- Kellogg reported revenue of $3.4 billion for the first quarter 2018, up from $3.2 billion in the year-ago period and topping Wall Street expectations, according to a company release. The cereal maker also posted net income of $444 million for the period, jumping from $266 million in the same period last year.
- Cereal consumption remained soft for the quarter, bruising Kellogg's morning foods performance, but both its U.S. Specialty Channels segment and North America Other segment saw strong growth. RXBAR was a major boost to the latter's performance, contributing about 13 percentage points to sales growth for the period.
- The company updated its guidance and now expects 3% to 4% net sales growth and 9% to 11% adjusted EPS growth. "We made visible progress on key elements of our growth plan, achieving accelerated growth in frozen foods and Pringles, stabilizing cereal in developed international cereal markets, and realizing underlying improvement in U.S. Snacks following our transition out of Direct Store Delivery distribution," Kellogg CEO Steve Cahillane said in the release.
Kellogg is starting off the fiscal year on the right foot, with much of the company's growth stemming from its transition out of direct store delivery (DSD) for its U.S. snacks segment. But the cereal maker's top line growth was also buoyed by cost savings through its Project K restructuring program and zero-based budgeting, moves that could be undercutting its long-term growth potential and are ultimately unsustainable.
The switch to warehouse delivery has allowed Kellogg to shift resources from its DSD system back into high-performing brands like RXBAR, which it bought in 2017 for $600 million. The acquisition has been a major bright spot for the company's North America Other segment, which includes Kashi and frozen food brands, and has given Kellogg a foothold in the fast-growing better-for-you category. The U.S. market for nutritional shakes and bars topped $9 billion in 2016, and sales for the segment are expected to jump 8.3% annually through 2021.
This growth in shakes and bars reflects consumer demand for on-the-go snacks that deliver the holistic nutrition that shoppers increasingly crave. Despite innovations in this category, however, Kellogg's U.S. snacks segment posted lower net sales year on year due to list-price adjustment related to its transition out of DSD.
On the flip side of snack development, however, is waning shopper interest in cold cereal. Many consumers, especially millennials and younger, feel that assembling a bowl of cereal is too time consuming for their morning breakfast, and would rather grab a bar as a meal replacement.
This shift in consumer behavior is plaguing cereal makers across the board, and companies are scrambling to either revamp their products to include on-trend, healthy ingredients like protein and probiotics to lure health-conscious shoppers, or double down on indulgence to play to consumers' nostalgia for sugar cereals. So far, neither strategy has slowed consumer rejection of the category. The path forward may be to innovate, as Kellogg has done, by bringing well-known cereal brands into new categories — such as Special K breakfast bars, protein bars and even quiches.
This quarter, Kellogg's morning foods segment fell at a decelerated rate from past quarters, despite efforts to bolster core health and wellness brands. It's unclear if this strategy will yield meaningful gains in the future, but given consumer disinterest in cereal, the company may be better served by further investing in RXBAR and other snack innovations.