Motley Fool Money - The Battle For Breakfast

Episode Date: September 18, 2023

Kellogg’s is spinning off its core cereal business to focus on the fast-growing snacks market. (00:11) Jason Moser and Deidre Woollard discuss: - Why Kellogg’s is splitting up its business. - If snacks still have growth potential. - Monster’s ability to become a 100-year brand. (13:35)  Ricky Mulvey and John Nash analyze newly-listed TKO Holdings, the company that runs both WWE and UFC, and address the challenges it may face in the future. Companies discussed: K, TKO, MNST, CELH Host: Deidre Woollard Guests: Jason Moser, Ricky Mulvey, John Nash Producer: Ricky Mulvey Engineers: Rick Engdahl Learn more about your ad choices. Visit megaphone.fm/adchoices

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Has Tony the Tiger lost his charm? Motley Fool Money starts now. Welcome to Motley Full Money. I'm Deidre Willard here with Motley Fool analyst Jason Moser. It's another food-centered Monday. Welcome, Jason. Hey, Deidre. How are you? I love to talk food with you.

We covered some interesting food-related mergers. Recently, last week we had hostess and smuckers. We're going in a different and yet related direction today. and talk about a split between Kellogg's and itself. So this has been in the works for a while, but we have an official date on October 2nd. It's splitting into two independently traded companies, Kelanova and WK Kellogg.

Now, this is interesting because Kelanova sounds like it's the new thing, but it's actually going to keep trading under the existing ticker K, which is such a great ticker. And WK. Kellogg is going to take the cereal brands, into a separate company. So, does that sort of take the emphasis away from the world of cereal? I don't think so. I mean, when you look at cereal, I mean, it's a 10.5 billion dollar industry here domestically. So, and that's according to data provided by Nielsen. I mean, it's still the number one breakfast food choice for kids and number two for adults. I mean, it's terribly convenient.

Some of it maybe is better for you than others. But yeah, I think for me, you start to see sort of the power of cereal. I know that sounds kind of funny to say, but the fact of matter is, clearly it's something that consumers keep in their pantry, I think virtually at all times. In wondering why they put cereal kind of on its own, I think ultimately this really just gives them a chance to focus on that one particular. strategy when it comes to cereal versus the rest of the business, which is more snack-centric, right? I mean, you look at the portfolio of brands that Kellogg has in total. It's impressive,

but cereal is really only only just one part of that. And so this really gives them, I think, the opportunity to focus on, you know, the strategies for snacks and the strategies for cereal. Yeah, it's sort of interesting because you have companies like Kraft Heinz. They're just like a whole conglomeration of brands, similar with PepsiCo, with all of the Frito-Lay stuff. I want to talk a little bit about Kellenova. So they're keeping the international cereal business in that, and I thought that was interesting. You've got the current CEO of Kellogg's. He's staying on as the chairman of Kelanova, and he sees a lot of growth in snacks and also in noodles. Apparently, noodles, a very big business across the world. So what does this mean?

is this, so should we think of the Kellenova part as a sort of like exciting emerging brand? Yeah, I think I think that's safe to say. I mean, we certainly like our snacks here domestically, but that I think really is all around the world. So it's safe to say that probably is some saturation here to an extent. But I think when you pan out and you look at the global opportunity, that's what leads them to believe this is the right move. And so, you know, again, looking at this, looking at this growth strategy, You look at the Kelanova side of the business. I mean, this is where they really see the growth potential, right? And it is certainly a more growth-oriented portfolio.

Just over the last three years, they've grown revenue on this side of the business at a 9% annualized rate, which is pretty impressive for the food business. And ultimately, going back to the snacks, snacks represent 60% of the overall business anyway. So again, I think they see this Kelanova side of the business is really the opportunity to shine a light on the growth. potential, which, you know, in the food business, right, it's not an industry really known for these robust growth numbers, right? And so I think this gives them the opportunity really to kind of shine a light on the growth potential on the Kellanova side. Yeah, one of the things I found was interesting is that 50% of that business comes from five brands, Pringles, Cheez-Itz,

rice, crispy treats, pop-tarts, and Eggo. I don't know why Rice Krispy Treats didn't get to stay with WK. Kellogg. Those things are delightful. I love them. Look at what they've done with the Pringles business, right? I mean, you wouldn't even really think about this. If they acquired Pringles back in 2012, they've doubled that business since they acquired it. So, again, just goes to show you the power of having that portfolio of those different brands and really the global distribution, because I can tell you just having traveled around the world. I mean, Pringles are a very popular item, pretty much everywhere you go. There is a comfort in seeing Pringles in a strange place. Let's switch over and talk about the Kellogg side.

