Kellogg – US Cereal & Snacking Business Strategic
Review & Incogmeato Launch – 19 February 2021
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Specialist: Matthew Perry (MP)
Title:
Moderator: Nyree Hinton (NH), Third Bridge Sector Analyst
Former VP, Commercial, Custom & Export Sales at Kellogg Co
Agenda:
1. Kellogg (NYSE: K) brand positioning and category management
2. Cereal innovation and headwinds
3. Launch of plant-based meat product Incogmeato
4. Outlook, operational efficiency and execution
Contents
Q: Could you provide an overview of 2-3 pre-coronavirus category trends, relevant to Kellogg’s alternative
meat, US cereal and US snacks business?
Q: What were some of the pre-coronavirus drivers of Kellogg’s Morningstar brand?
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Q: Kellogg’s Morningstar experienced a favourable boost from at-home consumption trends, particularly in
2020. How much of its growth would you attribute to Incogmeato and its plant-based meat initiatives? How
much of the growth was driven in conjunction with at-home consumption?
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Q: Could you outline the overall alternative meat opportunity?
Q: What are your thoughts on management’s decision to launch Incogmeato during coronavirus, where
shopper’s behaviours became very different?
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Q: What are the dynamics of launching a product during traditional operating environments? How does that
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compare to now?
Q: What are the differences between Incogmeato and Morningstar’s previous plant-based products? Is there
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a technical difference or is it branding?
Q: How would you assess the success of Incogmeato’s launch? What has been the consumer reception and
repeat purchase rates? How does it differentiate from competitors such as Beyond Meat?
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Q: What’s your near-term outlook for Incogmeato’s market share, growth and profitability, given the intense
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competition and pricing pressures in its category?
Q: What are some of Kellogg’s advantages and weaknesses in the plant-based meat segment? You alluded to
some of the weaknesses earlier around being under the Morningstar brand.
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Q: Do you expect any M&A or consolidation in the plant-based meat segment? What could Kellogg purchase
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to fill any gaps?
Q: Impossible Foods has slashed prices in its plant-based products multiple times. What are the implications
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of this competitive pricing? Why do you think it continues to cut prices?
Q: How does affordability impact marketing strategy around these plant-based meat products?
Q: Could you provide us with a brief overview of Kellogg’s US snacking portfolio, including some of its top
brands?
Q: What were some of the pre-coronavirus sales drivers in this snacking portfolio?
Q: How would you rate Kellogg’s performance in the elevated at-home consumption opportunity?
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Q: What might be the longer-lasting structural impacts of coronavirus on Kellogg’s snacking category? How
do you think consumer behaviour has changed?
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Q: Consumers are shifting purchases away from processed categories to healthier, unprocessed food. Where
does Kellogg’s US snacks business stand on this front?
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Q: Could you assess the US snack competitive landscape? Which direct competitors or significant threats to
Kellogg are taking market share in this category?
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Q: Could you describe the private label competition coming into the US snacks segment?
Q: What could be some of the key growth drivers in US snacks across the next 3-5 years?
Q: Could you provide us with an overview of Kellogg’s US cereal portfolio, including its price positioning,
unique selling proposition and how it roughly segments?
Q: How has coronavirus impacted the cereal category? I assume it benefited from the at-home trend.
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Q: How should we think about near-term sales growth, price discounting and profitability in the US cereals
segment?
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Q: What role is health and wellness also playing in this trend around convenience, where consumers prefer
breakfast on-the-go vs at home? Obviously now people can’t have food on-the-go as much because of
coronavirus.
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Q: What is the cereal industry doing to counter these health trends? Is it competing by improving its dietary
credentials?
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Q: How responsive do you think Kellogg has been to consumer trends? Is it increasingly catering for young
adults wanting other breakfast products and offering protein-rich items?
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Q: What is your outlook for Kellogg’s best- and worst-case scenarios over the next six months?
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Q: What else do you think the investor community should know around Kellogg’s management team and its
ability to execute on priorities?
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Kellogg – US Cereal & Snacking Business Strategic
Review & Incogmeato Launch
Transcription begins at 00:00:21 of the recorded material
NH: Welcome to Third Bridge Forum’s Interview entitled Kellogg – US Cereal & Snacking Business Strategic
Review & Incogmeato Launch. I’m Nyree Hinton and I will be facilitating today’s Interview with Mr Matthew
Perry, former VP of Commercial, Customs and Export Sales at Kellogg.
Matthew, before we start today’s Interview, please state I agree or I disagree to the following statement: You
understand the definition of material non-public information and agree not to disclose any such information,
or any other information which is confidential, during this Interview.
MP: I agree.
NH: Could you provide an introduction to your background?
MP: Yes, for sure. I entered food and beverage, I spent some time working for some of the larger beer
distributors in the country as well as for MillerCoors. Entered the food and beverage business back in 2010,
was brought in to lead the development of a new business unit within PepsiCo, which was transformational
innovation. Long story short is some chefs got drunk on the beach with Taco Bell executives and decided for
50th anniversary they wanted to do something cool, and that cool concept was the Doritos taco shell. Nobody
really had an idea of how to make that, and so I got brought in to build out the team and the capability from
white-space ideation through commercialisation, so sales, finance, marketing, legal, supply chain, everything
you can think of for getting the product to market and then executing within market on innovation. We did
that for about six years across all kinds of different brands, Doritos, Cheetos, etc, all different channels. Then
at the end of 2016 I left there to go to Kellogg. Did similar innovation work with Kellogg across brands like
Froot Loops and Morningstar Farms and Cheez-It, but also ran all of sales for national restaurant customers,
third-party manufacturers, global export. Did a lot of work on seasonal products into retail, and then also
some other special projects ad hoc depending on what was needed.
