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Just five months after WK Kellogg became an independent company, CEO Gary Pilnick says the Frosted Flakes maker is focusing on cereal before expanding its reach into other categories through M&A.
“I see there being real opportunities and synergies with certain types of businesses that would fit very nicely with a cereal business,” Pilnick said in an interview on the sidelines of the Consumer Analyst Group of New York conference in Florida. “But right now, we need to take the advantage of being cereal only, integrate this business, invest in the business, because it's been deprioritized.”
The split left WK Kellogg, a 118-year storied company that views itself as a scrappy startup, as a standalone player in the shrinking cereal category. The space has seen demand dwindle for years as consumers cut back on sugar and carbohydrates, two attributes long associated with cereal, in favor of protein-laden foods and more portable options.
Still, for WK Kellogg, the newfound independence also has provided it with plenty of opportunity.
In the wake of the split was a standalone business that could focus solely on innovating and selling cereal. It no longer had to compete for finite resources with the faster-growing snacks business. WK Kellogg also could modernize its supply chain and streamline its operations to better reflect its needs, helping to reduce costs, increase margins and boost efficiencies.
“There's a lot of different areas that we can go to, to enhance the category and enhance our business,” Pilnick said. “We just think this is a pretty remarkable category.”
Despite the challenges cereal has faced, Pilnick said there are opportunities to reinvigorate the space and increase the times when consumers decide to pour a bowl. WK Kellogg has targeted expanding consumption in dinner and snacking, investing in its core six brands — Frosted Flakes, Special K, Froot Loops, Frosted Mini Wheats and Rice Krispies which currently make up about 75% of its sales — and expanding its premium offerings.
Perhaps the biggest opportunity, however, could come from convincing consumers that cereal is more than just a nutritionless bowl of sugar. Pilnick is quick to point out that cereal, which spans nearly 70 feet of shelf space in some stores, addresses a range of consumer needs from taste to balance to wellness.
“I see there being real opportunities and synergies with certain types of businesses that would fit very nicely with a cereal business. But right now, we need to take the advantage of being cereal only, integrate this business, invest in the business, because it's been deprioritized.”
Gary Pilnick
CEO, WK Kellogg
He said cereal is low in fat and calories and that individuals who consume it typically get more nutrients, like vitamin D and fiber, than those who avoid it. People who eat the breakfast staple also tend to have less sodium and saturated fat intake than those who don’t eat cereal. In addition, cereal also is only responsible for about 5% of the added sugar in the average daily diet.
“We need to change consumer perception,” he said. “We need the perception, and innovation is part of it. Messaging is part of it. Education is part of it. We just need the world to understand the facts.”
Pilnick received some criticism last month after he suggested some consumers might want to turn to cereal for dinner because of its affordability.
“The cereal category has always been quite affordable, and it tends to be a great destination when consumers are under pressure,” Pilnick said amid a discussion about high grocery prices on CNBC. “If you think about the cost of cereal for a family versus what they might otherwise do, that’s going to be much more affordable.”
Overcoming a slew of obstacles
Robert Moskow, an analyst at TD Cowen, said in a research note in February that WK Kellogg management described the cereal category as stable with good performance in the premium segment, rational pricing, and opportunities to capitalize on value-seeking behavior. Still, he added that despite its early success since the spinoff, WK Kellogg has a challenging road ahead.
WK Kellogg not only faces further downward volume pressure in cereal, but “heightened investment needs, and ... the risk of operating a small company against better-capitalized competitors,” Moskow said. The report also expressed skepticism about how well the company’s brands resonate with today’s consumers.
At the same time, getting more consumers to embrace cereal again comes at a difficult time for the food space overall.
Prices have increased in recent years as manufacturers look for ways to offset costs such as labor, ingredients and shipping. The price hikes have helped increase revenue for many food companies but led to a drop in volume as consumers cut back on purchases or look for cheaper options. WK Kellogg’s product volume dropped 10% in the most recent year, and it was forecast to be roughly flat in the upcoming year.
WK Kellogg could choose to engage in M&A to accelerate growth before prioritizing its iconic cereal business. But Pilnick, who did corporate development and M&A at Kellogg for 20 years, insists that his company is better off invigorating its portfolio of well-known brands and tapping into its broad expertise in a category where it has more than a century of experience.
“You could do it the other way, you could,” Pilnick added. “But at some point, you have to choose, you can't do everything within an organization and assume you're going to execute it well…. We think this is the better path.”
When cereal is on a firmer foundation, likely a few years from now, WK Kellogg could decide to move ahead with M&A. He said the company would look for businesses — most likely in the center of the store — that have synergies with cereal and could benefit from WK Kellogg’s sales force and distribution system.
Erin Lash, a director of consumer equity research at Morningstar, applauded the decision by WK Kellogg to “right the ship first” by enhancing the efficiency of their supply chain and their manufacturing footprint before deciding to bring on new business outside of cereal.
Some on Wall Street have speculated that WK Kellogg, with improving margins and a steady predictable cash flow from its cereal business, could find itself in the cross-hairs of a private equity firm.
“It seems prudent that they're focused on the near term,” Lash said. “Whether that ultimately does put them within striking distance of being an acquisition target, I don't know that that's necessarily a bad thing.”
