Kellogg split—what it means for marketing and consumer trends

Kellogg Co.’s forthcoming breakup addresses broad consumer and business trends favoring growth in snacking and international expansion. Company executives assert the three-way split will also free the spun-off entities to pursue development without competing for resources with faster-growing sibling brands. It could also have significant impacts for marketers and agencies. The plan, which would refashion Kellogg as a globally-focused snack foods company and spin off its North American breakfast cereal and plant-based food units as separate units, has been dubbed “Unleashing Our Potential.” It would align each of the three businesses to focus on distinct strategic priorities with financial targets appropriate for their profiles. The spinoffs are expected to be complete by the end of 2023, with the North American cereal business expected to be the first to move. The plant-based food unit is also being considered for a sale, executives said. Brands on the rise A look at up-and-coming brands disrupting their categories Read more here Much remains to be revealed—including names for the units, their management and makeup, and detailed financial profiles. Below, four takeaways: The future is snackable Kellogg executives over the years have expressed frustration that the company as currently constituted hasn’t gotten proper investor credit for its growth characteristics—most of those coming through high-performing “power brands” such as Pringles and Cheez-It that are growing in the U.S. and abroad; brands with growth opportunities overseas including Eggo and Rice Krispies Treats; brands in hot categories, like RXBar; and acquired businesses that are growing fast internationally, such as a noodles business in Africa that delivered at a double-digit compound annual growth rate in recent years. Under the plan, Kellogg’s successor—identified for now as “Global Snacking Co.”—unites these fast-growing brands and business units that currently comprise 80% of the company’s overall sales, or about $11.4 billion based on a company estimation. About 60% of Global Snacking’s sales would comprise snacks, with slightly less than half of its overall business in the U.S. Big bets on snack marketing Pringles has aired five consecutive Super Bowl commercials Pop-Tarts made its Big Game debut in 2020 Global Snacking would also take on Kellogg’s current overseas cereal business, a move CEO Steve Cahillane said would help provide it with scale, distribution and manufacturing capabilities. Cahillane would be Global Snacking Co.’s CEO; other executive appointments or moves have not yet been decided. Worth watching is what the split means for ad spending and the agencies behind each brand. While snacks are growing faster than cereal, marketing support has been fairly even, at least in the U.S. According to Kantar, Kellogg spent $412 million on U.S. measured media in 2021. Of that, Ad Age Datacenter analysis indicates the company spent just more than half—about $210 million—on cold cereal and $181 million on snacks, including Eggo, Pop-Tart, Nutri-Grain and Rice Krispie Treats. About $20 million went toward vegetarian meat substitutes, according to the Ad Age Datacenter. Kellogg's major ad agencies include Publicis Groupe's Leo Burnett, which handles most major brands except for Morningstar and Pringles, which is at WPP's Grey. The company’s media agencies vary by region, with Publicis’ Starcom handling the account in the U.S. Other than Cahillane, no other executive moves related to the spinoffs have been announced. But there will surely be changes to the marketing teams leading each company. Charisse Hughes in March of this year was promoted to a new role as senior VP and chief brand and analytics officer, after two years as the company’s global chief marketing officer. A new morning for U.S. cereals Kellogg’s range of iconic if beleaguered cereal brands would be spun off in a separate entity that Kellogg, for now, is calling “North America Cereal Co.” The company by itself would be the second-largest breakfast cereal company in the U.S. and include five of the category’s top 11 brands. In Canada and the Caribbean, the company would be No. 1. The proposed spinoff would generate about $2.4 billion in annual sales and $250 million in adjusted EBITDA. Importantly, Cahillane stressed, its as-yet-unnamed management will have the opportunity to focus solely on the breakfast-cereal category. That's a dynamic that has proven difficult under the current Kellogg setup, where cereal marketers and brands need to compete for resources and attention with faster-growing siblings in the snack portfolio, “so Frosted Flakes does not have to compete with Pringles for resources,” Cahillane said during a Tuesday conference call explaining the deal to analysts and reporters. Subscribe to Ad Age Sign up now for the latest industry news and analysis Click here “Now an economist might say you could do that without splitting up the companies, but we don't live in a textbook,” Cahillane added. “We live in the real world, and that’s just the way it works.” Resources and attention are two things Kellogg’s cereals could use. In recent years, the portfolio has battled both secular category softness and issues specific to Kellogg. A fire shut down a cereal factory in Memphis, Tennessee last July, followed by a two-and-a-half month strike affecting four cereal manufacturing plants that ended in December. Kellogg is focused in the near term on recovering from those setbacks, Amit Banati, Kellogg’s chief financial officer, said in the conference call. Analysts appeared especially skeptical of this part of the plan. Over the course of the call, they peppered Kellogg executives with questions about the financial health and margin prospects for a North American cereal business, including the possibility that the unit would carry a heavy portion of Kellogg’s debt related to pension obligations—more than $700 million, according to its 2021 annual report. Banati said only that pension debts would stay with the businesses that carried them—that would indicate U.S.