2nd Kellogg Plans More Aggressive Price Increase

First Published Thursday, 3rd February 2011 04:36 pm - © 2011 Dow Jones


(Adds details from conference call and from CEO interview.)

By Paul Ziobro

Of Dow Jones NEWSWIRES

NEW YORK -(Dow Jones)- Kellogg Co. (K) plans more aggressive price increases this year on cereals, snacks and other foods in response to the increase in commodity costs.

The company now expects price increases across its portfolio of between three and four percentage points this year, Chief Executive John Bryant said on Thursday's fourth-quarter earnings call. The increase will come from a combination of raising retail prices, curtailing discounts and introducing new items at higher prices.

Last quarter, Kellogg expected prices would rise two to three percentage points based on where commodity prices were hovering.

Kellogg, whose fourth-quarter earnings rose 7.4% despite lower revenue and margins, is the latest consumer-product manufacturer stung by a rapid rise in cost pressures in what is becoming the overriding theme this earnings season. Last week, Procter & Gamble Co. (PG) and Colgate-Palmolive Co. (CO) both said they were seeing escalating commodity cost increases, putting pressure on them to raise prices.

Kellogg expects costs to be up 7% for the year. A rise in grain prices is poised to put pressure on Kellogg, Kraft Foods Inc. (KFT), General Mills Inc. (GIS) and other food manufacturers, a daunting proposition for companies selling to consumers who still face high unemployment.

While costs for most foods are rising--the United Nation's monthly food price index hitting a record high in January--Kellogg thinks that cereal, which costs about 50 cents per serving with milk, will appeal to consumers as a good value.

"Everything's becoming more expensive, so it's hard to move from one category that isn't being impacted," Bryant said in an interview. "If people are really price sensitive, they should be really trading to the at-home eating occasion."

The higher prices are putting an end to some deep promotions and discounts that food companies used last year to sell products, which hurt profits. A more rational pricing environment is welcome news for the industry. Kellogg shares rose 3.1% in recent trading, to $51.91.

Kellogg has already implemented most of the price increases, and some have come with promising results. Special K cereal, which was selling for $2.99 in January, up from $2.49 a year earlier, still sold "extremely well," Bryant said, as consumers tried to stick to weight-loss resolutions in the new year.

Higher-priced cereals like Bear Naked and Kashi are also selling better, an indication of higher-income consumers doing better. "We have a two-speed economy now," Bryant said.

Kellogg is trying to recover from several years of struggles where sales were hurt by aggressive discounting and the company was also hurt by two major product recalls. Kellogg is taking some steps to improve its supply-chain oversight, including more independent testing of raw materials. Its also adding more manufacturing capacity for Eggo waffles, whose supply was disrupted by a flood in 2009.

Kellogg fourth-quarter profit came in at $189 million, or 51 cents a share, up from $176 million, or 46 cents, a year earlier. The latest period had $9 million in "other" expenses, while the prior-year period had $21 million.

Revenue decreased 1.4% to $2.86 billion. Excluding currency fluctuations, sales were flat. Volume fell 1.1%.

Analysts polled by Thomson Reuters most recently forecast earnings of 51 cents on revenue of $2.85 billion.

Gross margin fell to 41.6% from 42.9%.

Sales were flat in North America, which accounts for 68% of Kellogg's revenue, while earnings fell 10% mostly due to the timing of advertising expenses. Internationally, sales dropped 4% and profit was flat.

-By Paul Ziobro, Dow Jones Newswires; 212-416-2194; paul.ziobro@dowjones.com

--Tess Stynes contributed to this article.

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