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“We’ve come through the last three-plus years facing all these unprecedented changes,” including supply chain constraints, labor challenges, dramatic shifts in how consumers shop and eat and a more critical retail environment that is pared down so that competition for shelf space is heightened, and are now the industry and Kellogg are entering “a new morning,” Cahillane said.
“Not to be too rosy about it, but it’s … a very, very promising outlook as we look towards how our industry and Kellogg will perform in the future. We’re very optimistic about the future,” he added.
He explained his optimism is based in part on the company’s strong performance in the first quarter, in which it saw organic net sales climb 13.7% led by sustained momentum in snacks and noodles, a rebound in North American cereal and a positive price/mix – all of which was possible because the company embraced new ways of innovating, manufacturing, marketing and partnering with other stakeholders to streamline and improve delivery.
“We’re investing in innovation and we’re investing in capacity, and so we are obviously coming out of the pandemic and the supply disruptions, the bottlenecks and shortages as so many other companies are, and we’re investing for growth,” he said.
He added the results of these efforts are reflected in the company’s upgraded guidance, which now anticipates net sales for the year will come in between 6% and 7% – up from previous expectations fo 5% to 7%, and a higher expected operating profit of 8% to 10% from a previous 7% to 9%.
In terms of innovation, Cahillane said the bar has been raised since the pandemic began and Kellogg is not only meeting it, but clearing it with new products that excite consumers and retailers.
“The bar for innovation, I’ve said this in the past, has clearly gone up as SKU counts went down during the pandemic. … There is no question that innovations have to be better. They have to be performing right out of the gate. Shelf space is more valuable than it’s ever been today in my years of in the business,” he explained
Successful examples of innovations from Kellogg in North America include the launch of chocolate chip cookie dough Rice Krispies Treats, collaborations with nostalgic and indulgent brands to create Cinnabon Bakery-Inspired and ICEE cereals, and a marketing partnership with the beloved videogame Minecraft for Cheez-It and Pringles.
These launches are supported by improved merchandising that, while not up to pre-pandemic levels yet, is helping to get Kellogg products on the floor to interrupt consumers’ shopping patterns, which Cahillane said is “a good thing.”
Innovation is also supported by more personalized marketing, he added.
“The whole world of marketing has changed like it never has before. The true promise of one-to-one marketing that we’ve been talking about for so many years is upon us with data and analytics, more sophisticated than they’ve ever been, first-party data, more robust and more available than it’s ever been – to really target consumers in a way that marketers have dreamed up for years,” he said.
Kellogg’s ability to execute new product launches as well as deliver on long-standing favorites also is improving thanks to the company deploying new technologies, including artificial intelligence and machine learning to better predict end-to-end what retailers need and when, Cahillane said.
“We’re getting better and better at predictive really end-to-end,” and now “supply chains have come through stronger as well as the relationship with consumers, I think, are more end-to-end than they’ve ever been before,” he explained.
He added that Kellogg has also eliminated friction with it customers through better joint business plans that consider how to eliminate waste, grow the size of the prize and still serve the common consumer.
“So, as you put all these things together … it’s not 1987 anymore,” it is a new era and one that is promising and made stronger by the trials of the pandemic and the new partnerships and solutions forged during that period, he said.
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At the same time, the company is ramping up investments in media and innovation to help preserve elasticities and build unit demand by boosting consumers’ value perceptions of its products, executives said during the company’s third quarter sales and earnings call yesterday.
This strategy also would allow General Mills to hedge against additional possible price hikes, should they be necessary.
“We continue to forecast total input cost inflation of approximately 14 to 15% for the full year in fiscal 2023, including double-digit inflation in the second half. Looking beyond this fiscal year, we expect inflation to decelerate but remain above historical averages” in the mid-single-digit range for total input costs in fiscal 2024, CEO Jeff Harmening told investment analysts.
While commodity costs are coming down from their peaks, CFO Kofi Bruce attributed the ongoing inflation to continued labor pressure, energy costs and “other conversion costs that go into taking raw materials, creating value-added inputs that go into our products.”
Other harder to calculate but still potentially impactful costs contributing to inflation are added pressure from supply chain disruptions and product changes that allowed the company to continue to serve in a disrupted environment, Bruce said.
On that note, Harmening acknowledged General Mills service levels still are below its “normal range of 98 to 99%,” but it is improving and should reach 90% in the US by the end of the quarter.
To manage rising inflation, Bruce said General Mills will “approach the fiscal year with an eye towards leveraging first, the productivity we get through our HMM cost savings programs. And to the extent that there is additional margin that we need to protect, we’ll use the other levers we have up to and including SRM.”
The company also will take into account inflation as it plans merchandising and marketing, said Jon Nudi, president of North American Retail at General Mills.
He explained that while General Mills is “getting back into merchandising in some categories that we couldn’t support from a service standpoint over the last few years,” it also knows that “ everyone in the industry is dealing with increased costs and inflation as well, so we expect to make sure that we’re rational from a merchandising standpoint as we move forward.”
Given that price points were up double digits across General Mills’ categories, the company is loath to pile on extra hikes, preferring instead to leverage price architecture and mix, Nudi said.
“We are much more sophisticated today than we were even a few years ago, and I think that’s helping us to make the right moves in the market, which is helping with the elasticities as well. So, it’s something we’ll stay focused on,” he explained.
If price increases become necessary, General Mills is laying the foundation to justify them by investing in marketing and innovation – strategies that also should protect market share from private label if the economy drops into a recession.
“If we do run into a recessionary period, historically, we’ve held up pretty well. Obviously, private label does well during that period, but we’ve held our own and hold share relatively flat. It is really the third and fourth tier players in categories that seem to get hit the hardest from a share staple,” Nudi said.
General Mills’ ability to hold its own against private label “is not really an accident,” but rather can be attributed to its investment in consumer spending, Harmening said.
“We’ve been investing in marketing. And so, you see, over the last four years, our compound annual rate of growth and marketing spend is up, I think, about 4% or 5%” to keep pace with pound growth if not sales growth, Harmening said.
Explaining that “healthy investments in brands is critical for long-term growth,” Harmening said General Mill is investing behind “compelling, digitally enabled, high ROI campaigns, such as Cheerios’ heart health, 20% More Meat news on Blue Buffalo’s Wilderness line and our latest global Haagen-Dazs campaign.”
General Mills also is investing in innovation to keep consumers engaged with brands and drive sales.
“Over the past three years, we’ve kept up our innovation pressure, and our new product retail sales have been 30% higher than the category average. We are continuing that focus with our fiscal 2023 innovation,” Harmening said.
As examples, he pointed to the company’s recent launch of mini versions of its Cinnamon Toast Crunch, Reese’s Puffs and Trix.
Many of these strategies already are paying off for General Mills, which reported net sales of $5.1b – a 13% increase – in its third quarter, along with a 16% increase in organic net sales. Operating profit also was up 20% in constant currency and earnings per share were up 17%.
“With stronger and more broad-based business momentum, we have raised our guidance and now expect organic net sales to increase 10 to 11%, adjusted operating profit to grow 7 to 8% in constant currency, and adjusted diluted earnings per share to grow 8 to 9% in constant currency,” Kofi said.
He added: “These profit and EPS ranges include a three-point headwind from divestitures and an estimated one-point headwind from the ice cream recall.”
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