Kellogg Co. (K), the maker of Corn Flakes and Rice Krispies, will cut 7 percent of its global workforce, or about 2,000 jobs, as part of a four-year cost-saving plan amid a persistent slowdown in breakfast items and snacks.
The program, known as “Project K,” will result in pretax charges of $1.2 billion to $1.4 billion, the Battle Creek, Michigan-based company said today in a statement. Kellogg had about 31,000 employees as of Dec. 29, according to regulatory filings.
Kellogg and competitors such as JM Smucker Co., Kraft Foods Inc. (KRFT) and ConAgra Foods Inc. (CAG) have struggled to get U.S. families to stock up their shopping carts as unemployment and declining incomes make them spend less. With store promotions failing to spur sales growth, Kellogg has resorted to cost-cutting to boost profitability.
“It’s not worth discounting if you’re not driving volume,” Brian Yarbrough, an analyst for Edward Jones & Co. in St. Louis, said today in an interview. “So you’ve got to retrench, you’ve got to look for cost savings, you’ve got to look for ways to be more productive, whether its through the supply chain or manufacturing.”
Yarbrough, who recommends buying Kellogg, said barely improving employment and uncertainty over the U.S. economy have conspired to restrain shoppers. The challenge for manufacturers is figuring out how to get them shopping again, he said.
The issue is hitting Kellogg particularly hard at the breakfast table. Sales growth for morning foods have slowed amid increased competition from growing options such as Greek yogurt and oatmeal bars. Net sales were little changed in the third quarter, hurt also by snacks, Kellogg also reported today.
More than 90 percent of U.S. households buy cereal, yet the category’s unit volume has declined for three years, both Kellogg and General Mills Inc. say.
Cereal sales have slid particularly among baby boomers and higher income consumers as they try to eat healthier and reach for a broadening array of breakfast choices, Kellogg Chief Executive Officer John Bryant said. He plans to add more healthful ingredients such as Omega-3 fatty acids to compete with everything from eggs to yogurt, rather than focusing as much on creating new flavors.
“There’s an opportunity to be more pioneering in some of the innovations,” Bryant said. “If we innovate more around nutrition, there’s an opportunity to bring people back into the category.”
General Mills has emphasized its Yoplait yogurt brands and Cascadian Farm organic frozen fruits and snack bars in recent years to pursue the demand for healthier breakfasts.
Kellogg rose 0.7 percent to $62.72 at the close in New York. They have gained 12 percent this year, compared with a 24 percent increase for the Standard & Poor’s 500 Index.
The cost-cutting plan involves increasing growth in emerging markets, consolidating facilities and a global emphasis on regional brands, according to the statement.
The program’s non-cash costs are expected to be $275 million to $325 million. Cash savings are projected to be $425 million to $475 million in 2018, Kellogg said.
North American net sales fell 1.3 percent to $2.4 billion in the quarter, while the U.S. snacks business declined by 2.5 percent. Latin America net sales rose 3.4 percent while European sales advanced 6.4 percent.
Kellogg also said full-year adjusted earnings per share will be at the lower end of its $3.75 to $3.84 forecast. Sales growth for the year will be 4 percent to 5 percent, after previously projecting 5 percent.
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