[00:02:41]
Q: Could you provide an overview of 2-3 pre-coronavirus category trends, relevant to Kellogg’s alternative
meat, US cereal and US snacks business?
MP: Relative to the overall meat business, the overall category growth was just off the charts. A lot of that was
being driven by a combination of the buzz-worthiness and trendiness of the category, as well as by great
marketing and execution by Beyond and Impossible, so that was rising tide lifting all boats for everyone in the
category. You also had just really strong distribution growth starting to be executed within the retail space.
Beyond and Impossible especially had built their business from 2018 on in foodservice, and now it was
starting to get some strong retail distribution, and so that was lifting the overall alternative meat category.
Kellogg was riding the coattails of that growth in terms of flexitarian. Kellogg in beef with the Morningstar
Farms had a really strong presence but it was with your traditional vegetarians or environmentalist eaters and
not with these flexitarians that were looking at the category more for buzz. What Beyond and Impossible were
doing in the category really helped lift Kellogg’s sales as well in retail, more organically than through
distribution growth because they already had really solid distribution growth. That’s alternative meat.
Cereal overall, it’s really flat to declining category depending on which brands you are looking at for Kellogg. It
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was just a very challenging space, and has been since I was there, prior to when I was there, but it’s not been a
growth category for them, and they’ve been trying to figure that out for quite some time. Whether that’s
marketing investment, innovation, working through getting to younger consumers through K-12, things of that
nature, but it’s just been, obviously, their core legacy business and a very, very difficult one for them to get
back on track.
Then snacks, their growth has been relatively strong. Their really two main players, at least in salty snacks, are
Cheez-It and Pringles. Cheez-It has had a very good, strong cult following. The fact that they use real cheese in
it has helped them, just from where consumers are going in terms of ingredients and health and wellness.
They had great innovation with Cheez-It Snap’d that boosted their sales over the last couple of years, and they
really haven’t had traditionally very strong innovation. Then Pringles has just been a solid, mainstream,
continuous growth player. Not a lot of innovation there, good flavour work and some partnership work with
specific channels of business, but within a really solid space for them. Rice Krispies Treats as well have been
doing really well for them in the snack space. Overall, they have been doing pretty strong, and then they were
innovating bringing things like Pop-Tart Bites into snacking, as well as looking at cereal snack packs, not
necessarily with milk but to eat on-the-go. That category had been one of the stronger ones for them for sure.
[00:06:03]
Q: What were some of the pre-coronavirus drivers of Kellogg’s Morningstar brand?
MP: The reality is, I think the drivers for them were the hardcore vegetarian community and/or the
consumers who are really invested in overall environmental impact of traditional animal protein harvesting,
lack of a better term. They were really the long-term, established gorilla in the market. I think, prior to Beyond
and Impossible coming in, at least from a retail perspective, their sales were something like 5x or 6x the next
closest competitor, which would have been someone like a Boca or a Gardein. Pre-COVID, the drivers of their
business were just continually evolving with those core consumers who were looking more at, “I want to be a
vegetarian, I want to change my eating habits,” really from a gut health perspective, and eat more vegetables
and/or just those who want to say, as well, “Environmental impact of what I eat is very important to me and
this is a better solution than eating traditional animal protein.”
[00:07:22]
Q: Kellogg’s Morningstar experienced a favourable boost from at-home consumption trends, particularly in
2020. How much of its growth would you attribute to Incogmeato and its plant-based meat initiatives? How
much of the growth was driven in conjunction with at-home consumption?
MP: The reality is, from a 2020 perspective, Incogmeato didn’t launch until September. Even then, their retail
distribution wasn’t ridiculously strong right off the bat, and so that did drive some growth for them in Q4 but
was not their core growth in 2020. What drove, I think, more than anything else, growth in 2020 was what
Beyond and Impossible had done for visibility to the plant-based protein category as a whole, and
reinvigorated buzz around it and brought in this new set of consumers that the tag word for them is
“flexitarian” which is people who are not just eating vegetarian all the time, they’re selectively doing vegetable-
based protein once a week, every couple weeks, once a month, etc, but they also still eat chicken and beef and
steak and things of that nature. That broader set of consumers that Beyond and Impossible really attracted to
the marketplace I think helped lift Morningstar Farms’ sales.
The other piece in 2020 obviously was COVID. COVID, I think, had two massive impacts, one being that
foodservice as a channel got completely eliminated. Plant-based protein, especially with Beyond and
Impossible, as I alluded to, had gotten their feet wet in the market via foodservice and then expanded into
retail. All of a sudden, when foodservice goes from mid-50% of food and beverage spending for consumers to
about 0% across restaurants, business and industry, travel and leisure, you name it, and all of that food
consumption purchase has gone into retail and e-comm, people who have a strong presence in retail and e-
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comm, almost regardless of the categories, are going to see a lift. That’s where the majority of Morningstar’s
business was, so I think that helped it a good amount.
I think the other part, from a COVID perspective, is consumers had a mind-shift in terms of what could they
control. We’ve done some surveys and research in the space with other clients I have, but ultimately,
consumers understand they can’t control the pandemic. They can’t control what’s going on with that. They can
try and mitigate it, but they can’t really control it, and they look to aspects of their life and/or health and
wellness that they can control, and the biggest piece of that when consumers look internally is, “What am I
eating? What does that do to my body?”, etc. A lot of times, that bodes well for product categories that are
more focused on health and wellness. Plant-based protein is one of them. Morningstar Farms had great
distribution compared to competitors throughout 2020, and when consumers had that mind-shift, I think that
also helped Morningstar’s sales in general.