So on this side, you've got Gary Pilnick. He's a longtime veteran of Kellogg. He's going to be the CEO over W.K. Kellogg. Now, they're calling it an 117-year-old startup. I don't know. I mean, they've got the legacy brands. Nine of the top 20 cereal brands are Kellogg's and probably the rest of General Mills. but who knows. They do have some younger brands like Kashi and Bare Naked Granola. What do you think?

Is this really an 117-year-old startup? I mean, you have to love the enthusiasm, right? And I think ultimately, like, we can joke about it. It is kind of funny to think about, but I think it's really more the mindset than anything else, right? I mean, creating that mindset that, yeah, I mean, listen, serial is cereal, but it's all about looking toward the future. And that's what you want in leadership regardless of the company, right? You just don't want leadership that's going to rest on their laurels. I mean, how much innovation can you expect in this market? I don't know. I mean, probably not a ton. Serial will likely be quite the same for the rest of our lives. But hey, that's a good thing, right? Given its popularity,

that there's something to be said for that. So I think ultimately, you know, I like creating that mindset looking forward to the future, because as we know, that's really what investing is all about. Yeah, yeah, I definitely think that there's room for changes. I mean, they talked a little bit about moving the brands themselves beyond cereal. And they're talking about cereal as itself as a snacking opportunity because it seems like what they're noticing. And I think this is, I think we've all noticed this, is that we spend less time with the, with the bowl and the milk and more time with the hand in the box. So I think there is an opportunity there to sort of move a little bit beyond what we, what we traditionally imagine cereal. But there is a larger question here, which is the health factor. And, you know, there's been concerns about gluten. There's concerns about sugar. So I think the brand itself may be there with the cashier and especially with the bare naked, they kind of have to evolve a little bit beyond the beloved brands that we think of as childhood favorites.

Oh, there's no question about it. I mean, I think that's ultimately part of it in really being able to focus on the cereal portfolio, for example, is just being able to ultimately deliver what people want, right? And every, it's such a wide world of assortments there. And, you know, some focus maybe on the health side of things more than others. And so you want to be able to just ultimately scratch every itch there. And that's what I think this ultimately gives them the opportunity to do. If you had the opportunity to invest in either one, are you going Kellanova or WK Kellogg? If you could only choose one. So I love cereal. Don't get me wrong. But I think, you know, the growth, the growth prospects of Kelanova are a little. bit more attractive to me. And I think most of that really is, you know, you think about the opportunity in snacks and I've got a salt tooth, probably more than sweet tooth. I mean,

I eat plenty of cereal, but man, the salty snacks for me are where it's at. And we've seen really, you know, companies like Pepsi through the years. Pepsi has benefited so, so much just from having that snack side of the business. And so given the growth prospects there, I think I'm a little bit more a little bit more favoring of the Kelanova business. Do you think there's a comparison here between what Johnson and Johnson did with spinning off their consumer brands into Kenview recently? Because, I mean, it seems sort of similar because you've got legacy businesses. I mean, with Johnson, Johnson, you also had some lawsuits and concerns that sort of prompted that. But Ken View's had a – it's been out like a month, so it's a little bit too certain to speculate on the success of that.

But do you think that the mechanics here are similar in how these two companies spin off from each other? Yeah, I think that's fair. I mean, you're giving the respective businesses a chance to shine and grow and do their own thing, right? And J&J split up some rather different businesses where Kellogg, maybe there's some more similarities there. But I think ultimately, in the day, the strategy is very similar, yeah. Yeah. Well, as we wrap up, you know, this had me sort of thinking about, food in general as an investment, consumer packaged goods. You know, it's not not exactly the most exciting thing for, for investors. It seems to be, it's a relatively steady thing. You just keep adding more brands. You keep adding more flavors. And then I thought about about drinks and how

we've seen things like Monster and Celsius, you know, it's become these, these pun intended, monster businesses, but it had to do it. But this, like, why? Why? I wonder, I wondered to myself, Like, why is it so much easier for a drink to become very, very popular? But a particular snack food or a line of food in general doesn't really take off that way. Yeah, it's a good question. You know, I think that when you consider Monster, I think Monster is unique because it essentially was kind of like a category creator, right? I mean, I don't know that they invented the energy drink, but I mean, it's something new beyond soda or coffee or just kind of what we were used to for so. along. So, I think part of the reason why Monster has done so well is because, you know,

it was kind of starting from ground level, right? It was a bit of a category creator. I mean, fast forward 10, maybe 20 years, and I'm sure that looks a little bit different than it does today, but clearly, I mean, we've seen more entrance into that market. You mentioned Celsius. And so, I mean, it's clearly a very competitive market. You're starting to see that play out in in Monster's performance there, right? I mean, margin is starting to come down a little bit, growth starting to slow a little bit. So, I think part of it was just kind of that category creator. But there's some other challenges I think that you deal with in the food space that you don't necessarily deal with in the drink space. And one thing that kind of comes to mind, I mean,

