Kellogg leaders plan to grow market share with infrastructure modernization, additional merchandising

08-Sep-2023 - Last updated on 13-Sep-2023 at 12:41 GMT

Image Credit: Getty Images - miniseries

Leaders of Kellogg Co.’s soon-to-be divided businesses plan to grow their respective entities by modernizing infrastructure to support additional innovation and returning to near pre-pandemic merchandising levels.

“Right now, at the Kellogg Company, our infrastructure is being maintained. We're going from maintaining to modernizing, and we can all think about things in our lives where if you're maintaining versus investing, maintaining versus modernizing, you end up with a very different outcome. So, we'll be modernizing. So, what comes out of that is investment in new: new packaging, new lines, new infrastructure, new digital capabilities,” Gary Pilnick, chairman and CEO of WK Kellogg Co, which will house the cereal business, told attendees this week at Barclays Global Consumer Staples Conference in Boston.

Rationalizing the split, creating a business focused solely on cereal and snack

Pilnick explained Kellogg Co decided to split its cereal and snack businesses next month into WK Kellogg Co and Kellanova respectively to better consolidate and direct resources.

"Who would you want to compete against: a big company that has a deprioritized cereal business or a smaller -- we'd say scale -- company that only focuses on cereal? Well, that's the underlying logic of the spin. Everything we're going to do is in service of cereal."

As part of the spin-off, WK Kellogg Co will take five of its separate business units and consolidate them “under one leadership team driving the business,” Pilnick said. Similarly, WK Kellogg Co’s sales team will be solely focused on growing the cereal business instead of the full range of Kellogg's products, which will help regain market share that it has lost from a fire and a worker strike, he added.

“If you think about the Kellogg Co. right now, exactly the right way to run a [$9.5bn] business. There's a lot of integration. Sales is integrated; the supply chain is integrated. It's a ... lot easier for us to go from idea to in-store activation when the only thing that the commercial team is thinking about is cereal, and the only thing our salesforce is thinking about is selling cereal, and the only thing the supply chain is doing is making cereal."

To rebuild market share, WK Kellogg Co will invest $450-500m over the next three years in modernizing its business from factories to new packaging, Pilnick said. WK Kellogg Co will invest its money into its most efficient facilities and lower cost platforms and manufacturing capabilities to create its products, he added.

“We're at 90% of where we were [in market share]. If we simply capture back what we think is rightfully ours, that alone would generate 200 basis points of market share when we do our math.”

Dealing with pricing, merchandising challenges in 2023-2024

Kellanova is looking to brush aside slower-than-expected growth in its snack business with sales for snacks, toaster pastries, waffles, crackers, and snack bars in the single digits as opposed to the goal of 3-5% top-line growth, according to scanner data for the 12 weeks ending August 26, 2023.

However, while this is lower than expected, it is in keeping with volume declines across the food and beverage industry due to higher prices, said Steve Cahillane, chairman and CEO of Kellanova.

"If you go back just 12 months ago, there was really nobody dancing in the streets saying look at this double-digit pricing and no effect on volume. Well, it's bound to catch up,” Cahillane said. “What we're seeing is ... the consumer saying, 'Whoa, this is quite significant.' And we've been saying every one of our quarterly calls and every public opportunity that we are expecting elasticity to come back, and it is coming back."

To offset this, Kellanova will focus on more in-store merchandising with promotions, which dropped off during the pandemic and hasn’t returned to pre-COVID levels, Cahillane noted. These activities will also be better supported with intelligence and data that CPG brands have at their disposal to make more effective merchandising, he added.

“There's a lack of true quality merchandising activity, and you're starting to see that change. But it won’t ignite a consumer change overnight, but it will provide a runway and a path to 2024... And so quality merchandising done correctly, getting the types of lifts that historically we've seen, I think it's very much in the future.”