[00:10:35]
Q: Could you outline the overall alternative meat opportunity?
MP: I think right now there are two ways to segment the market. One is what I would call veg-forward, which
is really what Morningstar had built their business on, which, easiest way to think about that is if you can see
the vegetable particulates in the burger patty, or any other product, that’s veg-forward. Boca and Gardein
compete a lot in that space as well. It doesn’t meant that you don’t have other types of products, but that’s your
flagpole. Your second category is really analogue product, and that is the Beyonds and Impossibles and
Incogmeatos where you’re really trying to mimic the texture and experience of eating traditional animal
protein. Call that, maybe I think from a consumer perception perspective, much more buzz-worthy but also a
little bit more of a science experiment vs natural. That’s how I would segment the overall category. The largest,
or strongest, points so far have been traditional beef and/or pork, sausages, bacon, burger patties, etc. Chicken
is an evolving category within the space. There are chicken nuggets, things of that nature, but people really
haven’t gotten into being able to do the texture of whole muscle chicken, like eating a chicken breast, so that’s
one of the big innovation focuses within plant-based protein category, is, “How do we go create chicken as
well?” Then fish is one that is on all manufacturers’ minds, but they haven’t really… that’s even a further step
from chicken, and so that’s kind of next step beyond that.
[00:12:21]
Q: What are your thoughts on management’s decision to launch Incogmeato during coronavirus, where
shopper’s behaviours became very different?
MP: I think a couple of things. I think it was fortuitous for them, and it was definitely not intentional. The
original launch of Incogmeato was supposed to come way pre-COVID. Way pre-COVID, it was supposed to
come in Q1. It got delayed both for internal reasons, to my understanding, just in terms of getting product
nailed down, supply chain, etc, as well as the impact COVID had on the marketplace. I think there had been so
much PR and buzz with investment community and others out there that Kellogg got to a point where they
couldn’t really afford to not put the product out there in the marketplace. Ultimately, I think it was a good
opportunity and timing for them to get out there. Part of the reason for that is you’ve seen this massive growth
of the number of competitors who are entering into the space, whether US-based players like Sweet Earth and
Lightlife, international players like Schouten and Meatless Farm that partnered up with Whole Foods, but all
of a sudden, this category is exploding really, really quickly. I think Incogmeato launching during the
pandemic allowed them to get a little bit ahead of what the competition was doing in coming into the
marketplace parallel path or just behind them.
I think the other good aspect for them is Morningstar Farms had been in both foodservice and retail for a
really, really long time, and Kellogg had struggled to get Morningstar Farms’ branding on the menu in the
foodservice channel. Very different than what Beyond and Impossible had done, and there are lots of different
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reasons, I think, to that, based on marketing investment and other things there, and innovation, as well as the
overall core brand halo, or not core but legacy brand halo of Morningstar Farms. I think the pandemic forced
them to not use foodservice as a launch channel, which probably would have hurt them, and made them go
directly into retail, which I think was a benefit.
NH: Could you expand on some of the challenges that Morningstar faced launching into foodservice?
MP: The net-net is, a lot of times, I think large CPGs try to take their retail portfolio and utilise that to go
execute in foodservice, and foodservice is just a very different channel, just based on the number of market
entrants, case pack architecture, product lifecycle, everything you can think of. A lot of the times, it requires a
lot of customisation of both product and a very different understanding of what profitability should look like in
that channel, especially as you think about players like large national restaurant chains, having to go through
distributors where everyone gets a margin cut, etc. Morningstar Farms had existed in the foodservice channel
for quite some time. A lot of people wouldn’t know that they were essentially the plant-based protein burger
that was on the menu at Chili’s, or was on the menu at Burger King before they got displaced by Beyond. They
had some good runway, but there was really no brand visibility, and their rate of sale within those foodservice
operators was not overly strong. It was just a challenging market for them for a lot of different reasons, but a
lot of it was were they really investing to grow within that space? Did they have unique offerings? Did their
brand mean something where operators wanted to put it on the menu? I think there was an eye-opening
experience when Beyond and Impossible came into the market and were able to do a lot of the things that
Morningstar had not been able to do in the foodservice channel.
[00:16:41]
Q: What are the dynamics of launching a product during traditional operating environments? How does that
compare to now?
MP: I think, a lot of the times, traditional operating environments, often you would launch in foodservice vs
retail, or a lot of people do. Beyond and Impossible were good examples in the category, but a lot of different
brands do because it’s an opportunity for consumers to get to sample product without having to spend as
much money on it. When you go into a retail environment, you’ve got to buy six units or 12 units or whatever.
Foodservice, you buy one. Beer business is another good example of how brands build through foodservice.
Another piece of it is a lot of the operators within foodservice will invest marketing dollars behind the brand to
grow their visibility because they have to just based on them having to continually speak to consumers and
generate buzz about coming back into Burger King or McDonald’s or Chili’s, wherever it might be, and so
you’re able to piggyback off of that. That’s a very traditional operating environment, based on my experience,
vs going straight into retail. I think that was one difference.
