Kellogg Co. (K) has had a difficult go of things in the wake of the recession, lagging rival packaged foods companies in the industries as it struggled to connect with consumers. Things may be getting worse as Kellogg is under fire from the Federal Trade Commission for misleading consumers about the health benefits for Rice Krispies and Frosted Mini-Wheats cereals.
K stock has struggled in the last year and a half in the wake of the financial crisis, which is strange considering that other consumer staples stocks like Kraft (KFT), General Mills (GIS) and others have done fairly well. As shoppers find less money in their bank accounts and focus on being frugal, eating out has become less common and packaged food products have seen strong sales.
But Kellogg hasn’t connected with consumers. In the long term, the stock is up about 40% from the March 2009 lows, while the broader stock market is up 50%. And in the short term, K stock is up about 3.5% so far in 2010, while rival Kraft is up 7.7% year-to-date and General Mills is up 5.5% since January 1.
Kellogg released its most recent earnings statement about a month ago, and the report was very favorable. Earnings were almost double that of the previous quarter, and topped Wall Street forecasts considerably. However, this poor press could really weigh on the company going forward and continue to hold Kellogg back.
Specifically, Kellogg ad campaigns that focus on how its cereals help kids stay healthy and attentive in school have been ruled to be false for the second time in a year. FTC officials have taken the cereal giant to task for misleading consumers by claiming in ads that Kellogg’s Frosted Mini-Wheats cereal makes kids do better in school and that its Rice Krispies wards off the common cold.
“We expect more from a great American company than making dubious claims – not once, but twice,” said FTC Chairman Jon Leibowitz.
Most recently, Kellogg was criticized for claiming that Rice Krispies “now helps support your child’s immunity.” On the back of the packaging, customers were told, “Kellogg’s Rice Krispies has been improved to include antioxidants and nutrients that your family needs to help them stay healthy.” While the cereal indeed contains Vitamins A, B, C, and E, there is no clinical evidence linking Rice Krispies to a better immune system.
Previously, a Frosted Mini-Wheats campaign that claimed the cereal had been “clinically shown to improve kids’ attentiveness by nearly 20%” was the source of a dustup. The actually study Kellogg was basing its claim on indeed linked a healthy breakfast to attentiveness — but only one in nine children who ate a bowl of cereal before school showed 20% or greater improvement in alertness. Half of the kids who ate breakfast didn’t see any improvement at all.
And unfortunately, Kellogg’s ad woes may not be over. According to the Children’s Advertising Review unit of the Council of Better Business Bureaus, the language on Kellogg Pop-Tarts packages saying the pastries are “Made with Real Fruit” should be taken off the products. Though the BBB has no regulatory authority to force a change, you can bet that the Federal Trade Commission will give this claim a very close look in the wake of two previous misleading ad campaigns.
As of this writing, Jeff Reeves did not own a position in any of the stocks mentioned here.
