Kellogg Q3 2021 Update – Domestic Challenges &
Emerging Markets Momentum – 27 July 2021
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Specialist:
Title:
Moderator: Nyree Hinton (NH), Third Bridge Sector Analyst
Jared Rosenbaum (JR)
Former Senior Director, Corporate Development & Strategy at Kellogg Co
Agenda:
1. Category update across Kellogg's (NYSE: K) snacks and cereal products
2. Navigating coronavirus trends and the health and wellness segment
3. Kellogg's Incogmeato plant-based meat brand – market share gains and competition vs Beyond Meat
(NASDAQ: BYND) and Impossible
4. International growth and North American at-home consumption outlook
Contents
Q: How has cereal and snacking adapted to the trend towards health and wellness? What are the challenges
around building a portfolio geared towards this trend?
3
Q: Do you think it’s worth it for Kellogg to still make significant investments into the cereal category, given
how the pandemic provided an opportunity to showcase brand dominance, market position and pricing?
Should it have been more aggressive in adapting to the health and wellness trends, through putting more
money into snacks or alternative meat? Why do you think cereal is still a priority? Do you think the gains
during coronavirus were enough to convince the company that this is a category it wants to continue to
dominate?
Q: Could you discuss the snacking segment and Kellogg’s success there over the years? How has it adjusted
to plant-based products?
5
5
Q: You mentioned health and wellness or better-for-you offerings are coming to market but are plateauing
and the consumer will probably just go back to the pure indulgence. How can Kellogg cater to the pure
indulgence customers without alienating itself from that better-for-you market? Should it wait for a brand in
the health and wellness category that’s thriving and acquire it or does it have to maintain a presence in the
categories?
7
Q: It seems Kellogg is not really implementing the growth strategy of buying popular businesses and scaling
them. Why do you think Kellogg is experiencing very strong numbers for traditional CPG overseas in some
categories? What lessons could the company take from its performance in these markets to jump-start
growth in North America, which is growing at 1-2% YoY or declining?
8
Q: How would you assess the performance of Kellogg’s Incogmeato brand and plant-based meats in general?
9
Could you outline the success or challenges around this product, touching on the delays in roll-out?
Q: What are your expectations for Kellogg’s cereal and snacking strategy and opportunities for pricing?
What do you think the company can do on pricing as the market starts to normalise?
10
Kellogg Q3 2021 Update – Domestic Challenges &
Emerging Markets Momentum
Transcription begins at 00:00:03 of the recorded material
NH: Welcome to Third Bridge Forum’s Interview entitled Kellogg Q3 2021 Update – Domestic Challenges &
Emerging Markets Momentum. I’m Nyree Hinton and I’ll be facilitating today’s Interview with Mr Jared
Rosenbaum, former Senior Director, Corporate Development and Strategy at Kellogg.
Jared, before we get started with 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.
JR: I agree.
NH: Could you provide overview of your background and the various roles you’ve held in the industry?
JR: A background in corporate M&A and strategy, did formal investment banking early in my career and also
some commercial banking for that matter, so familiar on both the credit and the equity side. Then, have done
corporate M&A for a couple of different Fortune 500 companies including what was WellCare, which is now
part of Centene in healthcare. Then, joined Kellogg in 2015 and really focused, it was a global role and we will
talk a little bit about Asia, I know. A lot of my focus was domestically in the US, specifically in the health and
wellness area and snacking as well as breakfast and plant-based and also in Europe, which has similar
attributes or more closely to the US but did also spend time in both Latin America and a fair amount of time in
Asia as well.
Worked on various projects, such as global portfolio strategy, so looking at the entire universe of the
geographic universe and food universe to say, where do we want to take the portfolio? Where’s the white
space? Also worked on some of the projects, like our exit from DSD, moving to a warehouse delivery model,
various corporate restructurings, things like that. I led, in totality, the divestiture of Keebler, which was
Keebler and other cookie brands and odds and ends and so as part of that we reorganised North America and
righted the organisation as well. That’s a flavour of the types of stuff I did but, I didn’t say it, most of the
activity centred around how to grow the portfolio or reshape the portfolio which again, led to a divestiture but
in most cases you’re looking for inorganic growth opportunities.
