Kellogg Outgrows Frosted Flakes – WSJ #Kellogg #Outgrows #Frosted #Flakes #WSJ Welcome to Lopoid
It is understandable why
management wants to ditch cereals to focus on the faster-growing snacks business. It is less clear that this is best for shareholders, who will be left holding a standalone husk business in an out-of-favor category without the benefits of synergies from the bigger group.
The company said Tuesday it would spin off its North America cereals business, home to mid 20th Century marketing icons such as Tony the Tiger and Toucan Sam, with around $2.4 billion of sales last year. It also will spin off, or possibly sell, its plant-based food business, including the MorningStar Farms brand, with around $340 million of sales.
That will leave behind an $11.4 billion global snacks business, including brands such as Pringles, Pop-Tarts, and Cheez-It, along with Eggo waffles and the ex-North America cereals business. Kellogg says this grouping had high-single-digit organic sales growth over the past two years, compared with growth of 6% and 3.5% in those two years for the company as a whole.
Kellogg seems to be suffering from
envy. That global snack giant, which owns the Oreo and Cadbury brands, is what was left after spinning off the rest of Kraft Foods Group in October 2012. Since then, its shares have posted a total return of 207%, compared with 150% for the S&P 500 consumer staples index, according to FactSet. Mondelez is now valued at 2.7 times forward sales and 19.3 times forward earnings compared with 1.6 and 16.6 times, respectively, for Kellogg. So Kellogg’s global snack portfolio would likely fetch a better multiple on its own.
The move also makes sense for the plant-based business which, though profitable, is now competing with much more aggressive, unprofitable competitors in a rapidly moving category. It might well benefit from a more growth-focused owner group.
That leaves the poor old domestic cereal business. True, it has faced short-term challenges such as a worker strike and a factory fire last year. But cereal also has been a challenged category for many years as consumer preferences have shifted away from sugary, highly processed carbohydrates for breakfast. Kellogg says it is merely aiming for “stable” sales in the overall cereal business after the spin.
Management argued Tuesday the business would benefit from a greater focus on cereal alone, hinting that resources and management attention have been allocated more to other categories lately. The company also pointed to an opportunity in the near and long term to improve profit margins. Yet it is unclear how this can be achieved over the long term while synergies with the larger group are lost, increasing costs.
Company managers always seem to point to the benefits of synergies when merging, and to the advantages of strategic focus when breaking up. But Kellogg seemed to get a particularly skeptical hearing from analysts on Tuesday’s conference call. They grilled managers not just on cost dissynergies such as overlapping information technology, logistics and management expenses, but also on potential revenue losses, such as due to decreased negotiating clout with retailers.
Focusing even harder on trying to turn around Kellogg’s cereals will likely only lead to a worsening headache.
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