Another difference within retail itself is the ability to do sampling in the retail environment or through
experiential events, concerts and other outdoor large gatherings, where a lot of times when you launch a
product, you’ll try and get it in front of consumers in those type of avenues, and this non-traditional
environment didn’t allow that to happen. It also limited a lot of kinds of PR and media coverage, both because
you didn’t do those events but also because half the nation, or most of the nation, was focused on a
combination of the pandemic and the upcoming election. I think those are all different. A few other points
would be, from selling into retailers, a lot of times when you build the brand or build the opportunity within
the foodservice channel, you then have a proof point to sell into retailers, where, I think in the environment
that they launched in, you’re really relying on your overall leverage and relationship than you are necessarily
core, strong data about your product or brand. That’s another piece that I think just is different in this
environment in terms of where they have to launch vs how you might normally launch.
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[00:19:13]
Q: What are the differences between Incogmeato and Morningstar’s previous plant-based products? Is there a
technical difference or is it branding?
MP: I think number one is branding is absolutely different. Morningstar has got this legacy experience to it,
and it’s been in the market forever. It’s perceived as more of a veg-forward brand than Incogmeato is, and it’s
your all-America-based normal offering in the category. From a brand perspective, obviously, Incogmeato is
trying to follow a little bit more in the footsteps of Beyond and Impossible of really recreating that analogue,
animal protein meat experience. I think, from a branding perspective, they’re positioned very, very differently,
and you can get that just from the look and overall vibe and the buzz around the brand. From a technology
perspective, a lot of the ingredients that are in Morningstar, it’s less of a scientific process of combining them
to create that bleeding textural animal protein experience, without being too gross about it, vs the texture of
mixing vegetables and other ingredients together, and so there’s a big textural piece to it that’s very, very
different. The main thing was, I think when Incogmeato and some of the work I did on it, was that
Morningstar Farms could not compete from a brand buzz and visibility perspective with Beyond and
Impossible and how they had positioned themselves, and Incogmeato was their attempt to essentially take
market share from Beyond and Impossible.
[00:21:25]
Q: How would you assess the success of Incogmeato’s launch? What has been the consumer reception and
repeat purchase rates? How does it differentiate from competitors such as Beyond Meat?
MP: I think number one is they’re really differentiated not vs Beyond, vs Impossible, yes. I think, mainly
based on the breadth of the product portfolio where Impossible is pretty much a burger patty and that’s it,
Beyond has got a fairly broad product portfolio, and I think Incogmeato does as well. One of the differences, if
you look at Beyond and Impossible as the primary competitors for where Incogmeato has been positioned, I
think Incogmeato has taken a bit more of a holistic family approach in that they’ve got the chicken nuggets and
the Mickey Mouse-type deal as well, which is very much more kid-focused than a Beyond or Impossible is. I
think they’re trying to position a little bit more of plant-based protein by stealth, where I think Beyond and
Impossible have really focused on the technology and it bleeds like a regular burger, and it’s much more
science experiment-ish. I think that’s just a brand positioning difference between the two of them. I think their
success has been really driven by their ability to get distribution into retail. I think repeat purchase rates have
been probably at par to expectation, mainly because of that shift of consumer spending back into a retail
channel that’s really been driven by COVID. I think they’ve been hurt by the inability to create cross-channel
buzz, not being in foodservice because foodservice really doesn’t exist right now.
I also think one of the challenges for them is they have not invested dollar-wise the same way that a Beyond or
Impossible has, and I think that’s probably hurt them a little bit in terms of repeat purchase and overall brand
awareness and visibility. The other thing is that most people know that Incogmeato is part of the Morningstar
family, which is part of Kellogg, and I think that doesn’t generate the same buzz and excitement as when you
see a Beyond or Impossible CEO on Jim Cramer Live and you talk about all the cool celebrities that are
investors, and that you’re watching your product at the tech showcase in Vegas two years ago, and things of
that nature. I just don’t think there’s been that same level of excitement, and I think that has also probably
mitigated their overall sales a little bit beyond what they expected.
[00:24:13]
Q: What’s your near-term outlook for Incogmeato’s market share, growth and profitability, given the intense
competition and pricing pressures in its category?
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MP: I think you’re going to see continued top-line growth. I think that’s just based on, again, the overall
category growing. I think the category needs to figure out how to improve their nutritionals to continue to
compete against animal protein, because right now, I think if you really wanted to dive into it you could argue
that the nutritional deck on plant-based protein is the same or if not maybe even a little bit worse relative to
saturated fat and cholesterol levels and things of that nature, vs eating traditional animal protein. I think as
nutritionals get better, as they innovate more into other categories, ie, chicken and fish, and as the pricing
delta comes down vs animal protein just based on the number of competitors in the marketplace I think you
will see top-line growth. I think you will see reduced profitability within the category for Kellogg or for
multiple players, and that’s really tied back to the increased competition and that the CPGs or the
manufacturers are going to have to more trade promotion to keep their shelf space and from a competitive
environment perspective. Kellogg specifically, even though they’ll see top-line growth, I think they’ll see really
flat to declining market share because you are continuing to have more and more large, CPG-backed market
entrants, and I think there will be even some more international brands that start to enter into the
marketplace. I think that, ultimately, for the near mid-term is going to hurt Kellogg as much as anything else
on the profitability and market share side.
[00:26:05]
Q: What are some of Kellogg’s advantages and weaknesses in the plant-based meat segment? You alluded to
some of the weaknesses earlier around being under the Morningstar brand.