[00:02:58]
Q: How has cereal and snacking adapted to the trend towards health and wellness? What are the challenges
around building a portfolio geared towards this trend?
JR: I’m going to break this into two pieces, so just double click down if I miss something, so let’s start with
cereal. Cereal, obviously, has been around forever or at least the modern day forever and really is a completely
established category that everybody is fighting just to stay where they are. That has a couple of dynamics. One
is the health and wellness element, which we’ll come back to. The other that plays into it is the on-the-go and
convenience. There was a study of a few years ago where some ungodly percentage of millennials felt like
pouring milk into a bowl was too much work for breakfast and so, collectively, cereal has, arguably, passed its
days. The opportunity with cereal is that it really works for a lot of occasions outside of core breakfast, I’ll say
if you’re older. It’s great at lunch, it’s great as an afternoon, after-school snack, it’s always wonderful for
dinner. It’s not something you would make as part of your routine but it certainly has other functions.
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Then you’ve seen it again in smaller places, like people are putting it on French toast and other blends and
meals but even with all of that said, you’re fighting just to stay even. I’ll say this, it’s a declining category and
John Bryant when he was the CEO he used to say, “We are the category,” and there really are only a couple of
players in cereal. Whatever happens to Kellogg or General Mills happens to the category and so there’s a
philosophical question of, could you spend your way to prosperity? Historically, Kellogg’s invests a decent
amount into its brand building efforts for cereal but certainly has pulled back over the years and there’s a
question of which is pulling which? If you were to double your ad spend in cereals, could you revitalise the
category? The answer is, I don’t know.
I think that some of those other trends might be too strong but certainly there’s enough money you can throw
at any problem and at least, for temporary reasons you’ll have some good fortune. Now, with all of that said,
COVID really changed the landscape, at least temporarily because everybody was home and people were
ordering what they knew from the stores. A lot of what has worked against big food in general, so this applies
to cereal, it applies to snacking, are all of the insurgent brands that have shown up and people go to the store
and they look for what’s new or they try things online. When the pandemic hit, everybody bunkered down and
said, “What brands do I know and trust and what can I just rely on eating?” Certainly the first 3-6 months but
really arguably the last 18 months, that was the trend, so that’s where you see the numbers for cereal and other
traditional, big food brands going the way they did, it’s because that’s where everybody flocked.
The billion-dollar question is, is it transitory or is it here to stay? I think we might get more into this but I
think the jury is still out because while the world has reopened, we’re not out of the woods yet. People are still
working at home, we’re in limbo and I think that arguably, a company like Kellogg’s or any big food tends to
talk out of both sides of their mouth. They can say, “We were hurt because people are going back to work and
now their behaviours are changing.” They can also say, “We’re benefiting because a lot of people aren’t going
back to work and therefore we still have people consuming at home.” I think this, if nothing else, was a great
opportunity to remind people of how great cereal can be. It’s a fun food, it’s a filling food, especially for kids,
which has generally remained a little stronger than some of the adult foods, the diet-type brands, like Special
K.
The other challenge, if you put COVID aside and just assume the world stabilises somewhere, is the trend
toward health and wellness. Kellogg was founded as a health and wellness company. If you go back and you
read the history of cornflakes and the Kellogg brothers and all that, that’s really what they were going after and
in 1900, this was healthy. This was far better than anything else you could get. It was safer, it was made better
but now, we live in world where just corn with sugar thrown on it, is not quote healthy and certainly not in the
way healthy people want it to be, so now you’re seeing things like RXBar which again, has the convenience
angle. Kellogg tried to compete a little bit with a product called Joybol, if you look that up.
Kellogg also invested in a smoothie company, I believe it was Bright Greens, that was the venture fund made
that investment, so there are all these other ways to eat really a more real breakfast. Something that doesn’t
have artificial anything, doesn’t have sugar thrown on it and is basically, some form of, I’ll say, plant-based,
seeds and nuts, real fruit because that’s what people want and it’s a real trend. I will contradict myself a little
bit, especially when we get into snacking because the health and wellness trend is real and it does chisel away a
piece of the market. What is also important to remember is that, for as much as we talk about health and
wellness, and I suspect most of the people listening to this are either in New York, on the West Coast, in
Boston, the talk of health and wellness is substantially more significant on the coasts than it is in the rest of the
country.
