EUR 850.00 For Business Accounts Only

Morningstar | Even Amid the Noise, We Think Recent Brand Investments Support Kellogg's Competitive Edge

While headwinds persist, we think the merits of Kellogg's strategy to move away from direct-store distribution (which had accounted for about 25% of its U.S. business) in favor of warehouse delivery are starting to surface. Management touts the move as an opportunity to reduce complexity and lower costs, targeting to eliminate $600 million-$700 million in costs through 2019--around 6% of cost of goods sold and operating expenses excluding depreciation and amortization, which aligns with the 6%-9% peers target. In our view, this should free up funds that previously had been directed toward Kellogg's distribution network but can now be allocated to brand-building, which we view as crucial, given the intense competitive landscape.We think funneling added spending behind its brand mix should further entrench Kellogg's operations with retailers (supporting one facet of its intangible asset moat source) that depend on leading brands to drive store traffic. We see trusted manufacturers like Kellogg that supply products across multiple aisles, including cereal, snacks, and frozen items, as key partners for retailers reluctant to risk costly out-of-stocks with unproven suppliers. Kellogg maintains leading share of the U.S. ready-to-eat cereal space, and across its mix, it boasts three brands that generate sales north of $1 billion annually and seven that drive annual sales of $500 million-$1 billion.We don’t believe Kellogg intends to pull back on its brand support (which equates to about 7% of sales, or about $1 billion annually) to bolster profits. This contrasts with peers, which have opted for outsize margin gains the past few years at the expense of sales growth, as we think Kellogg sees the merits of driving profitable top- and bottom-line improvement in the long term. Now that these efforts have wrapped up, we think the firm is poised for stabilization in its sales trajectory and further margin gains, and we forecast low-single-digit sales growth each year and operating margins expanding 400 basis points to 19% by fiscal 2027 (relative to its five-year historical average).