MP: I think advantages are, as much as anything else, they’ve got really strong historical experience in the
category. They have been there forever, they’re strong in the space, they’ve been the dominant market player
for a long time in retail, and I think that’s also helped them in terms of retailer relationships and trust with
retailers for this category. I also think, eventually, the consumer trend in this space is going to evolve away
from just necessarily mimicking analogue, being analogue product and mimicking animal protein, back to
really veg-forward, like something that’s truly, when you can see the vegetables, it’s not a science experiment,
it feels really close to nature. I think that’s where Morningstar’s core brand legacy is, so I think that’s
advantageous for them. They’ve got solid capacity from a manufacturing perspective, which I know some of
their competitors have struggled with, as well as overall supply chain experience. The other thing I think, vs
especially a Beyond or Impossible, is they do have the backing of a large, multinational CPG. They have a fairly
deep bank account, and being able to support the brands, whereas Beyond and Impossible are still just
clipping along at being, quarter by quarter, barely profitable. How long that’s sustainable I think is very, very
questionable. I think those are advantages for Kellogg in the space.
I think weaknesses for them are their market share is eroding. I think their innovation capability is
questionable at best, and what I mean by that is I believe they should have had Incogmeato out two years
earlier. They should have been smart enough to see where the trends where going with the Beyond and
Impossible, and either try to buy one of them or try to get something out into the marketplace within six
months to compete with them, not two-and-a-half years afterwards. I think their capability to innovate in the
space will be a challenge for them, and I also think their marketing investment and capability are also
challenging for them. I think that’s probably part of what delayed getting this product out relative to an
Incogmeato. It took a really long time. Should it have taken that long to figure out a name, get the project out
there, etc? That, to me, goes back to overall marketing investment and capability.
[00:28:49]
Q: Do you expect any M&A or consolidation in the plant-based meat segment? What could Kellogg purchase
to fill any gaps?
MP: It’s funny, if you go to Expo West, I think that’s a great place to see overall trends in health and wellness,
or at least when that trade show was going on every year. I think there were opportunities for some smaller
players there that, if you were able to effectively purchase something and keep that brand identity and equity
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vs doing the typical large CPG M&A where you buy something and then kind of bastardise it, it could be an
effective strategy. I think at this point any of the larger market competitors have priced themselves out of the
market where it doesn’t make sense anymore. I think you saw the other day where, I believe it was PepsiCo
and Beyond did their joint deal to grow the category. That hurts Beyond, obviously, or the ability for PepsiCo
or Kellogg to even look at something like Beyond in general, and I think Impossible is way overpriced. I think
they’re late to the game in terms of M&A.
[00:30:12]
Q: Impossible Foods has slashed prices in its plant-based products multiple times. What are the implications
of this competitive pricing? Why do you think it continues to cut prices?
MP: I think the reality is the overall category is starting to become a little bit commoditised, just based on the
number of market entrants and competitors that are in the space. To be able to keep your shelf space and keep
inventory moving, especially, as you kind of danced around, not having enough capacity, now bringing on a
ton of capacity where you want to run it at close to optimal levels as possible, you’ve got to keep moving
product. One way to ensure that other competitors aren’t displacing you on the shelf is essentially from a
pricing strategy perspective. I think that’s been super important for them, and I think they really want to
sustain their brand recognition, and so that’s another reason where they’ve slashed price. Excess inventory. I
think the one other one that’s important, or is becoming more relevant, is private label in the space is starting
to grow. Sysco has their own brand in the space, Kroger has gotten their own brand in the space, and so I think
that is causing some of the pricing initiatives that Impossible is taking to try and make sure that they don’t lose
that shelf space to even private label in the future.
[00:31:43]
Q: How does affordability impact marketing strategy around these plant-based meat products?
MP: I think it’s absolutely critical because there’s such a, still, large price delta between what I would call the
real competitive step for this category is animal protein, and it’s a huge price premium. I think it’s one thing to
try that out every once in a while, from a consumer perspective, but is my repeat purchase going to be once
every 30-60 days or is it going to be once every week or two weeks? If the price delta is too large, I think that’s
very, very challenging. At the same time, and I think it’s a little bit of chicken and egg, you still want to
maintain a price premium for this category because of what it’s doing from an environmental perspective,
because of what eating vegetables vs animal protein can do from a gut health perspective, and so I think it’s
critical for the category to keep an elevated price vs animal protein, but that delta I think has to shrink if they
want to get the same level of trial and repeat purchase that they really need for long-term sustainability.
[00:32:58]
Q: Could you provide us with a brief overview of Kellogg’s US snacking portfolio, including some of its top
brands?
MP: Within salty snacks they’ve got Cheez-It and Pringles. In what I’d call healthier snacks you’ve got their
bar portfolio, so Nutri-Grain, Kellogg’s Bars, RXBar. You’ve also got some health and wellness plays in terms
of Kashi and Bear Naked Granola. Then you’ve got what I’d say is more indulgent in their snacks, which is Rice
Krispies Treats, what they’ve done with Pop-Tart Bites, which has crossed over from breakfast category really
into snacking category. Then I think even within the last few weeks there has been more of a push for them to
do cereal snacking, so not necessarily having breakfast cereal with milk, but putting Froot Loops and other
brands into small, snackable pouches for kids or other people to indulge in throughout the day.
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[00:34:08]
Q: What were some of the pre-coronavirus sales drivers in this snacking portfolio?
MP: The overall drivers, a combination, right? I think part has been, and it’s kind of how their portfolio has
broken out, part of it has been really on health and wellness. You’ve seen them really get into that space with
what they’ve done with Bear Naked, where they’re trying to evolve their whole bar portfolio. I think those have
been a couple of the trends. The other is really that people enjoy nostalgia and indulgence. The other side of
their snacking portfolio, I think, whether it’s Rice Krispies Treats or Cheez-It or Pringles, sit in that space, and
so I think that’s been overall positioning of their portfolio for quite some time.
