Kellogg held for a long-time a strategic playbook (increasing investments in capabilities and brands while extracting inefficiencies). As of now, the company is processing with some dis-investment such as the North American cereal and plant-based alternative arm, the rationale of which might be unclear to the larger investment community as it leaves it with its global snacking brand. It is assumed that the motivation leans towards unlocking higher ratios for the faster-growing snack business once it’s unencumbered by the more mature North American cereal brands.
Even absent the pending split (which is slated to transpire by the end of calendar 2023), the underlying business faces headwinds. For one, cost pressures (related to raw materials, labor, packaging, and transportation) are ravaging firms across industries, and Kellogg is no exception. Further, stepped-up restrictions to curb the spread of COVID-19 in select geographies could again inhibit its manufacturing and sales operations, particularly in faster-growing emerging markets, which have boasted outsize growth of late (organic sales up double digits on a three-year stack basis in Latin America and Asia, the Middle East, and Africa, one fourth of its consolidated sales in aggregate in fiscal 2021). Although near-term uncertainty persists, the firm’s robust exposure to these regions (far outpacing the negligible contribution its domestic packaged-food peers derive) will prove advantageous over a longer horizon. In addition, organic growth and inorganic pursuits to tailor its mix to local trends, bolster the affordability of its fare, and expand its routes to market should aid its growth prospects. When combined with our expectations for favorable demographic and income trends for those regions longer term, one can expect forecasts of mid-single-digit annual sales growth to emanate from these faster-growing regions on average over the next decade, versus the low-single-digit growth from its developed market regions in aggregate.
Opportunities:
Kellogg has shown it can win even in an intensely competitive landscape, chalking up 18 consecutive quarters of organic sales growth in Europe– a mature market where private label has pronounced share and retail consolidation has run rampant.
Pringles should aid Kellogg’s pursuit to build out its global distribution, as snacks have broader appeal with consumers around the world than cold cereal.
The firm has built an industry-leading presence in faster-growing emerging markets (about one fourth of its total sales base), which should bolster its top-line prospects.