I’m not going to turn it into a political thing but it almost looks like the political map. When you’re in large,
urban areas people are more conscious of health and wellness but there is still a massive part of the population
that is in the rest of the country that has no interest in it or has a very mild interest in it. We talk about health
and wellness like that’s all that’s going to be eaten. The reality is, foods like cereal, like Pringles and other
snacks that I’ll talk about in a minute, those are still going to be around, in very significant form. When you’re
talking about brands that are billion dollar brands or any significant size, when you’re fighting just to stay even
or to have low single-digit growth, any detraction from your base just means you have to work that much
harder. Even if you’re only losing, pick a number, 1-2% of your users or consumers, that just makes the hill
that much harder to climb. It’s a real trend, in the sense that as a public company, as a company that has to
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base itself off of comps, it’s real but the brands themselves are going to be here for a long time because cereal,
in and of itself, is not going anywhere.
[00:11:45]
Q: Do you think it’s worth it for Kellogg to still make significant investments into the cereal category, given
how the pandemic provided an opportunity to showcase brand dominance, market position and pricing?
Should it have been more aggressive in adapting to the health and wellness trends, through putting more
money into snacks or alternative meat? Why do you think cereal is still a priority? Do you think the gains
during coronavirus were enough to convince the company that this is a category it wants to continue to
dominate?
JR: Yes, so let me try to figure out what order to take that in. First of all, and I have no insight, I was gone by
the time COVID hit but I also have no true insight but cereal is a very big cash cow, which is also why you’d
want to keep it. I suspect that when COVID hit, there was probably a lot of disruption to the business in
general. Obviously, there was the uncertainty about manufacturing and just, was the world going to end but
I’m sure there were either categories or products that were impacted and cereal presumably did well from the
get go. I’m sure there was discussion internally about Kellogg is making more profit than before, and it
probably needed to support some of those other businesses, from a managing-the-street perspective. How do I
keep EPS, to where it’s supposed to be? My view is, in isolation, you would have taken this opportunity to
massively overinvest and reinvigorate these brands in a sustainable way. To me, this was a gold opportunity
but again, I would guess that as a public company you had a lot of competing priorities and because of that,
you may not have been able to do what you would do if you, literally, just owned a cereal business, but I don’t
know that for sure.
In terms of the long term, I think that, again, the jury is out and people were reminded but I suspect that as
people leave the house, they will also leave cereal. Again, not in droves but just relative to what we’ve recently
experienced but again, this is a business that it has tremendous operating leverage, and so the incremental
sales are very profitable and that makes it a very stable business. I know we’ll get to Asia in a little bit, even
plant-based. When you’re dealing with more volatile and growing businesses, this gives you a nice cash
cushion to base off of. Now, I could make a very strong argument, from a pure economic, financial model,
you’d be better off selling Kellogg and breaking these pieces into various forms, and arguably, the sum of the
parts is worth more than the whole. As a staple food company that is focused on paying its dividend every
quarter, this gives you that cash flow that you need, in case some of the other businesses have more volatile
results.
[00:15:58]
Q: Could you discuss the snacking segment and Kellogg’s success there over the years? How has it adjusted to
plant-based products?
JR: Yes, so the Keebler acquisition back in, I want to say 2000, really gave a big, iconic brand and then
Pringles, in the early 2010s was another one. The challenge that Kellogg has is, snacking is very spread out,
really through the whole ecosystem but even within a store because you have impulse buying, you have
confection, you have things like chips and popcorn, other salty snacks. Some of them are in one aisle, some are
in another, crackers are in their own aisle, which can be snack, can be breakfast. It’s disjointed as a group. I
know we think of it as, quote, snacking but even things like an RXBar or a Clif bar, Kind bar fall into snacking,
which can even be in two different aisles. You might find them in nutrition or now you see bar aisles or near
breakfast. The challenge Kellogg has is, there are a couple of great brands and obviously we made the decision
to sell the cookie portfolio but you’re competing in some very narrow segments as opposed to some of the
other brands out there that really cover the territory more broadly.