[00:35:00]
Q: How would you rate Kellogg’s performance in the elevated at-home consumption opportunity?
MP: It’s been so-so. I think they’ve been riding the wave, based on COVID pushing this elevated at-home
consumption because people aren’t going to school or to work or anything else. I think they’ve been pushing
for more innovation, but that was really prior to COVID-induced. That was some of the stuff like around
Cheez-It Snap’d and around some of the work they were doing with Pringles and Pop-Tart Bites, and they
really haven’t followed that up strongly, which is interesting to me. That’s been a big piece of it. Their
performance in the bar category has been somewhat challenged. They took a big leap of faith in buying RXBar.
I think they paid a really high evaluation for it in a category that is oversaturated with a number of different
brands at this point, and they haven’t found really strong and unique positioning in the bar category. In snack,
they really haven’t invested as heavily as I think they could from a marketing perspective.
I think one of the challenges for them in snacks is they really don’t have a lot of portfolio breadth. If you look
at salty snacks, you’ve got Cheez-It and Pringles. That’s all you have in salty snacks. I’m now competing with
the Goliath that is Frito-Lay, which has brands across Doritos and Cheetos and Lays and Rold Gold and
everything else. Then I’m also trying to compete with where consumer behaviour is going a little bit on
regional and local players like Utz and Herr’s and Cape Cod. I’m kind of sitting in no-man’s land, really, with
two products that play in the salty-snack space, and that’s a little bit difficult in terms of them really taking
advantage of the opportunity. I think the other big challenge, and they’ve done a better job on snacking with
this in international markets, but Pringles being such a massive brand for them, in the US they’ve never been
able to get it out of the can and into a bag. The bag plays much better from a portability perspective than the
can does, and until they can figure that out, I think it’s going to be hard for them to take further advantage of
the elevated at-home consumption in the snacking space.
[00:37:31]
Q: What might be the longer-lasting structural impacts of coronavirus on Kellogg’s snacking category? How
do you think consumer behaviour has changed?
MP: I think overall consumer behaviour has changed, and I think this has accelerated it, but I think people are
looking at staying closer to home with some of the products that they purchase, and what I mean by that is
more supporting local and regional opportunities. I think that’s going to be a struggle for Kellogg that has
snack brands are the really large, national brands. I think, and similar to what we’ve talked about in plant-
based protein, you’ve seen this massive push further into health and wellness, and the reality is they have a
couple of products in that category, but their really large, scalable products right now, in Pringles and Cheez-It
and Rice Krispies Treats, really don’t play in the health and wellness space, so I think that’s going to be
difficult for them. I think you’re going to see more and more single-serve consumption because people aren’t
doing big events. When you look at the products they sell, you can go into the retail store and buy a massive
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bag of Tostitos or Doritos, and I think people are going to start doing more events at their home with smaller
groups of people but where they can control that environment. If you just look at the overall portfolio for
Kellogg and how they sell and package their products in the salty-snack, or in the snack space, it’s not super
strong or conducive to that environment.
I think Rice Krispies Treats is going to be hurt because you’re going to see people baking more at home, in the
snacking category, just because they’re at home more. I think that will be a little bit difficult for them as well.
Then relative to bars, the challenge with bars is people were grabbing and going snacks like bars when they
were going into work, when they were going into school, when they were going to the gym. I think COVID’s
impact on people not doing those activities, or doing them at home more, is going to hurt overall bar sales, and
that’s one of the other categories that Kellogg plays in in the snacking space.
[00:39:44]
Q: Consumers are shifting purchases away from processed categories to healthier, unprocessed food. Where
does Kellogg’s US snacks business stand on this front?
MP: I think they understand that trend and they’re trying to have a balanced approach across their portfolio
in that, obviously, some of their products will never get there based on the brands that they have and their
overall legacy, but I think the RX purchase was an attempt to go further into that space. I think Bear Naked,
from a brand perspective, and what they’re doing with Kashi bars and Kashi Go, is further energy into that
space. I think ultimately, though, there are so many competitors entering this healthier space, that Kellogg has
either got to come up with a strategy to get new market entrants and new brands into the categories really,
really quickly and have a broader portfolio of offering, or they’re going to have to look at M&A, but right now I
don’t think they’ve got a deep enough portfolio to really play strongly in some of the health and wellness
trends.
[00:40:58]
Q: Could you assess the US snack competitive landscape? Which direct competitors or significant threats to
Kellogg are taking market share in this category?
MP: When you get into the bar category, and that’s probably an easy one, look at people like Quest Nutrition.
Look at some of the diet trends where it’s like Atkins bars or some of the other ones that are operating in the
space, or some of the really protein-fortified weightlifting ones, which are like Met-Rx and a few others. Just in
bars as an example, they kind of sit in the middle, they’re a little bit in no-man’s land in that they’re not really,
really strong in one aspect of where that health and wellness portfolio is going, and I think that, for them, is a
challenge. Similarly in cereal and in granola, granola has a lot of private-label, smaller manufacturers vs Bear
Naked, and in Kashi, same type of deal. There are a lot of all-natural cereals, Cascadian Farm and others,
Barbara’s, other people like that. Ultimately, there’s just a lot of competition there and they’re an older legacy
brand that really doesn’t stand out.
[00:42:22]
Q: Could you describe the private label competition coming into the US snacks segment?
