Kellogg (NYSE:K) is getting out of the cookie business, selling it to privately held Ferrero for $1.3 billion. Ferrero, an Italian company, is best known as the maker of Nutella and reportedly beat out Hostess for the brands.
Kellogg has been trying to sell its cookie brands, which include Keebler’s and Famous Amos, since November. It says that the cookies had sales of $900 million last year and earned just $75 million in profit. Shares fell 2.4% on the news but recovered 50 basis points overnight to open April 2 at about $56.30.
The agreement is another defeat for the “center of the grocery store,” where shelf-stable, branded food products are being squeezed out by fresh or pre-made options at the sides of the store.
There are six huge bakeries involved in the sale, but what few reporters are noting is that the deal includes a Louisville, Kentucky factory that makes Girl Scout cookies.
The Girl Scout Lesson
While mainline cookies like Keebler are losing their share, the Girl Scouts have built a cookie empire, with estimated revenue of $800 million. To put it in perspective, that’s more than Mondelez’ (NASDAQ:MDLZ) brings in from Oreo’s.
The Girl Scouts have become “Big Cookie” by tying good works to the brand. They’re not the only group giving new life to old categories through charity. Newman’s Own, launched by the late actor Paul Newman in the 1980s, has donated over $500 million to charity over the years, selling everything from dog food to spaghetti sauce to (yes) cookies.
I participated in the Girl Scout phenomenon when our daughter was younger, and people who would hesitate to spend $2 in a store thought nothing of forking over $4 cash for cookies they wouldn’t eat for a month. When a neighbor came by recently, I learned the Scouts now do sales in front of stores, take credit cards and even have an app, but the heart of the pitch is still cute kids looking to fund camps.
The Cookie Crumbles
For Kellogg’s, the sale represents a giant failure. The company paid $3.86 billion for the brands back in 2001. Getting out of cookies will bring Kellogg’s business below the level it was at in 2017, when the company earned $1.25 billion, $3.65 per share, on revenue of $12.9 billion. The 2018 results were net income of $1.34 billion, $3.85 per share, and revenue of $13.55 billion.
The $1.3 billion, due in July, will reduce Kellogg’s debt level, which was $8.2 billion at the end of 2018, against assets of $17.78 billion.
What’s left is almost entirely a cereal company, sold in the center of the store, except for Eggo frozen waffles. Of 21 analysts following the stock, only four call it a buy, while the majority call it a hold.
While Kellogg’s was founded around corn flakes as a health food, in the early 20th century, it has found itself on the defensive in recent years over how much salt and sugar is in its products. It recently gave in on a U.K. scheme to redesign packaging based on salt and sugar content but is resisting this in other markets.
The Bottom Line
Kellogg is a very tired company in a very tired category. Like Campbell Soup (NYSE:CPB) and Kraft-Heinz (NYSE:KHC), it’s stuck in the shrinking center of the grocery aisle, where competition from store brands is heavy and overall sales are falling.
A recession might bring some sales back, or the company could be sold. Both these outcomes are unlikely, as is the chance I’ll be buying any Kellogg’s stock.
You think the Girl Scouts might want to sell cereal? Naaah.
Dana Blankenhorn is a financial and technology journalist. He is the author of a new mystery thriller, The Reluctant Detective Finds Her Family, available now at the Amazon Kindle store. Write him at firstname.lastname@example.org or follow him on Twitter at @danablankenhorn. As of this writing, he owned no shares in companies mentioned in this article.
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