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Kellogg Co. says cereal business spinoff will happen in fourth quarter

Posted By: The Detroit News on August 9, 2023.  For more information, please click here to read the source article.

Battle Creek-based Kellogg Co. said Wednesday that its planned split into two companies is on track to be finalized in the fourth quarter of this year.

At an investor day event, company officials said the split will create two entities: WK Kellogg Co., which will focus on cereals like Fruit Loops and Frosted Flakes in North America, and Kellanova, which will focus on snack foods and growth opportunities in foreign markets.

Kellogg Co. announced in June 2022 it would split into three parts: a cereal business and a plant-based food company, both of which would remain headquartered in Battle Creek, and a snack business to be headquartered in Chicago with a campus in Battle Creek. The company subsequently said in February that it would keep the plant-based food business, MorningStar Farms.

Kellogg’s snack food business, which includes brands such as Pringles and Pop-Tarts, accounts for the majority of the company’s revenue. According to Kellogg’s website, Kellanova predicts projected net sales of $13.5 billion in 2024, compared to $2.7 billion for WK Kellogg Co. This month, Kellogg Co. reported second-quarter net income of $357 million on revenue of $4.04 billion.

Kellogg is looking to increase its global market for its snack business, the company said Wednesday, according to Arun Sundaram, the vice president of equity research at CFRA Research.

“In developed markets like the U.S. or even Europe, using the brand Kellogg doesn’t really provide that much value,” Sundaram said. “Consumers sometimes don’t like big brands; they like smaller brands, newer brands, so saying Kellogg’s Pringles or some like that doesn’t really resonate that well.”

Sundaram added: “It does resonate really well with consumers in emerging markets. So for example, incorporating the master brand Kellogg and all the packaging, consumers are rushing to buy these products because they’re the big brands well known to have a strong reputation.”

In the United States, Kellogg is more interested in emphasizing its sub-brands, such as Pringles and Cheez-Its, as individual products.

WK Kellogg Co. is looking at around two or three years of flat sales growth because cereal consumption in the United States is in a secular decline, Kellogg shared at its investors meeting on Wednesday. Sundaram said the company “is OK with that.”

While Steve Cahillane will remain as chief executive officer of Kellanova, Gary Pilnick, Kellogg Co.’s vice chairman of corporate development and chief legal officer, was appointed WK Kellogg Co.’s chief executive officer designate in August 2022.

“The leadership appointments are subject to — and will be effective upon — completion of the planned separation of North America Cereal Co.,” Kellogg said in a press release.

Kellogg decided to keep MorningStar Farms amid falling sales. In April, MorningStar Farms discontinued its meat alternative brand, Incogmeato.

Sundaram thinks this is the right move. “Right now is a tough time to be competing in the frozen plant-based meat aisle of the grocery store. There’s been a lot of new entrants and you can get new brands coming in or new companies entering the space. There’s been a lot of hype over plant-based meat. The category was doing really well in 2020, but overall, the plant-based meat category has slowed down considerably over the last year or two.”

Sundaram thinks that the plant-based meat industry will consolidate over the years and come down to a few front-runners and “anticipates better days for MorningStar Farms.”

For food packaging industries as a whole, Sundaram said they will face pressure in 2024 to improve volume sales as food price inflation levels off.

“This year, 2023, price-related growth is driving overall sales growth because volumes are actually down year-over-year, so really all the revenue growth has been driven by prices,” Sundaram said. “And then in 2024, we’ll probably see overall growth will moderate, but we’ll probably see more balanced growth between price-related growth and volume-related growth. And then towards the end of 2024 and starting ting 2025 there will be a lot more pressure to grow volumes because there probably won’t be any more price-related growth left for companies.”