MP: It hasn’t been massive to date. It’s always been out there, a little bit as an annoyance, but I think it’s
starting to grow more and more. I think Target is getting much, much deeper into the space. I think retailers
are looking at it and saying, “Okay, in snacking, especially if I’m more creative with the branding…” so if I’m
Walmart, not every brand has to be Sam’s Select (Choice) because it’s my private label. I can do other branding
and be a little bit more creative, and then that consumer perception on quality of private label changes a little
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bit. I think it’s going to be a more challenging environment for Kellogg, moving forward, in the snack space.
[00:43:18]
Q: What could be some of the key growth drivers in US snacks across the next 3-5 years?
MP: I think health and wellness overall. I think product fortification, so you’re seeing more and more things
like chips that are protein-enhanced. I think products that are aligned to diet trends, keto, Whole30, things of
that nature, those all play in that health and wellness category. Then I think on the other end of the spectrum
you’re going to see more things like really extreme flavours, like Paqui did a great chip with a great marketing
play, with the hot chip challenge that’s brought a lot of visibility to their brand, and so I think you’ll see more
extreme flavours, more international flavours and maybe even some different product forms than you would
traditionally see. How do you take a chip and turn it into a palpable bite, like a ball, like the old Cheese Puff
balls, but can you do that with a potato or something other, structurally, from a chip perspective? I think
there’ll be innovation in that space as well.
[00:44:29]
Q: Could you provide us with an overview of Kellogg’s US cereal portfolio, including its price positioning,
unique selling proposition and how it roughly segments?
MP: The easiest way is to just look at it how it segments, and I think there are three categories for them. One
is what I would call their indulgent cereals, so higher sugar content, things of that nature, so Frosted Flakes,
Fruit Loops, Corn Pops, Mini-Wheats, Honey Smacks, Apple Jacks. Things that probably play to a younger
audience, and things that are going to be priced at the lower end on a per serving or per ounce spectrum, just
based on who they’re targeting. I think, in a healthier space, you’ve got traditional Kellogg’s Corn Flakes,
you’ve got the Special K brand, etc, and then it’s focused really on not even just healthier but a very specific
consumer who’s looking for natural ingredients, or is looking for products that have been fortified, etc. You’ve
got the Smart Start, the Kashi cereal, Bear Naked from a granola perspective, but they look at as part of their
cereal category, Mueslix, things of that nature.
[00:45:56]
Q: How has coronavirus impacted the cereal category? I assume it benefited from the at-home trend.
MP: I think it definitely helped in terms of, again, just more consumers buying at retail or buying through e-
comm, number one, and number two is just eating at home. You eliminated some of the opportunities that
consumers had been going down relative to, “I’m going to drive through a Starbucks or a McDonald’s and get
my breakfast on the way to work,” or, “I’m going to buy it at a micro mart,” or for children, K-12, that are
eating breakfast in school, before school. All of a sudden, I think there was more of a captured demand. Where
the cereal business has its strongest presence is in retail, and so I think there was a boost from that perspective
for sure.
[00:46:59]
Q: How should we think about near-term sales growth, price discounting and profitability in the US cereals
segment?
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MP: I think the sales growth is going to start to flatten out pretty quickly because you saw that goose from that
COVID push and now it’s going to start to flatline a bit. I think profitability in the space is going to continue to
be challenged. I think just to keep the linear footage that the category has within retail, there’s going to be
more price promotion, and so that’s going to take overall profitability down a category. I think the reality is, if
I look at it today, just at a macro level, my two kids don’t eat cereal every morning. It’s not like I did 30 years
ago when I was a kid and it was cereal for breakfast every day. They’re having smoothies or they’re having
other things that Kellogg even sells, like Eggo or Morningstar Farms frozen breakfast patties, or whatever it
might be. I think, ultimately, that’s going to be a challenge for the cereal category, moving forward.
[00:48:09]
Q: What role is health and wellness also playing in this trend around convenience, where consumers prefer
breakfast on-the-go vs at home? Obviously now people can’t have food on-the-go as much because of
coronavirus.
MP: I think you’ve seen proliferation of brands from a health and wellness perspective that have focused on
either added benefits or tied to diet trends, so you look at what Kodiak and Birch Benders have done in the
retail space, both with mixes meals to be made by yourself at home or frozen offerings that you can then re-
therm. Same with Jimmy Dean. You’ve got Jimmy Dean core more indulgent products, but then you’ve got
their Smart side that’s lower in saturated fat, higher in protein, things of that nature. I think health and
wellness in the space has been a massive impact. You look at things like what else is in consideration set. Even
Eggo did their, I think I think it was Off the Grid, which was protein-enhanced Eggos, but in that space you’ve
got smoothies and yoghurts and things of that nature, and I think all of those are really starting to compete
and are perceived, a lot of them, as more healthy than the traditional legacy high-sugar cereal brands. I think
that ultimately will be a challenge for a lot of Kellogg’s portfolio, moving forward.
[00:49:56]
Q: What is the cereal industry doing to counter these health trends? Is it competing by improving its dietary
credentials?
MP: I think, from a health credential perspective, they’re coming up with brands and offerings that are better
nutritionally, lower in sugar, higher in fibre, all the different buzzwords and functional aspects that you could
think of. From Kellogg’s perspective, I think that’s really where Kashi plays, and they’ve got different cereal
lines for them across Kashi, Kashi Go and Kashi Kids. I think one of the challenges within that space maintains
to be that the overall quality of cereal products in the health and wellness space is just nowhere near as,
honestly, as tasty as the sugary indulgent ones, and I think they’ve got to improve the products further from
the health and wellness perspective. From the convenience perspective, I think cereal has looked at on-the-go
cups, cereal bars to some extent, there have been some different entries in that space, more by General Mills
than a Kellogg, per se, but that’s the other piece. You’ve got the health on the one side and the convenience on
the other, but overall, it’s been difficult for them, and I think that’s why they’ve seen continual market share
erosion vs some of these other health and wellness offerings that people are consuming for breakfast.