I know that private label competition exists in the beverage space, but I don't think Monster really suffers or is really threatened by that private label competition that you would see in the food market. So, you know, I think you fast-futable. forward 10 or 20 years, it probably looks a little bit of, you know, the market for something like a monster looks a little bit different, but it kind of goes back to that idea of the category creator. Interesting. So do you think looking forward that Monster eventually, they get a bunch of brands under it and they have that sort of like a Kellogg's kind of trajectory? In 100 years, is Monster

the Kellogg's? It's possible. It's absolutely possible, but it's also possible that another company out there is looking at Monster today and thinking, you know what, we really want to have that dynamic in our portfolio. So either, you know, one of two things is going to happen. Monster is going to need to evolve by either, you know, coming up with some kind of new category or new beverage. They're going to need to make some acquisitions or, you know, someone out there is going to see, you know, the merits of that business and decide they want it for themselves. Yeah, it's interesting to speculate. What could, what kind of food could make a new category? I mean, we saw that with Beyond Meat, and that has not gone well so far.

So I think you really would need a new category that sort of captured the sort of the imagination and people. That's a really hard thing to do. Yeah, disruption in the food market is pretty difficult. I mean, you kind of think of Starbucks and coffee and like, I mean, I'm pretty sure that 100 years from now, I mean, people are still going to be drinking coffee and they're going to be drinking them the same way we kind of always have. Now, maybe that changes. I don't think either one of us will be around to see that. But I think for the rest of our lives, at least coffee is going to be very difficult to disrupt.

And yeah, I think when it comes to beverages, it is fun to kind of think about iteration and evolution and such in the food beverage market. It's a lot easier said than done. Yeah, absolutely. Thanks so much for your time today, Jason. Thank you. The bell has been rung at TKO Holdings. A new company built from WWE and UFC is now battling on the New York Stock Exchange. Ricky Mulvey and Combat Sports Journalist John Nash break down what happens next and a lawsuit that could be a body blow for the company.

What does leadership really look like? On the power of advice, a new podcast series from Capital Group, you'll hear from athletes, entrepreneurs, and executives who've led on the field, in the boardroom, and in their communities. It's not about titles. It's about impact. Discover what drives them and the advice they carry forward. Subscribe and start listening today. Published by Capital Client Group, Inc. It is a strange time for combat sports observers. Sean Strickland is your UFC middleweight champion and the UFC and the WWE are now one company. Debuting last week is the TKO Group.

Joining us now is John S. Nash. He's a mixed martial arts journalist, writing for the bloody elbow and hosts the Hay Not the Face podcast. Welcome to the show, John. Yeah, people are probably confused tremendously by the titles of the website and my podcast. Like, what does that have to do with anything? Well, if we're going to talk about the business of combat sports, I think both of those titles probably make sense versus a more traditional financial media outlet. So I'm excited to get your perspective on this.

UFC and the WWE have combined in creating one organization. I mean, at a surface level, why do you think investors are excited about this new entity? because both have dominant market power in their fields. And they're basically the only companies, especially casuals, people that are outside the sports that are in the world of those sports. Those are the only two entities they know about in those sports. So they have brand name familiarity. They dominate. They both dominate their market space.

WW has a little bit of competition with the AEW. I'm not a pro wrestling fan, so I might screw up the pro wrestling side. But AEW, so they have that, but they still are the huge people are, everybody knows what the WD is. They've heard it. They've heard kids talk about it, whatever. And UFC is this thing that's grown massively. And they know it's the, they own, basically own a sport. And I think that's exciting to investors.

I think the representatives from one FC may disagree with you there, John. But I think that one of the most incredible parts of this story is that the, the control of the WWE has been taken away from Vince McMahon through this new. group and by this this by endeavor and the new group led by r amanuel yeah well that's i think vansman put in a key position ahead of everybody in the ufc and w wese so he oversees both those reports only to endeavor and what fascinating was you know correct me if i'm wrong but there was there was basically a mutiny at w w a while ago uh he was going to get expelled as ownership control the company he negotiated a thing where he would negotiate the sale of the company.