In reality, it doesn’t necessarily matter that Pepsi owns A, B and C or that Hershey sells chocolate and popcorn
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now. The consumer doesn’t now that but the ability to leverage that power with the retail, the ability to get
better pricing or to offer more discounts, could make a difference and I just realised that was the one thing on
cereal, we didn’t talk about pricing, I’ll come back to. The thing about snacking is that, at its core, indulgent
snacking is very price-competitive. People are not, broadly, looking for premium, they’re looking for
indulgence and they want something that tastes good and at the end of the day, high fructose corn syrup and a
few other ingredients will almost always get you there or salt and potato will get you there. As those trends
have changed and they have, again, they’re real and they’ve had an impact, the core of snacking has remained
very solid. Again, I would point to Oreo as, what I would call maybe the best snacking brand which is not a
Kellogg’s brand
. I would think that Oreo is a blue-chip example of just year in and year out performance and for Kellogg,
Pringles and Cheez-It are very similar and they’re just very solid. If you look at Pringles in totality, both
domestic and international, when Kellogg bought Pringles, it was very neglected, internationally. If you look at
Pringles total growth over the last, almost 10 years at this point, probably eight years, a lot of the growth came
internationally. There was certainly domestic growth too but it was really the benefit of taking what was an
unloved brand at a different company and putting all of the attention on it and a lot of it was low-hanging fruit
but it was also just fruit that they weren’t picking. As Pringles has gotten larger, it’s hard to continue that level
of momentum because now it’s sort of where it should be, but still very solid brands.
Those guys are always going to be fighting with what I would call the traditional snacking players. Everybody
is fighting for shelf space, everybody is fighting on pricing but you have a very solid, core user base that I
would argue has been helped both by COVID and the away-from-home trends that were happening before
COVID because snacking is very on-the-go. You can change your pack sizes and your formats, so that people
can eat in the car, they can eat in the office, you can serve them to the kids after soccer, very, very versatile in
many ways. At the same time, when everybody is bunkered down in the their houses and stressed, those are all
great foods to eat. When we talk about health and wellness, that’s where the trends of people eating away from
home, on the go, in the office where becoming more apparent because it was a little more convenient. It’s easy
to grab a bar or something of that nature or a Lenny & Larry’s cookie but it also was lifestyle that people were
just trying to eat better, not indulge so much in the office or in other locations.
What’s really happened over the last 10 years and even five years, and the rate of change is getting quicker, is
healthy food is starting to taste better. If you go back 20 years, anything that was vegan or, quote, healthy or
natural, generally either didn’t taste good at all or maybe it wasn’t so bad, had an aftertaste. Now, the stakes
have been raised where consumers expect it to taste like regular food but just be healthy. It’s getting closer
every day. Every new product is getting closer to that mark and they’re coming up with ways to do it that are
natural, free from additives and other things and contain real ingredients. RXBar is obviously one of the best,
or most recent examples of that but there are tons of them now. What you saw, for a little while and you still
see in pockets, is this trend towards, when people say, “Better for you,” for a while that really meant healthy.
Now, it just means better than the baseline, so if I’m eating a better-for-you potato chip, that has, I’m making
this up, 500 milligrams of sodium, well, it’s better than the other one that has a 1,000 milligrams of sodium, so
it is quote, better for you. It may not be good but it’s better.
A lot of those brands came and went or came and plateaued at relatively low levels because people like that it’s
better but at the end of the day it’s not really healthy and if I’m going to indulge and I’m going to let myself
have a cookie or have chips, I might has well just have the good ones because it’s still not really a healthy
choice. It’s an evolving landscape and I think that as these brands or new brands continue to create food that is
closer to the real thing, it will continue to be a bigger threat. At the same time I would argue, again, some of
these foods can be replicated with relative closeness. Cookies are a good example of, healthy cookies are
getting pretty close but I would argue that… or maybe I should say a chocolate chip cookie? An Oreo is going to
be very, very hard to replicate in a healthy way, that tastes similar to the original. A Pringle? I’ve seen ones that
are close. I’m not sure if it’s close enough. Cheez-Its? There are some other cheese cracker types, like a Whisps,
it’s almost like a Cheez-It but it’s just pure cheese and it’s good and it’s healthy but it doesn’t taste quite as
delicious as a Cheez-It.
