Questions Remain As Kellogg’s Prioritizes Snacking In Three-Company Split

Kellogg’s announced today that it was splitting itself into three companies in order to focus its resources in the cereal and plant-based categories while emphasizing the growth potential of its global snack brands.

The Battle Creek, Michigan-based company will spin-off the companies tax-free and has not finalized the names of the three businesses but expects the change of strategy will be completed by the end of 2023. For now, the three companies are referred to as Global Snacking Co., North America Cereal Co. and Plant Co.

The move is the next step in the company’s transformation, Kellogg’s Company CEO and Chairman Steve Cahillane said in a statement.

“These businesses all have significant standalone potential, and an enhanced focus will enable them to better direct their resources toward their distinct strategic priorities…each is well positioned to build a new era of innovation and growth.”

Yet, that might not be the whole story.

“High performing divisions are often hidden value inside a larger machine, so the idea that breaking them up will unlock a higher aggregate market cap is viable,” said Jeff Grogg, Managing Director of innovation consulting group JPG Resources.

But Grogg was skeptical that Kellogg’s is all-in on the three categories. “It feels like splitting into 3 companies is maybe just a stepping stone to actually selling two divisions, in essence.”

Focusing On Snacking And International Reach

The biggest piece of the pie is the 116-year-old food business’ global snacking, international cereal and noodles, and North America frozen breakfast categories, which will make up the Global Snacking Co. These brands represent nearly 60% of Kellogg’s net sales and cover a range of products from Pringles to Cheez-Its to Rice Krispies Treats and RXBARs. According to the company’s statement, these categories made up about $11.4 billion in net sales in 2021 and represent a “higher-growth company than today’s Kellogg Company.”

In the company’s Q1 2022 earnings call in May, Cahillane expressed his confidence in the company’s snacking segment strategy and the growth potential that exists in emerging markets.

“We have sustained top-line momentum both in net sales and consumption growth. This reflects the strength of our reshaped portfolio, particularly our international markets and our North America snacks and frozen businesses,” he said in a prewritten statement during the Q1 call.

The U.S. will continue to be the center of the company’s business and operations with Battle Creek remaining as the headquarters for the cereal and plant-based businesses. The Global Snacking Co. will be run from the Michigan hub along with an outpost in Chicago with Cahillane heading the new snack company.

Cereal has been a declining category at Kellogg’s for a while. Recent supply disruptions stemming from a prolonged union strike in the second half of 2021 and a fire at a Pennsylvania productions facility have exacerbated the pain in the CPG company’s cereal division. The North American Cereal Co. will take over this segment of the business and focus “on the restoration of inventory, profit margins, and share position.”

Gaining back its hold on the breakfast cereal market could be important for the company. The global cereal market was valued at $36.5 billion in 2021 and is expected to grow 3.7% CAGR from 2022 to 2030, according to data from Grand View Research.

The smallest arm of the three-company spinoff will be the separation of Kellogg’s vegetarian/vegan segment into a pure-play, plant-based foods company anchored by the Morningstar brand. It earned an estimated $340 million in sales in 2021.

Observers are watching what happens with Morningstar Farms because, although the brand is still a market leader in the plant-based category, there is a lot of volatility in that sector.

“I would bet my life that they would sell that off,” said Greg Fleishman, Co-Founder & General Partner of Good Alpha Industries. “They’ll sell off their alternative meat business and that will allow them to double allow them to incubate and reset their cereal business and really drive the margins on it.”

Kellogg’s has reported that its plant-based Morningstar products like Incogmeato as well as the Gardenburger brand have experienced slower growth as consumer demand for plant-based options has spread over a more competitive market – indeed, there have been dozens of new plant-based protein brands that have entered the market in recent years.

“We already knew there was a bloodbath coming even before the market chilled so fast,” Grogg said. “Tons of tech money rolled in which has rarely worked in food, the market was overheated, and the crash was inevitable. It’s just here sooner than most anticipated.”

What Does This Mean For Kellogg’s Future Strategy?

What remains to be seen is how the spin-off companies will impact Kellogg’s venture arm, eighteen94 Capital. The investment offshoot of Kellogg’s has already invested in plant-based ingredient manufacturers Plantible and Myco Technology as well as snack foods like water lily pop brand Taali and Siren energy bites.

Cahillane insisted on the Q4 2021 earnings call that Kellogg’s was always looking at new M&A opportunities – especially in snacking, wellness and emerging markets – but is “being

very disciplined on price.” How the company will use these three new companies to rebuild its cereal segment and invest in plant-based offerings is still a mystery.

North America represents just under half of net sales both from snacks and cereal, with emerging markets about 30% of net sales and developed international markets more than 20% of net sales, according to the company.

Some emerging brands might see the Kellogg’s spin-off as an opportunity in certain categories.

Last week, Magic Spoon announced the closing of a $85 million funding round and distribution in Target stores increasing competition in the cereal aisle. Beyond Meat has struggled to regain its foothold in the plant-based meat category, leaving the door open for new brands to eat into consumer demand.

Grogg said that if the smaller divisions are properly capitalized they could be acquirers but he doesn’t think that either of them can “continue forward long term as they are.”

If Kellogg’s takes a lesson from Coke’s recent moves, the spin-off companies could prioritize products that have shown potential and abandon less successful brands.

Coke has been outspoken in its decision to discontinue underperforming product lines like Zico and Honest Tea highlighting how some CPG giants are trimming the fat from certain segments of their portfolios.

Investors were initially excited by the morning announcement with stocks leaping up 5% when the market opened Tuesday. Enthusiasm subsided over the course of the day with Kellogg’s closing 2% higher for the day, at $68.89 per share.