[00:51:26]
Q: How responsive do you think Kellogg has been to consumer trends? Is it increasingly catering for young
adults wanting other breakfast products and offering protein-rich items?
MP: I think they’ve attempted to dip their toe in the water but they haven’t gone as far as they could go. Bar
category, good example. RXBar, good attempt, but what are you doing with the rest of your bar portfolio? Are
you really, really growing it? Are you positioning it in ways that are relevant to consumers? I know there was
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some publicity a couple of years ago, they were working on some kind of kid probiotic-type snacks, I think it
was called GoodBelly, and they just couldn’t get there from a functional innovation perspective, but they didn’t
really lean back in and say, “Okay, I’m going to go figure this out,” or, “I’m going to go come out with
something else.” They’ve kind of defaulted back to the bars with Kashi Kids bars and things of that nature. I
think they tried to address it but they haven’t really said, “This is a big strategic pillar that we have to go figure
out to be able to survive,” and really dedicated the resource, marketing investment, innovation investment to
be able to get all the way there.
Some of the things they could be doing are, you look at something like Bear Naked Granola and if you know
that yoghurt is a competitive opportunity in the health and wellness breakfast space, why aren’t you going and
partnering with a yoghurt company, or even using private label yoghurt, and coming out with Bear Naked
Yoghurt Granola with a little granola topping on top of it in the yoghurt aisle, and thinking about how you
leverage your existing brands to expand it in different categories to battle where the consumer trends are
going? It’s just some of the things that I think they could or should be doing that they’re maybe not all the way
there yet on.
[00:53:26]
Q: What is your outlook for Kellogg’s best- and worst-case scenarios over the next six months?
MP: This will sound really weird, but I think in a best-case scenario COVID remains a major consumer issue,
in that you have continued really strong retail purchases, and that Kellogg is able to, at least from the time I
left, evolve their e-commerce capabilities to be able to effectively compete where consumer spending stays
strong in those two channels, and where Kellogg has a really strong presence. I think that’s kind of a best-case
macro environment scenario for them. I think worst-case scenario is the growth via retail from COVID dies
down, that they’re not able to further capitalise on e-comm vs where their competitors are. I don’t know what
their innovation pipeline looks like, but I think they’ve had some good starts and then have gone really quiet
from an innovation perspective. If they don’t have a really strong innovation pipeline, and foodservice comes
back and they’re just not as relevant in foodservice as they probably could be, I think that’s a worst-case
scenario. The reality is, if international markets where, at a macro level, Kellogg has been able to get some
growth and opportunities, whether it’s some of the stuff they’re doing in Africa, western Europe, etc, if those
markets are even in a worse position from a COVID perspective than the US, I think that Kellogg is going to be
in for a really rude next six months.
[00:55:21]
Q: What else do you think the investor community should know around Kellogg’s management team and its
ability to execute on priorities?
MP: Yes, I guess what I would share, and I won’t talk about individuals per se, and I think it definitely got
better while I was there, or small, incrementally better, there’s a massive culture of risk aversion within
Kellogg. They’re a long-established Midwestern company, which is great to some extent, that’s had people in
the same roles for 30-plus years, but doing innovative and new things has been very, very challenging for
them, and I think that’s an internal cultural issue for them as well. I think their management team’s ability to
really lean in on innovation… I remember one of the things Indra Nooyi said, or one of the focuses when I was
at PepsiCo, was 15-20% of revenue was always going to come from new product innovation. It was always
churn, it was always, “What’s the next thing? How do we keep pushing ourselves?” and knowing that not
everything will necessarily be successful but that we’ve got to keep figuring out how to reinvent ourselves. I
think that’s a challenge at Kellogg. We did something with Froot Loops where we did a Froot Loop doughnut
to play off the cronut craze, and got it into foodservice. We were trying to figure it out into retail and it just
died. I saw that they just came out today, I think it was today or earlier this week, with Eggo Bites, which is a
cool concept, it goes to portability and convenience in the breakfast space vs their existing portfolio, but it was
something that I worked on three years ago. I think there are some challenges there from their culture, from
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really leaning in on strategy and innovation.
I think the other thing for them, or the other two that I would highlight for investors, is how much is their
focus on the US vs international markets? As I said before, a lot of their growth has come out of some of the
work they’ve done in Africa and Asia, things of that nature. Have they really reinvested the dollars that they’ve
gotten out of sales of the cookie and cracker portfolio, or what they did in the DSD warehouse transition even
longer ago, into marketing investment, into growth of innovation? I think those are important. The last one I
would say is, I think it’s well-known, obviously their corporate headquarters is in Battle Creek, Michigan. I
think that is challenging for them to get the type of talent that they need from a strategy and marketing
perspective to really grow. I think they’ve evolved a little bit where they have more people working out of
Chicago, but I think their long-term pipeline of people is something that they’ve really got to focus on to be
able to capitalise and grow, moving forward.
[00:58:21]
NH: That concludes our Interview. Let me close by saying thanks, Matthew, for your input, and thank you,
clients, for joining Third Bridge Forum’s Interview today. Please take it easy. If any clients would like to
arrange a private meeting or consultation, please contact your relationship managers. Bye-bye.
MP: Thank you.
Transcription ends at 00:58:34 of the recorded material
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