Innovation aids Kellogg recovery

August 13, 2011
| By Pete Daly |
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Innovation is a key ingredient in Kellogg’s recipe for recovery from the rough year that was 2010, as demonstrated by the just-ended second quarter — and there’s more where that came from.

At the end of July, Kellogg Co. management announced second quarter net sales growth of 11 percent over the same quarter last year, for a total of $3.4 billion worldwide. Earnings for the second quarter were $343 million, or 94 cents per diluted share, an increase of 19 percent from second quarter 2010 earnings of 79 cents.

During the second quarter 2011, Kellogg North America net sales were $2.2 billion, an 8 percent increase. The company’s total share of the cereal market in North America is now 35.5 percent, an increase of about 1.7 percentage points.

A challenging economy in Europe, particularly the U.K., continues to make that theater difficult for Kellogg, which saw its European internal operating profit decline by 9 percent.

“As we said on our last (conference) call, we expect Europe’s results to remain under pressure this year,” said Ron Dissinger, CFO.

However, Kellogg’s worldwide internal net sales, excluding the effects of foreign currency exchange rates, rose 6 percent over the same period last year. Second quarter 2011 operating profit of $543 million increased 12 percent on a reported basis and 8 percent on an internal basis.

“We’re driving about two-thirds of the innovation sales in U.S. cereal so far this year,” said John Bryant, Kellogg’s president and chief executive officer.

“We continue to build momentum as demonstrated by our solid first-half top-line results. During the second quarter, we benefited from improved net price realization and were pleased with the performance of our strong innovation,” said Bryant.

He added the company expects continued sales growth through the second half of 2011 “driven by price and mix and are confident in our innovation lineup and commercial plans.”

Kellogg’s strategic plan for this year had included a goal of $800 million in sales of new products, and Bryant confirmed during a conference call with industry analysts that goal is still very much in place.

“I think we might be tracking slightly ahead of that now,” he said.

Bryant cited the recent launch of Crunchy Nut cereal, which already has a 0.6 percent market share in a cereal market crowded with competing brands and product variations. He added that the new Mini-Wheats Touch of Fruit already has a 0.4 percent share. New cereal launches also included Rice Krispies Gluten Free cereal and FiberPlus Caramel Pecan Crunch. In its snack line, Kellogg has introduced Cheez-It Colby, Special K Crackers Chips and Kashi TLC Pita Crisps, among others.

“We are expecting the performance to get better,” said Bryant. “As we said, we have innovation coming out the back half of the year.”

2010 was “a very difficult” year for Kellogg, according to Bryant. A fire at a key plant led to a shortage of Kellogg’s popular Eggo waffles, and later there was a recall of millions of boxes of cereal due to an unusual odor related to the plastic internal packaging.

Almost two years ago, the Kellogg Co. opened its greatly expanded W.K. Kellogg Institute for Food & Nutrition Research facility on Hamblin Avenue in Battle Creek. Kellogg poured $54 million into the facility, resulting in a 157,000-square-foot pilot project plant and office space expansion. The institute originally opened in 1997 and now entails about 400,000 square feet, which includes chemistry laboratories, test kitchens and development labs. The new plant provides small-scale production experiments of potential new foods.

According to Margaret Bath, senior vice president of research, quality and technology, the institute “is the epicenter for Kellogg’s global product development, research and innovation and is an important driver of our company’s ongoing success.”

She said that since the opening of the institute in 1997, Kellogg has achieved many accomplishments and milestones.

“For example, we built Special K into a global brand, reduced sugar and sodium and increased fiber in many of our products. A wide variety of innovations and renovations have been created there, including ready-to-eat cereals, cookies, crackers, cereal bars, shakes and frozen foods,” she said.

Recent innovations that came out of the institute include products such as Keebler Fudge Granola bars and Cheez-It Colby crackers, among others.

More than 500 Kellogg scientists, engineers and technicians from more than 20 countries are involved in Kellogg product research and development. Their expertise includes cereal processing, bakery technology, sensory and consumer understanding, flavor chemistry, snack processing, packaging, food design, product development and food engineering, among others.

The 2010 annual report indicated that Kellogg spent $187 million on research, an investment that has delivered more than $800 million in new products, according to Bath.

The cereal colossus was born in 1906 when production of Kellogg’s Corn Flakes began at W.K. Kellogg’s new Battle Creek Toasted Corn Flakes Co. The ready-to-eat cereal innovation changed the way people eat breakfast, and Kellogg became a worldwide company in 1914. It continued to expand its operations and innovation throughout the years by acquiring the vegetarian-based Worthington Foods in 1999, and then the organic-based Kashi Co. in 2000. Kellogg also acquired Keebler Foods in 2001 — a large company whose roots were in a Philadelphia bakery in the 1850s — and brought the Cheez-It brand into the Kellogg fold.

Battle Creek, still known as Cereal City, also is home to Post breakfast cereals and Ralston Foods. Ralston (formerly Ralston-Purina) claims it is one of the largest manufacturers of store brand breakfast cereals. Ralston began making cereal more than 100 years ago and currently supplies more than 50 cold and hot cereal varieties that are sold under a wide variety of corporate and store labels.

Kellogg is easily the largest food-processing corporation in West Michigan, according to Birgit Klohs, president of The Right Place economic development agency in Grand Rapids.

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