One of the biggest concerns currently about the overall consumer staples sector is how staid and established food product companies adapt to changing consumer tastes and preferences when their tried and true brands no longer resonate with many customers. Brand loyalty is on the wane for many of these companies. Kraft Heinz’s (NASDAQ:KHC) $15.4 billion goodwill write-down for the declining value of its trademark Oscar Meyer brand, as well as others, illustrates the challenges the sector faces.
Kellogg (NYSE:K) has been a laggard among the companies within the consumer staples sector; its stock has been stuck in the doldrums. The stock has fallen more than 20% from 2017 to 2018. Though Kellogg shares are up approximately 12%, including dividends, this year, it trails the Consumer Staples Select Sector Exchange-Traded Fund (XLP) by 22%.
Fortunately, all is not lost. The stock has shown some promise in recent months. Its August earnings report was solid; the company raised its dividend.
There are a number of factors that will help propel the company’s organic sales growth and improve its somewhat lackluster and declining operating margins. The company has made a strategic shift to snacks, versus giving its old-line cereals top billing. Kellogg has restructured its food product mix, reducing its reliance on its principal traditional source of revenue from its cereal brands. In 2019, 36% of the company’s sales have come from Kellogg’s cereal products, compared with 50% in 2010.
The snack component is now 50%, up from 38%. This is a substantial revision to its product offerings and is a prudent move as a younger generation eats less cereal and consumes more snacks. The company is counting heavily on the potential organic sales growth from its snack products.
Additionally, snacks offer better growth prospects than cereal in the developed markets. In the second quarter, Kellogg’s total net sales for cereal had a small overall decline; most analysts expect cereal sales to grow at a tepid 1% annual rate. Indeed, in 2018, organic net