The news last week that the Keebler elves and Famous Amos were being traded to Italian confectioner Ferrero may have surprised some people, but Kellogg (K 1.44%) had been looking for a buyer for its cookies and sweets lines for a while. Clearly, management wants to focus on its core breakfast lines.
In this segment from MarketFoolery, host Chris Hill and Motley Fool Asset Management's Bill Barker talk about why Kellogg wanted out, whether the businesses just weren't gaining the economies of scale they needed together, the competitive landscape in cookies, the impact the sale will have on consumers, and more.
To catch full episodes of all The Motley Fool's free podcasts, check out our podcast center. A full transcript follows the video.
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This video was recorded on April 9, 2019.
Chris Hill: Speaking of large caps, there's a story from last week that we did not get to about Kellogg. Kellogg is getting out of the cookie business so it can focus on breakfast cereal and snacks. Kellogg is selling its Keebler cookie brands and Famous Amos to Ferrero for $1.3 billion. Ferrero, the parent company of Nutella and Tic Tacs, two tasty things that don't necessarily taste great together.
This seems like a good move for Kellogg. You look at the cookie brands that they had, they were doing less than $1 billion in sales and driving not a lot of money in terms of operating profit. It seems like, even though the breakfast cereal industry has its challenges, I think if I'm a Kellogg shareholder, I'm generally happy about this move.
Bill Barker: I mean, I don't know how much it was distracting them from focusing on cereals. If it was, then it's a good move to get rid of it. I mean, Keebler cookies, it kind of runs on its own. You get some synergies from just taking up more shelf space in the grocery store. That allows you some economies of scale. But maybe it wasn't in this case. Maybe the logistics of getting the cookies into the same place that the breakfast cereals were going was not achieving any economies of scale. I don't know. I think consumers won't notice any difference, ultimately.
Hill: No, they definitely won't. Look, Kellogg's been trying to sell these for at least since the end of last year. This was something that they were able to execute. Maybe they didn't get the price that they wanted, but they were clearly looking to streamline. Good for them. Like you said, consumers aren't going to be able to tell the difference. I'm sure, for all of the jokes I make at the expense of Mondelez, they're really crushing it in the cookie business. I'm sure part of the thesis for Kellogg was, "Look, we don't need to keep doing this."
Barker: "We can't compete with 70 flavors of Oreos."
Hill: "We can't, and we're not going to anymore. We're going to let that be someone else's problem. Now, we'd like to introduce you to 70 flavors of Pop Tarts. Let's talk about that!" And that's working for Kellogg.
Barker: Yeah. There are quite a few flavors of Pop Tarts popping up, but it's not quite as trendy as the Oreos. They don't have the flavor of the day kind of thing that Oreo seems to.
Hill: They don't. The thing about Oreos that has not broken through for Pop Tarts is the brand marketing alliances that you see. The most recent one for Oreos is the Game of Thrones-inspired Oreo cookies, with the final season of Game of Thrones getting ready to start. I guarantee you, the HBO marketing people were not going to Kellogg saying, "Look, we have an idea. It's a Game of Thrones breakfast cereal and Game of Thrones Pop Tarts." No. That's an easy one. That's a layup.
Barker: Who would not want dragon-flavored Oreos?
Hill: What does that taste like? I think they're just going with straight-up chocolate.
Barker: What's that got to do with Game of Thrones?
Hill: I don't know!
Barker: It's like they haven't been watching the show at all.
Hill: I don't think these are dragon-flavored.
Barker: Well, that's just a missed opportunity. You would have thought Oreos would have been on top of that one.
Hill: Well, there's a Game of Thrones fan at my house, so I think I'm going to have to pick up a box of one of these things. For all of my railing against Mondelez...
Barker: You're going to fall for it, huh?
Hill: I mean, if I can momentarily buy one of my kids' love for a few bucks? Yeah, sure! I'll do that! I have no problem doing that! Don't tell me you haven't done that before! Most parents have done that.
Barker: Oh, yeah!
Hill: "Here's a little thing. I'll spend a couple of bucks. My kid will be happy. That'll be that."
Barker: It's just Oreos.
Barker: It's not wasted money.
Hill: Right. They're going to get eaten, might as well benefit from it.