You’re in this evolutionary period and the consumer is going to have to decide and again, there is a cohort that
will completely convert and will eat, quote, healthier. Not just better for you but genuinely healthier and all of
that but there are a lot of people that are not going to pay the premium that’s required for a lot of these foods
because when you talk about truly healthy, natural foods, again an RXBar is dates and nuts and real
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blueberries or other pieces of fruit, those are expensive. Especially if you want organic, if you want free from
pesticides and other things like that, it all costs more to make, so while there has been a lot of price
competitiveness in certain ways, a lot of these companies did not make money, and so that’s why some of them
went away. To sustain yourself, as a natural, healthy alternative, you’re going to have to be price premium and
the market is going to have to accept that pricing, otherwise the equation doesn’t work. You can get away with
it and some of what you see, a good example is if you look at just some of the stuff that makes it into Costco.
People use Costco as a barometer for some of these health and wellness-type foods, and don’t get me wrong, if
you’re two people in a kitchen and you get into Costco, it’s a great day but a lot of times, you’re not making
money off of Costco because it’s such a competitively priced area. The pricing that you’re offering in Costco (a)
to get in there and (b) because people are generally buying larger quantities, is not necessarily, and in many
cases, not sustainable as a long term business or brand. You may see something in Costco for a quarter or even
a year but the real test is what happens when you go into quote, regular retailers, whether we’re talking
grocery or even other mass retailers. Can you sell your product at a profitable level and then can you grow your
business? That’s the challenge that every single one of those brands has. Candidly, they’re going to have it
whether they’re in independent or in a company like Kellogg. Just because RXBar goes into Kellogg, doesn’t
mean, “Now we can make a ton of money that we couldn’t make before.” Yes, a little bit of operating leverage
and help here and there but at its core those brands need to be sustainably profitable to survive and so that is
still TBD, candidly.
[00:28:20]
Q: You mentioned health and wellness or better-for-you offerings are coming to market but are plateauing
and the consumer will probably just go back to the pure indulgence. How can Kellogg cater to the pure
indulgence customers without alienating itself from that better-for-you market? Should it wait for a brand in
the health and wellness category that’s thriving and acquire it or does it have to maintain a presence in the
categories?
JR: Yes, so the answer to that is no. I think that especially for a company like Kellogg, you don’t want to be
dabbling in 50 different places and not really being competitive, so I would argue the GE model for any large
food company, we want to be number one or number two in the category, we want to have a path to number
one or number two or we want to get out, those are the choices. The first thing to remember is Kellogg’s, even
in cereal, I know the name’s on there but Kellogg’s, in and of itself, in the US, is not a brand that spans all of
these categories. Now, when you go into Europe and other places, Kellogg’s plays a much larger role in some of
these and more specifically, in cereal but in general, people don’t say, “I want some Kellogg’s Cheez-Its or
Kellogg’s Pringles.” Every brand is really fighting on their own and they’re fighting within their own category
and then across snacking or, I’ll say, the appropriate occasions, whatever they might be.
You have to look at each one of those independently. Now, yes or maybe I’ll say it this way, what you’ll often
hear inside of food companies and even inside the industry is, “Of course, as Kellogg’s you have more leverage
with the retailer, you can get more shelf space.” All of that is true but that whole dynamic is very different
today than it was in the past. Before the internet, there were 10 big food companies and they controlled the
entire grocery store because nobody else could get in but now, consumers are finding these brands before they
get to retail and then they’re demanding them to be in retail and that has shifted the competitive landscape
because retailers want to serve customers, not their suppliers. Yes, you’ll always have more leverage as a larger
company with more products but there’s a reality that more shelf space is only good to a point. It’s not going to
make you sell more product on a repeatable, sustainable basis. There’s a sweet spot, there’s obviously a level
where you don’t have enough of it but these other brands are competing and again, there might be 50 little
brands that aren’t going to exist in five years but it doesn’t matter because there will be another 50 brands that
will continuously disrupt the larger players.
