Rising transportation costs, Brazil trucking strike put pressure on Kellogg’s profit margins

Kellogg (NYSE: K) is the latest company to cite rising freight costs as a threat to profit margins in 2018, according to the Wall Street Journal. It also reported the far-reaching impacts of the trucking strike in Brazil in May 2018.

In March, General Mills’ CEO Jeff Harmening noted that the company saw “an unprecedented rise in logistics costs” and was “a quarter late in reacting” to the change. In July, General Mills announced their decision to cut 625 positions due to an increase in transportation rates. Weeks later, Hershey Co. expressed its intention to better anticipate shipping needs in order to avoid more expensive last-minute shipping services.

Both General Mills and Hershey have compensated by raising prices on the shelves, as reported by the Wall Street Journal, though Kellogg “generally lower[ed]” prices in Q2.

Despite an increase in profits in the second quarter, Kellogg noted that transportation costs were beginning to impact the company’s profit margin. “The surge in transportation costs has been well documented,” said Kellogg’s CFO Fareed Khan in the company’s quarter two earnings call on August 2.

According to a document released by Kellogg, the second quarter’s “productivity savings continued to come in as planned, particularly the overhead reduction associated with the closing of the direct store delivery system in US Snacks. These savings are helping to offset rising cost pressures, particularly transportation costs.”

Kellogg wrote that growth in Mexico, the Caribbean, and Central America “offset the negative impact of a ten-day trucking strike in Brazil. Kellogg Latin America’s operating profit decreased sharply on a reported and currency-neutral adjusted basis, due to a substantial increase in advertising and promotion investment, as well as costs related to disruption from the Brazilian trucking strike.”

Kellogg—known for household favorites like Frosted Flakes, Froot Loops, and Rice Krispies—has certainly been impacted by the nationwide decline in cereal sales. Rory Masterson, former industry analyst for IBISWorld, noted in an interview with CBS that within the cereal market, “revenue has declined 3.3 percent” between 2012 and 2017. The company’s US morning foods division saw a 3% decrease in sales in the last quarter.

Much like General Mills, Kellogg has seen a dip in sales of processed foods. Kellogg’s CEO, Steve Cahillane, in an interview with the Wall Street Journal, noted the move toward healthier options on the shelves. “Simple label, convenient food. Those are some of the really important trends we see in the U.S. that are helping drive our approach,” Cahillane stated.

In order to compensate for rising prices and to appeal to today’s customers, Kellogg has begun diversifying its health-conscious brands while also focusing on so-called “indulgent cereals” that evoke nostalgia for consumers. The company purchased RXBAR in 2017 for $600 million and attempted to generate interest in cereals like Chocolate Frosted Flakes and Froot Loops with marshmallows, according to the Wall Street Journal.

Looking ahead, Kellogg’s CEO Cahillane said in an interview with the Wall Street Journal in February that “cereal doesn’t have to be the growth engine of Kellogg…the growth engine is snacks around the world.”