn’t mean the company has altogether abandoned some of its longtime sweeter and popular cereals, such as Chocolate Frosted Flakes and Fruit Loops with marshmallows. The company is hoping that some consumers will maintain interest in these sugary cereals by consuming them as a snack or dessert instead of only for breakfast.
Kellogg is not the only member of the consumer staples group that has been forced to adopt new strategies for consumer retention as a new generation of more price-conscious shoppers have upended companies' signature brands that had previously provided earnings stability due to predictable sales patterns, which ensued even in economic downturns.
The company, however, needs to be circumspect in its desire to maintain somewhat eroding operating margins due to sales declines in its regular brands. Kellogg’s reliable, old-time products no longer enjoy price inelasticity. Today’s consumers now have a plethora of new product choices available and are not anchored to what was at one time Kellogg’s reliable and ubiquitous food products.
The path on which Kellogg and other consumer staple companies are embarking is similar to the diversification strategy employed by PepsiCo (PEP, Financial) over the years, which emphasized more healthy drinks and foods rather than its old-line sweet cola and beverages products. PepsiCo has enjoyed great success implementing its novel and untraditional strategy.
It is precisely this type of unorthodox thinking that consumer staples companies will need to adopt if they are going to survive in the 21st century.
Disclosure: I have no positions in any of the securities referenced in this article.