A lot of times we’ll call them ankle-biters because they’re just nipping away and again, as a large public
company that is responsible for delivering sales growth, delivering EPS growth, answering to institutional
shareholders, a 2% bite out of your sales is something that you have to deal with. If it’s more than 2%, because
you’re really being disrupted by somebody, and I would argue that RXBar was a good example of a disrupter,
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more broadly, in the category. If you zoom out, you had things like Nature Valley and Nutri-Grain and those
types of classic bars and then collectively, Clif, Kind, RXBar, Quest, all of a sudden there are four new bar
brands that just show up in relatively short order that completely took over that category. You were dealing
with significant double-digit declines for many years, if you were a traditional player in that space. The
challenge is, you have to balance your portfolio because your core is your core. You can’t ignore it, it is what it
is and you want to grow it but at the same time, you really need to be aware of these new trends and so that
takes you to, let me look at the categories and see where the growing categories are.
I would argue, a great, recent examples is popcorn which is both in salty snacks and then within popcorn,
specifically, for a long time, popcorn was the fastest growing category within salty snacks and was growing
faster, exponentially. Most of that was SkinnyPop and also Smartfood and that was a space where you had a
category that was clearly here to stay, was clearly disruptive to the salty category in general and then you had
to say, “Where do I want to place my bets?” Smartfood is owned by Pepsi, so that’s out. You had SkinnyPop
which was Amplify which was a public company at the time. You had a company called Popcorn, Indiana and
then there were a whole litany of regional players and the way that it shook out is SkinnyPop was the
sustainable winner and pretty much everybody else fell down. Some of them fell harder but it really has
resulted in a two-horse race. If you’re Kellogg, I would argue that the play would have been to buy Amplify,
when it was available, because, like I said, you’re not going to buy Pepsi and nobody else really has the power
to compete and those are going to be the two winners. You don’t want to be the 5% player in a category with
two that are at 40%. You would have to present a really compelling reason as to why you think you could take a
band that is 5% or 1% of the market and overtake the two dominant players, which I believe it’s possible, I just
don’t think it’s realistic.
If you’re Kellogg, you always want to be attuned to which categories are consumers shifting to and you can do
research and you can hypothesise, like, “I think that kale chips are going to be the next big thing,” but you also
want to base it on where the consumer is. The advantage of being Kellogg or another large company is, you can
afford to buy them late. I, philosophically, would buy them earlier and we can get into that discussion later, if
there’s time. I would argue that you could try to jump in sooner and then have the winners but there is a really
true reality that, as a large public company, you can wait and I’ll say either over pay or just pay a large number
for the proven winner. Some of that might come down to judgement, whether you think someone is emerging
as a winner, which I would argue, RXBar was. At the time of that transaction, it was clear that they were going
to win or you can say, “I’m going to give this 18 more months and it might cost me,” pick a number, “USD
200m, USD 500m more, whatever it is, but you know what? I know that I’m buying the best one in the
category and I’m buying the long-term winner.” You have to philosophically decide which of those paths you’re
going down. You don’t necessarily want to split that but I would certainly argue, it is easier for a company like
Kellogg to buy than it is to build and I know we’ll move to Incogmeato in a minute.
I think one of the trends that we’re definitely seeing in newer brands is just that they’re very authentic. They
are created from an authentic place, they’re serving an authentic purpose and they really know how to reach
and resonate with the consumer. I think that that’s something that, in general, big food has a problem doing.
Some of that could just be cultural, some of it could be the age of the people running the business. Do
executives in big food companies even know what Instagram or TikTok is? You joke about that and the
marketing departments are obviously, very well-versed but it’s not the same as people who brew it from their
basement up. You can tell, even from brands that were incubated by a VC firm vs the ones that truly got there
organically, just how they resonate and reach their consumers. That is really hard to replicate inside of a large
company and so for that reason, I am almost always biased that mine is the right answer and you can do that.
Go ahead.
[00:38:38]
Q: It seems Kellogg is not really implementing the growth strategy of buying popular businesses and scaling
them. Why do you think Kellogg is experiencing very strong numbers for traditional CPG overseas in some
categories? What lessons could the company take from its performance in these markets to jump-start growth
in North America, which is growing at 1-2% YoY or declining?
