The company also said investment in supply chain efficiency negatively impacted its results.
For the third quarter in 2011 net sales were up on the previous year 5% to $3.3bn. However operating profit slid 14% to $464 million.
The company said in a statement: “The decline is partially the result of the acceleration of costs related to supply-chain initiatives which increased cost of goods sold. Approximately 8 points of the decline is due to increased supply-chain costs and 12 points is due to the reinstatement of incentive compensation costs.”
“Without these factors, operating profit would have increased from the level posted in the third quarter of 2010,” it said.
Europe performance
Geographically, Europe was the worst performer for Kellogg with a 2% decline in internal net sales and a significant 17% plummet in operating profit, which took the figure from $102m in Q3 last year to $84m this year.
Company CEO John Bryant complained of a “difficult operating environment in the United Kingdom” where “a tough economy combined with a highly competitive retail landscape” affected performance.
“We underestimated how much work was required to gain momentum in the UK and have increased the level of investment in our supply chain,” he said.
UK Cereal performance was down 3% for the quarter and Kellogg plans to introduce a new brand, Mini-Macs, similar to Mini-Wheats in the US, to boost the sector.
In contrast, Bryant said: “Continental Europe is a little bit of an emerging cereals market and we are seeing single digit growth there.”
For snacks, Bryant said it had been a difficult year in the UK due to aggressive new entrants to the category that had adversely impacted business.
“Snacks is an inherently innovation driven category and we have not had the necessary level of innovation,” he said.
On a more positive note for Kellogg, some nations in mainland Europe showed, such as France, Italy, and Spain, showed growth in mid-single digits. Russia also exhibited modest growth in line with Kellogg’s expectations.
Rebuilding
According to Bryant, 2012 would be another rebuilding year as the company plans to step up investment in brand building and supply chain efficiency. It will also re-implement the resource software SAP at cost of between $20 and $30m.
Ron Dissenger, Kellogg’s chief financial officer said the outlook for 2012 would be a little rosier with a 5% internal net sales growth forecast and earnings per share climbing 2 to 4%.