BATTLE CREEK, MICH. — Food businesses, including Kellogg Co., have consistently outperformed the gloomy forecasts of investment analysts since the start of the pandemic, said Steven A. Cahillane, chairman, president and chief executive officer of Kellogg.
Affirming the company’s upbeat outlook for its business, Mr. Cahillane shared his thoughts about the consumer-packaged foods business June 15 in a discussion with David S. Palmer, senior managing director at Evercore ISI Institutional Equities. The discussion was part of Evercore’s Consumer and Retail Conference.
“To be honest, the investor community has been pessimistic about our sector, I think overly pessimistic,” Mr. Cahillane said. “And if you go back (to) when the pandemic happened and we, along with most of our peers saw outsized demand. The glass half empty was, ‘Well, that’s only COVID-related demand and it won’t stick.’ And then you had inflation, and we were able to price for inflation. And it was like, ‘Well, that’s outsized growth caused by inflation. That won’t last.’ And now it’s, ‘Well deflation is going to come, and they’re going to promote all that away when the historical look back hasn’t really shown that that’s the case.’ So, there’s been this pervasive half empty no matter what happens and the industry performs well against these externalities. I, for one, don’t think that is overly justified. And so, we see a good opportunity for margin expansion and for hanging on to the consumers that we’ve gained even as we come out of this very brutal inflationary cycle. And our planning stance is that elasticities will return closer to historic levels, but that’s okay.”
At the same time, Mr. Cahillane said Kellogg does not have a perfect crystal ball in terms of forecasting how consumer behavior will evolve, noting “there are a lot of variables in the mix right now, and there’s a lot of noise as you try and really come to grips with exactly where the US consumer is.”
Recalling comments he made recently calling the US consumer “stubbornly resilient,” he said changing realities more recently have clouded the picture. In particular, he noted fewer Americans currently qualify for benefits under the Supplemental Nutrition Assistance Program (SNAP).
“Obviously, that’s a real thing,” he said. “SNAP benefits have declined. So, there’s less money in the pockets of those consumers. You see that in their spending habits. You saw a slowdown a little bit in the last couple of weeks. And then really, I think, about a week or two ago, a little bit of a bounce back. And, so, I think it’s too early to really call one way or the other, exactly what the state of the US consumer is because I think it’s mixed. I think it’s overall resilient, but I think we have to be ever mindful of just the absolute money available in household budgets and understand that that is under pressure.”
On a more positive note, Mr. Cahillane said a recent decision by the Federal Open Market Committee of the Federal Reserve to pause its interest rate hikes has injected a note of optimism in discussions about the economic outlook.
“A couple of months ago, everybody was talking about when the recession was going to happen,” he said. “Now it’s a question, is there going to be a recession.”
Days after the CEO of General Mills, Inc., its largest competitor in the ready-to-eat cereal market said it was playing a “winning game” versus Kellogg, Mr. Cahillane said efforts at Kellogg to regain share lost because of a fire and work stoppage in 2021 continue to bear fruit.
“It’s hard to overstate the challenge when you have literally a 12-week work stoppage, which was preceded by a massive fire at our largest plant,” he said. “And so the business has continued to regain the share that was lost during that time. It’s created a lot of momentum in the business. We’re really only very recently back to a full capability in terms of all SKUs that we wanted back, back. We continue to regain our shelf space. Each time there’s a new set we’re making progress.”
Offering a brief update on ongoing activities toward the spinoff of Kellogg’s cereal business, Mr. Cahillane said the process has not sidetracked management from ongoing progress across the business.
“We always said the number one objective is to get this done without distracting our business and without losing momentum,” he said. “And so that’s number one. We haven’t lost our momentum. In fact, we’ve gained momentum while we’ve been doing this and it’s very much on track.”
He said the company is moving toward generating pro-forma financials for the past three years, figures that will be subject to an audit. He also discussed the “dry run,” Kellogg will conduct shortly.
“This summer, shortly in our future, we’ll be doing something called company and company, which is essentially running water through the pipes,” he said. “And it’s just like it says it is. We’re actually going to be invoicing customers, WK Kellogg Co and Kellanova separately invoicing customers and basically operating a shadow company inside the company in preparation for the day one split. So, when day one happens, we’ve actually already effectively gone from order to cash and seeing what potential issues are and solve for those issues.”