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JR: I think there are a couple of dynamics at play and I think the summary is that they’re not really
comparable. I do think, just generally speaking, there are things that they do in Europe, in Asia, in Latin
America, that the US would be well-served to take a page from, but they’re relatively small types of things.
They’re not going to take you from 1% growth to 10% growth but just in general, I think that other parts of the
world have things to offer the US. I think, in general, the US with just a general, I’ll call it the American
arrogance of, “We know what we’re doing best and we’re the biggest and therefore we’re just not even going to
ask anybody what else they’re doing.” That’s a broad comment but first of all, most brands are suffering from
the law of large numbers. Again, if you look at Pringles, for the first five years after the acquisition, the
numbers were huge because you had an unloved brand and now we’re tapping into the potential but at some
point, with all brands, you reach a plateau and it’s very hard to get to the next level. If you can grow low single-
digits, if you can grow in line with the population, in line with inflation, you’re winning the game. A lot of
times, you’ll find yourself in a declining category or a declining sub-category and again, if you are breaking
even, you’re actually ahead, you’re gaining share and you’re doing better than everybody else.
Some of it, especially in the US are those very specific dynamics. RXBar is an example that is bucking the
trend. Eggo is bucking that trend. MorningStar for a while was because those were categories that were
growing disproportionately to the population, to inflation and therefore they had the opportunity to grow at a
little bit faster pace. What you’re seeing overseas is effectively that same thing but what’s happening is, in
emerging markets you have populations that are growing double digits, and more specifically than population,
you have income growth. If you look at India, China, Africa, a lot of big emerging markets or international
markets, what you have to look at is, what is income growth? Especially as it relates to people coming out of
poverty, people moving into the middle class? Basically, you have new consumers entering your space, so it’s
not that there are 100 consumers and last year 50 of them bought serial and now 60 of them did. It’s that you
had a 100 consumers and next year you have 200 consumers, so when you see international markets, 20%,
50%, 100% growth for 5-10 years is totally reasonable.
I could make an argument that when you look at Kellogg growing in the teens or 20s, that they’re missing
opportunity. I’m making that statement very casually because, obviously, we have to look at the categories and
their specifics but the opportunities are so great in some of these countries because there is so much income
growth, so much population growth, etc, etc. That’s what is driving the international growth. The other thing
that is at play, what you’re seeing in those number is, Kellogg invested, if you look back a few years, first into
an African company, Tolaram and then we did a subsequent transaction, and Multipro, which is a distributor,
a subsequent transaction where we gained majority control so we could consolidate it. I’m trying to think how
many years it has been. It’s out there, it’s very easy to find but post that transaction, Kellogg is now able to
consolidate all of that revenue growth, into its own numbers.
Then, later on, down in the income statement, you have a line that says, income for other holders, or whatever
it’s called and that’s where the earning disappear, so that didn’t change from before but optically those
numbers of sales growth and how we’re doing overseas have changed. Part of the whole rationale for that
distribution partnership is that you can then insert Kellogg products into that distribution chain and again, I
haven’t seen the numbers but presumably, what you’re seeing is some of Kellogg’s own brands, not just the
products that were already sold by that distributor, and Kellogg brands getting some traction. Again, even a
little bit of traction overseas is going to give you tremendous uptick in those numbers which also, by the way,
are off of a much smaller base. If you’re growing off of a USD 500m base, 20% sounds good, it’s USD 100m. If
you’re growing off of a USD 1bn base, those are also some of the dynamics because the Asia-Pacific or Asia-
Pacific-Africa is significantly smaller than the rest of the organisation.
[00:45:39]
Q: How would you assess the performance of Kellogg’s Incogmeato brand and plant-based meats in general?
Could you outline the success or challenges around this product, touching on the delays in roll-out?
JR: It’s very interesting because Kellogg was really the pioneer in this space with MorningStar and for a long
time they were they leader and they’ve had faux Chik’n Nuggets and other things like that for years.
MorningStar, traditionally, was growing pretty nicely and you saw Beyond Meat and Impossible and some of
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the other ones coming. They basically showed up and just completely, I don’t want to say ran circles because
MorningStar is still a really solid brand but they’re the ones that really woke everybody up to this trend and
obviously, they’ve done tremendous jobs getting partnerships, getting themselves into restaurant distribution,
into deals with national chains. There’s no reason that MorningStar Farms could not have done all of this 10
years ago. It’s still a good brand and I think that people that look in that space still respect it and they have a
lot of innovative ideas but it is a very competitive space. Now you have the marquee names have completely
overtaken them, in terms of recognition, popularity etc.
