Kellogg: MIA in Breakfast War
Jane is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
By the time the market closed Monday, Kellogg’s (NYSE: K) stock price was down 6.09% to 50.70. That's near its 52-week low of 48.10. Only part of that, I am convinced, was due to its adjusted 2012 full-year guidance of internal operating profit to decrease 2% to 4%. That could lower EPS to between $3.18 to $3.30.
The rest might reflect disappointment that Kellogg didn’t really exit its Midwestern good-for-you staid box after its acquisition of Pringles from Procter & Gamble. Atypical for Kellogg, that purchase put it in the same snack category as PepsiCo with its iconic FritoLay, whose slogan is “Good Fun."
We started to anticipate more. And more didn’t happen, although there was plenty of opportunity. Here is just one example. I cite it because it could be emblematic of an organizational culture which isn’t aggressive or fast enough in pouncing on developing trends. On the one hand, Kellogg complains about reduced domestic sales in the U.S. Yet, it hasn’t entered the fastest growing part of that market in a provocative way: Breakfast on the go. And there's a war going on among many of the fast food players for more of that A.M. food and coffee dollar. Just being a combatant in that war, as PepsiCo and Coca-Cola found out from the cola battle, gets a company plenty of attention. Kellogg could have updated its stodgy image among constituencies such as media, investors, regulators, consumers, and communities.
Breakfast away from home should have been a no-brainer for Kellogg because on the go eating is how its consumers in its markets in China and India take in much of their food. So, why is it that much of its portfolio of A.M. products is primarily stuck in the era when families ate breakfast together at home and the kids dutifully read the copy on the boxes of Frosted Flakes? Its PopTarts, which can be eaten on the run, is a mature product. More to the point, PopTarts isn’t measuring up to what’s out there. Not the standard fare like McDonald’s Egg McMuffin. And not the new Taco Bell, owned by Yum! Brands, egg & sausage breakfast burrito. Obviously, younger companies like Yum! are taking risks such as testing out if burritos in the A.M. can go mainstream. Other companies like Wendy's and Subway, seeing the A.M. potential for them, recently have introduced breakfast menus.
That breakfast away from home segment is already massive. According to Technonic’s ”The Breakfast Consumer Trend Report,” currently 46% of Americans go to a fast food outlet for breakfast, up from 33% in 2009. That’s almost half the breakfast market. No surprise incoming McDonald’s chief executive officer Don Thompson announced from the get-go that he is focusing on breakfast.
For the A.M., Kellogg has so many options. It could simply dig in its heels and maintain the status quo. Through heavy promoting, it would frame breakfast at home as the emotional centering for the day. Better if the family does that together, supporting each other for the challenges ahead. This mirrors how Walt Disney (NYSE: DIS) packaged family vacations in its theme parks. Why else would dad and even mom opt for standing on lines for several days, often under the blazing sun, for wholesome entertainment? And/or it can develop and promote post-PopTarts A.M. foods for the car, waiting for the school bus, or ambling wherever. To increase sales channels for those, it could also partner with fast food establishments, newsstands, and vending machine companies to get space for a pre-packaged something. Since A.M. food and coffee are always bought in the same place, the coffee part would also have to be negotiated.
The beauty of capturing more of the A.M. dollar is that it’s a gateway meal. The companies which provide it can create that emotional bonding and habit which bring consumers back for other purchases. That’s exactly part of the reason why Thompson has made breakfast a priority. In much of fast food traffic tends to fall off after 2:00 P.M. It’s also what led Starbucks (NASDAQ: SBUX) to test out wine, beer and appetizers for the evening in select locations. Kellogg could create the same kind of platform for more consumption of its snacks, be they Pringles, Cheez-It, or other major and unexpected acquisitions.
What Kellogg learns from repositioning itself in the A.M. for the big war, it can apply to other parts of its product portfolio, both domestically and abroad.
janegenova has no positions in the stocks mentioned above. The Motley Fool owns shares of Walt Disney, and Starbucks. Motley Fool newsletter services recommend Starbucks, and Walt Disney. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.