-based cereals. A different game for plants Kellogg was an early mover in plant-based foods, acquiring the MorningStar Farms brand more than 20 years ago. Today, MorningStar holds the highest household penetration in the frozen vegan components category and heads a business estimated by the company to comprise $340 million in annual sales and $50 million in adjusted EBITDA. The unit, to be spun off under the generic name “Plant Co.,” could also be sold to another entity before a spinoff occurs, executives said. According to Cahillane, the boom in plant-based foods that Kellogg anticipated years ago also changed how the sector is viewed, making profitable plant-based brands embedded in consumer goods companies less conspicuous—or valued by investors—than “pure-play” brands that might not have the same profit profile. This appeared to be a reference to high-flying meat-alternative brands such as Beyond Meat and Impossible Foods. (Kellogg used MorningStar to introduce its own plant-based meats co-brand in 2019, Incogmeato). “The environment that [MorningStar] competes in right now has changed fairly dramatically from where it was just a couple of years ago, with players that are coming in very rapidly that are not profitable that are playing a different game, this allows MorningStar Farms to play that different game,” Cahillane said, adding, “It will have its own strategy. And it may be more aggressive in that strategy in the way that expands across channels [and] the way that it expands internationally, because it won't have the burden of being part of a global corporation where its profit is in our base.” We’ve seen this movie before In some ways, Kellogg’s move has precedent in the consumer packaged goods industry—namely the Kraft Foods Inc. breakup first announced in 2011 and completed a little more than a year later. Like Kellogg’s plan, that move created a new entity and a new name—Mondelez International—for a fast-growing global snacks portfolio, while spinning off slower-growing legacy grocery brands to a separate company that retained Kraft in its name, Kraft Foods Group Inc. The move met with mixed success, especially in the early going for spun-off Kraft, according to Burt P. Flickinger III, managing director of Strategic Resource Group. “The Kraft-Mondelez spinoff worked for Mondelez, but not for Kraft,” he said. “The better management team went with Mondelez.” (Kraft later merged with Heinz and the combined company of late has enjoyed a renaissance fueled by standout marketing that helped land the company on Ad Age’s 2021 Marketers of the Year list.) An analyst participating in Kellogg's conference call, Jonathan Feeney of Consumer Edge Research, raised the issue of retailers in the aftermath of such CPG breakups tending to view these deals negatively. He suggested the reason is that the brands sold get less support. (Such budget cuts could trickle down to marketing.) Feeney was not immediately available for comment. Cahillane responded by saying he had not shared details of Kellogg’s plan with customers (meaning retailers) but said “it’s a value-creation opportunity for the entirety of the company, but it is the right thing to do for our cereal business. And I think that will translate well with our customers so that they know that the Kellogg's cereal business in the U.S., Canada and the Caribbean has a dedicated focused management team, dedicated customer teams that have really one objective, and that is to win in cereal with our retail partners.” Cahillane dated the moves Kellogg’s announced back to the 2018 introduction of the company’s “Deploy for Growth” strategy. One key element of that strategy was dismantling a direct-store delivery program for its snacks business, and redeploying those assets behind brand-building efforts for products like Pringles, Cheez-It, Pop-Tarts and Rice Krispies Treats. Acquisitions (including RXBar in 2017) and divestitures (cookies, fruit snacks, pie crusts and ice cream cones) since then also shaped the portfolio for growth, he added. The deals however may not be over, noted Flickinger. Despite a healthier projected portfolio, the $11.4 billion Global Snacks business would still be looking up at the size of snack-focused competitors such as Mondelez (which reported $26.5 billion in sales last year) or PepsiCo, with a global snack business including Frito-Lay. Sign up for Ad Age newsletters From influencer marketing to agencies, get the latest news and analysis delivered to your inbox Click here

Kellogg split—what it means for marketing and consumer trends

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