There are other brands, there are quite a few of them, that are competing in the frozen space specifically, so
not just plant-based meat but in either frozen plant-based or frozen, microwavable meals, things like that. I
would call them ankle-biters but they’re almost not because there are enough of them that are at enough size
that they’re genuinely competing. They’re not disrupting, they’re competing, and so it will be interesting to see
how that plays out because some consolidation would probably up the stakes a little bit and really give
MorningStar a run for its money. It’s still, relatively speaking, at least the last time I saw anything, a very
highly regarded brand, very strong brand equity, resonates with the consumer. Again, MorningStar has lived
on its own. Kellogg doesn’t put its name on it, it’s not trying to be lumped in, they live and breath on their own.
Incogmeato was the response to Beyond Meat and Impossible and to me, I think it’s been received more than I
thought it would have but I think that it goes back to the discussion of, it was created by a big food company,
it’s viewed and treated through the lens of a big food company. I just think that they’re never going to compete
in the way that those other two will. I just think their cultures are different, their mindset is different and to be
fair, their expectations are different. Beyond Meat can lose money for a long time or squeak out a profit for a
long time and investors will probably hang on for a long time. Incogmeato, if it’s not making money inside
Kellogg, they’re going to kill it and if it’s not growing enough, they’re going to kill it. The tolerance is just
different, that puts a different pressure on. You can’t do things the same way, you can’t take the same risks.
Like I said, it’s done better than I would have thought but I think that it’s still a really difficult uphill climb.
Again, you’re now looking at a space where, especially in that specific part of the market and that consumer,
everybody knows Beyond Meat and Impossible and that’s what they’re going towards. They don’t need a third
option and they certainly don’t need it to come from Kellogg. You’re fighting all of these headwinds but the flip
side is, first of all, you had to at least try, if you’re Kellogg. you couldn’t watch this for this long and not take a
shot. If you can do it in a way that gets any traction, that doesn’t cost you money, maybe it’s okay but like
everything in a large food company, smaller brands are going to have a hard time sustaining, over the long
term because again, there are limited resources. People only have so much time and if a brand is small and not
growing, you’re better off cutting it loose and focusing on your winners.
[00:51:19]
Q: What are your expectations for Kellogg’s cereal and snacking strategy and opportunities for pricing? What
do you think the company can do on pricing as the market starts to normalise?
JR: This is really interesting because we’ve had no inflation for 10 years and so that’s obviously changing in
real time but over these 10 years, as all the other disruption has happened, as the internet and iPhones and the
shelf space changes, all of that has happened at the same time that there has been zero pricing pressure on big
food companies. As a large food company, you can almost always find a little bit of savings every year. You can
push your suppliers a little bit, get a little more efficient, you can trim the fat here and there and for a long
time, that has given them the opportunity to remain competitive on price and there has been a ton of pricing
pressure in recent years. Again, when we talk about both cereal and a lot of snacking, it’s not specialised
enough, premiumised enough that you can have differentiated pricing, so the pricing has been very, very
competitive and I would argue that that’s going to continue to be a dynamic.
I’ll talk about inflation for a minute, then I’ll go back to the categories. I’m very curious to see what’s going to
happen because now, and I recognise there’s still an ongoing or open question as to whether inflation, or at
least the current levels of inflation, are really transitory or not but these price increases are real. USD 15
minimum wage is going to happen. Even if it doesn’t happen, nobody seems to want to work for less than USD
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15, so you have a lot of money hitting the system, you have workers that are demanding more pay, more
benefits, there’s supply chain disruption. There’s going to be an increase in input prices and again, as a public
company, you have to deliver EPS growth, you have to hit targets, that’s what makes the whole system work.
[00:54:15]
NH: Thank you for joining Third Bridge Forum’s Interview today. If any clients would like to arrange a private
meeting or consultation, please contact your relationship managers. Have a good one.
Transcription ends at 00:54:43 of the recorded material
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