Special K's fading popularity hurts Kellogg cereal sales

Breakfast-maker wants consumers to feel good about themselves rather than hold back calories

Special K can't seem to shake its outdated image among weight watchers.

Kellogg said Thursday its U.S. cereal unit suffered another sales decline in the fourth quarter, hurt by the performance of its top moneymaker, which over the years has branched out into an array of products including bars, crackers and chips.

During a conference call, Kellogg CEO John Bryant noted weight watchers are no longer as focused on "holding back calories'' and instead want foods that make them feel good about themselves. That has hurt Special K, which is known for its "Special K Challenge'' that debuted more than a decade ago and promised people would be able to shed pounds by replacing breakfast and lunch with bowls of the cereal.

Bryant said Kellogg's problem is that it was "basically asking people to deprive themselves'' with the challenge. Moving forward, he said the company will change the way it markets Special K, and noted a new gluten-free variety of the cereal intended to be more in line with prevailing trends. It's just the latest attempt by Kellogg to transform Special K's image; in 2013, the company introduced a Special K instant hot cereal made with quinoa and other grains.

For the quarter, Kellogg said sales of U.S. breakfast foods declined 7.7 per cent. The maker of Frosted Flakes, Raisin Bran and Kashi has been struggling to grow its broader cereal business amid the proliferation of breakfast options, including Greek yogurt or breakfast sandwiches at fast-food chains. But Bryant said Special K and Kashi were mostly to blame for the unit's decline.

Sales of U.S. snacks also fell 3.1 per cent in the quarter, dragged down by Special K bars, chips and crackers and Fiber One offerings. The company's "Right Bites'' – 100-calorie versions of Keebler cookies and other snacks – were also hurt by the shift away from calorie-counting, Bryant said in a phone interview, with sales plummeting 60 per cent.

"The consumer is basically saying, 'We're not interested in that sort of offering','' he said.

Kellogg's gets about two-thirds of its revenue from North America, but struggled in Europe and Asia as well; comparable sales in each of the regions declined 1.2 per cent during the period. In Latin America, comparable sales rose 7.2 per cent.

To improve results, Kellogg Co. has been slashing costs under a program called Project K. But Bryant noted that the company can't "save its way to prosperity'' and that it needs to push up revenue. Looking ahead, Kellogg now expects core revenue to rise between 1 to 3 per cent over the long-term, down from the previous forecast of 3 to 4 per cent.

Kellogg was also hit with mark-to-market adjustments related to its pension plans of $822 million during the quarter. As a result, it posted a loss of $293 million, or 82 cents per share, for the period ending Jan. 3. Excluding one-time items, it earned 86 cents per share, which was short of the 92 cents per share analysts expected, according to Zacks Investment Research.

Revenue was $3.51 billion, also falling short of the $3.65 billion Wall Street expected.

For the year, Kellogg earned $632 million, or $1.75 per share. Revenue was $14.58 billion.

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