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Analysis: Why Did Kellogg Company Reconfigure Itself By Creating Three Businesses?

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This morning's announcement by Kellogg Company (NYSE: K) to disconnect its North American cereal and plant-based foods businesses and create three new independent publicly-traded companies via a tax-free spinoff strategy caught many observers by surprise. However, industry experts welcomed the move, observing this strategy will enable the three soon-to-be-created companies to focus on their specific markets while Kellogg itself can focus on its primary corporate goals.

What Happened: The three businesses that are being separated from the parent company account were identified by Kellogg as the following:

"Global Snacking Co.," with approximately $11.4 billion in net sales, will focus exclusively on global snacking, international cereal and noodles, and North America frozen breakfast. The brands associated with this company include Pringles, Cheez-It, Pop-Tarts, Kellogg's Rice Krispies Treats, Nutri-Grain and RXBAR;

"North America Cereal Co.," with roughly $2.4 billion in net sales, will focus on the U.S., Canada and Caribbean markets. The brands associated with this company include Kellogg's, Frosted Flakes, Froot Loops, Mini-Wheats, Special K, Raisin Bran, Rice Krispies, Corn Flakes, Kashi and Bear Naked; and

"Plant Co.," with about $340 million in net sales, will concentrate on plant-based foods anchored by the MorningStar Farms brand.

The division of the company is expected to be complete by the end of 2023. Kellogg did not offer new names for the three spinoffs, nor did it preview their potential leadership teams. North America Cereal Co. and Plant Co. will remain headquartered in Battle Creek, Michigan, the site of the parent company, while Global Snacking Co. will have its corporate headquarters in Chicago while maintaining a campus in Battle Creek.

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Why It Happened: Steve Cahillane, chairman and CEO at Kellogg Company, presented the reconfiguration as the logical next step in the company’s operations.

“Kellogg has been on a successful journey of transformation to enhance performance and increase long-term shareowner value – this has included re-shaping our portfolio, and today's announcement is the next step in that transformation,” said Cahillane in a statement issued by the company.

“These businesses all have significant standalone potential, and an enhanced focus will enable them to better direct their resources toward their distinct strategic priorities. In turn, each business is expected to create more value for all stakeholders, and each is well positioned to build a new era of innovation and growth.”

Thomas Hayes, chairman and managing member of Great Hill Capital, applauded Kellogg’s strategy.

“The sum of the parts is greater than the whole,” he said. “Fast growing snacks business will get higher multiple than the cereal business. This is a key value unlock that was not available when snacks were lumped in with cereal. I expect to see more companies to follow suit in coming months.”

Joseph Welch, who runs an eponymous consultancy focused on the grocery industry, agreed.

“Cereal has always been a very competitive category with lower in store margins than cookies and candy and fruit snacks,” he explained. “This shift is a focus to separate the two.”

Welch noted that Kellogg’s history of expansion through acquisitions ultimately created a company that was asymmetrical in its strengths.

“When they grow by acquisition – as opposed to growing organically with blood, sweat and tears and hard work – they take on a company, sometimes paying too much, and then just try to cut, cut, cut at the expense of jobs and people that actually built the company in order to get a rate of return that's satisfactory to their shareholders,” he continued. “This approach demonstrates that they're really focused on the individual business units. And they'll probably have different sales teams, which I think is a good sign.”

Aaron Chio, an associate partner at Clarkston Consulting, noted that Kellogg’s strategy is not uncommon for large corporations with diverse brands and divisions.

“It's a pretty standard move that you see a lot in across many different organizations,” he said. “Kraft (NASDAQ: KHC) is a great example – they did something similar years ago, and typically what ends up happening is that you have different performing divisions inside an organization where some may be faster growing and some are slower growing, some that are more profitable, some that are less profitable, and the companies will end up spinning off these divisions so that they can get a better return to their shareholders. Otherwise, what's happening is you're getting an aggregate of everything as a return as a shareholder.”

Chio pointed out the imbalance between the respective pursuits of the three divisions, where the plant-based business is “super-fast growing, maybe at an even higher margin category, compared to the more stable, slower growing category like cereals, and to a faster moving one like snacks.”

As a result, Chio added, the company can “position them individually for what they do really well. What you want to do is let the really good brands shine and then manage your slower growing but still-successful cash cows in a very different way than you would manage a fast-growing business that requires different types of investments.”

Photo by Mike Mozart / Flickr Creative Commons

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