And then he went around and sold, merged the company instead with Endeavor and they put him in charge. So it's, I mean, this is straight out of the TV series, success. This is, this was, this was classic, I don't know, Vince McMahon machinery right here to stay in power. So I found that even though he's technically no longer the sole owner greater. He still has more control than he was. And the other version of the other trajectory they were taken.

Yeah, my understanding is that he stepped back from sort of the public-facing role in response to a lot of the accusations, but he wasn't giving up his ownership control, if you will. Yeah. But the reason I want to focus on the combat sports side, because is this company went public, a lot of the company's leaders were making the rounds on financial media. and there was just this sticking point that I found when TKO president and chief operating officer Mark Shapiro went on CNBC and was in this response to this claim that, you know, maybe this Saudi Arabian-backed mixed martial arts league would create these dramatic increase in fighter pay, which I disagree with the premise of the question. But anyway, on the question about fighter pay, Shapiro said, quote, first of all, fighter pay has great.

in a faster clip than overall UFC revenue. And more to the point, UFC's overall revenue is driven by high margin revenue streams which can absorb anticipated or unanticipated increases in fighter pay while still resulting in margin accretion. End quote. You've written extensively about how UFC's revenue, through UFC's revenue growth, fighter pay necessarily hasn't grown with it at all. So I'm wondering where there might be a difference of opinion here between you and chief operating officer Mark Shapiro. Yeah. I mean, they famously had in the, there's currently a lawsuit against UFC. It didn't disclosure.

The UFC revealed documents about the lending, the lender presentation they did when William Morris, WMME, which now is Endeavor, bought the company. And their whole plan was we can keep, we can freeze fighter pay as a percentage of our revenue. so it's not going to increase. In fact, looking at the numbers, it seems like it's decreased in recent years. So his argument that it's increased fast in revenue, well, it doesn't line up with what you reported in the antitrust lawsuit. Also, in a filing by the defendants, the UFC, they seem to concede that fighter pay has not risen as fast as revenue. Now, if you go back to a previous earnings report that they did, a conference call, Well, it was reported during that they pinpointed how they got this number.

And that is they went back to 2005 under the previous ownership. In 2005, they picked that year and they said since that year, fighter pay has outpaced revenue, right? Well, 2005 is a very special year because that's the first year after the UFC blew up after the tough, the ultimate fighter show. Revenue skyrocketed. Fighter pay was locked in the previous contract. That was the lowest, that was the lowest paying year as a percentage of revenue the UFC ever had.

UFC was paying 40% of the revenue to fighters in the first 2001, 2002, 2003, and then in 2005, it plummeted down to like 9% of revenue. So if they take, if they would have just used 2004 or 2006, it wouldn't be a true statement. But by starting with 2005, that's the one year you can make that statement and ends up being a true statement. Well, and the thing that's also key about this is that Endeavor had no ownership stake in the company at that time. Yeah, none. So they bought it in 2016. And if you look at 2016, fighter pay in that year, as was like 22, 23%, it actually went up a bit.

They had a bump that year. And it looks like we calculated an estimated fighter pay in 2021, or, yeah, 2020, actually, was around 13 to 14%. And, you know, we can get into the calculations based on what the ZUFA said, the UFC, the reports. But it's obviously gone. since the peak year was the first year that Endeavor bought it. As a percentage, as a wage share, they're going to say, well, wage levels have increased,

but as a wage share, it's obviously gone down. Well, it's also, and it's maybe not a perhaps, it might not be an appropriate comparison because the number of events have skyrocketed since then as well. So the level argument might be a little different, right? I guess I'm going back to the 2005 case. I want to move, though, when we talk about Fighter Pay, the reason it's important for this new company is because it is facing a lawsuit. It's called Lee v. Zufa. UFC fighters claim that the organization used anti-competitive practices to suppress pay and force fighters into restrictive

covenants. One example would be using their likeness for free on video games and the fighters don't get any revenue from that. In one of these suits, the fighters were recently granted class certification after many years that happened in August. Can you explain why this is a big deal for the fighters to get that class certification in this lawsuit? Well, because when you're doing a class action, one of the major hurdles is getting class certification. If you sue as individuals that, you know, you could have all the evidence of world and you could win, but the damages are limited because you're doing individual cases.

