Retail sales of Kellogg’s plant-based meat brand MorningStar Farms continue to plunge in 2022 – dropping nearly 15% from the previous year, which was also down several percentage points despite a slight uptick in the overall vegetarian and vegan meat category in both 2021 and 2022, the company acknowledged during a call Thursday to share third quarter earnings results.
Cahillane attributed the “pause” in growth in part to consolidation in the frozen plant-based segment by retailers following a surge of innovation in the space in 2020 led by new entrants, new technologies and new spaces in stores for plant-based offerings.
In the past, Cahillane lamented that in the rush to meet consumer demand for plant-based meat alternatives during the pandemic, many suboptimal products came to market – putting off newcomers to the space who judged the category as a whole by poor first experiences.
The sharp drop-off also reflects ongoing supply disruptions with a key co-manufacturer, which have yet to be resolved and are forcing Kellogg to prioritize SKUs, Cahillane said.
Despite the sales drop, Cahillane remained bullish about the space and the long-term potential of MorningStar – an iconic player in the plant-based meat space – and Incogmeato – a newer entrant that came to market in 2019 with a ‘next-gen’ plant-based burger, chik’n nuggets and chik’n tenders designed to compete head on with more meat-like competitors, including Beyond Meat and Impossible.
He explained his confidence is based on strong consumer engagement with the brands despite their struggles and growth in products not impacted by supply challenges.
“While we have not yet been able to fully resume commercial activity, we have been able to support products that are not capacity constrained. A good example is sausage and links and we are generating double-digit consumption and good share growth in that segment,” he said, emphasizing: “This supply disruption is a temporary issue and we continue to work through it.”
Kellogg sees ‘long runway for growth’ in plant-based
Cahillane’s confidence in the segment also comes from strong household penetration rates for the brands, which he said remain above pre-COVID levels, and from “ample opportunities to return to consistent growth behind underlying consumer focus on health and environmental concerns.”
He added: “These are demand fundamentals that remain firmly in place for a long runway of growth.”
Once supply challenges are resolved, Cahillane said Kellogg is prepared to support its plant-based brands with a new media campaign – another testament to his belief that “despite near term disruptions, this is a business that remains in good condition with excellent prospects.”
Strong overall sales from pricing offset plant-based business losses
The drop in Kellogg’s Plant Co business, which is one of three that it is spinning out to stand independently, the company had a strong third quarter – reporting strong organic net sales growth in the quarter of 9% to $3.95b, which exceeded expectations of $3.78b in revenue.
Most of this growth came from price increases, which rose on average 15.7% in the third quarter.
Despite a 2.3% drop in volume in the quarter, Kellogg is confident that it can maintain and grow share across categories in the fourth quarter – allowing it to raise its organic net sales expectations for the year to more than 10% from a previous forecast increase of 7% to 8%, CFO Amit Banati told investors. He added that the company is also raising its guidance for adjusted-basis operating profit growth to approximately +6% on a currency-neutral basis, from its prior guidance of +4-5%, and is raising its earnings per share growth expectations to about 3% from previously stated 2%.
Is Kellogg overly confident?
Some investors are not as confident as Kellogg – even as they acknowledge the company’s success while facing significant headwinds.
Bernstein analysts Alexia Howard and Connor Cerniglia called out that Kellogg’s gains are less notable than the company positioned them given they are “against a very easy comp due to the cereal worker strike last year,” which caused sales to plummet in the short-term.
They also call out Kellogg for potentially placing too high expectations on maintaining sales as prices continue to rise.
Kellogg executives noted that elasticities continue to remain better than expected, giving them confidence going forward. However, the company acknowledged a subtle downshift in spending on cereal in Europe that could portend the same in the US.
“Overall, we remain concerned that if input costs and supply chain pressures remain intense in 2023, and pricing perhaps becomes harder to come as retailers seek to hit sharper price points to retain a weakening consumer, the margin and overall profit trends could deteriorate by next year,” Howard and Cerniglia wrote in a same day note.