But class cert, this applies to a wide range of fighters, 1,200 fighters to be exact. So the damages are greatly increased. On top of that, it's an antitrust case. if it goes to trial and the plaintiffs win, then it gets the damages get treble, tripled. So those vast damages get tripled if they win in a trial. And because it's a class action, the judge can offer remedy injunctive relief

and basically force changes in the industry so that these damages don't continue in the future. So the reason the class certification is, in fact, you're allowed to appeal a class certificate because usually a class certification is a victory. If you get granted class certification and can go ahead as a class action, odds are is the opposing side is going to be forced to settle

because almost all cases settle, because appeals are rejected. And the Ninth Circuit, they reject like 80% of appeals. So it's considered such a massive hurdle that, and the potential damages and stuff are so vast that it's almost often viewed as basically the decision in the court, that this is as important as a trial decision. So that's huge.

And I think a lot of people are ignoring that. They don't, they're not really paying attention. But the next step after that then is now we have to wait and see what happens to appeal. Okay. So let's say the plaintiffs win a massive settlement. They're arguing about contracts up through 2017. It's getting some attention among the business and in, uh, MMA media. Contracts have changed since then. Now fighters are in a, what is it, an anti-arbitration or a, a forced arbitration clause, which means they can't, uh, take arguments to a jury trial. like this, is this, let's say, okay, so let's say that the plaintiffs win a massive settlement, would this fundamentally change the business of this new TKO enterprise, or is it a big one-time

payout and then they can go along their merry way? Well, this, the current case would be a one-time payout. There's two cases ongoing. There's the Lee versus Zupa from 2010 to 2017 that covers. And then from 2017 on is another case, Johnson v. Zufa, which is basically the identical case, but it starts up at a different class period. At the end of, if we go to trial next year, which is what the judge says he wants. So if appeal doesn't work and they go to trial, then the end result of that would be just damages.

And if they lose in trial, the damages, though, could be vast. Their expert says that they estimate damages from anywhere from $800 million to $1.6 billion. And, of course, if you lose and you get troubled, that becomes $2.4 billion to $4.8 billion. No matter what, that's a lot of damages. That's a lot of money.

So that's going to hurt a crime. company that has to cover that. But on top of that, you've now set the precedent that this, that they've engaged in antitrust violations. They've monopsinized the sport. So you can take that into the next case and make you a stronger case. Now, as you mentioned, the defendants there have made every fighter in the UFC have now signed a waiver, an arbitration agreement saying that you have to go to arbitration and a class action waiver. The plaintiffs are going to contest that. take it to court and see if the argue that the UFC use

their monopsony power to force fighters to sign these and so they shouldn't be, the court shouldn't accept them. But if they do, that eliminates a huge amount of plaintiffs, right? But it doesn't eliminate the injunctive relief part. If they wanted to, they could continue the case forward and go and ask for injunctive

release. They might not get damages for all those fighters that are in waivers. But the court could combine the Lee versus Johnson case, and this would be several years down the road, but then say, we have to do some sort of injunctive relief. They've already tipped their hat what they're calling for for injunctive relief, the plaintiffs. There was a case in boxing in the 60s, late 50s, a monopoly case called the International Boxing Club of New York.

And in that case, the court ordered that no contracts could be exclusive for the next five years. Now, there was anyone signed to the International Boxing of New York could go fight for anybody else and sign contracts with anybody else. And in this case, you've seen it that they've asked for contracts to be limited to one or two years maximum with no. extensions possible, which would dramatically change the industry landscape because all the big fighters, if you watch the UFC and you know, like there's a fight like John Jones and in France and Ghana was a massive fight inside or outside the UFC. Those two guys, France deGano's outside the UFC right now, but John Jones could sit for a year and then say, okay, now I'm going to take the highest bidder to go fight France and Gano. And you can see that just across the all the top major

fights could be made that way, which would drastically increase the amount that fighters are making. Final question. This is a nerdy one. I enjoy watching Dana White's Contender Series on ESPN Plus. It's basically a tryout competition for the UFC. But John, one thing that consistently bothers me is they always celebrate this fighter's getting a contract. They never say what is in these contracts, though. It's just, hey, you get a contract. Do you have any insight into what is actually in these contracts? Oh, yeah, we all know what's in the contracts. I have several of them. It's the contenders contract, you get $5,000 to show and $5,000 additional if you win.

Then if you get a UFC contract, you're coming in almost always from the contender series on a $10,000 to show, guaranteed. You know, that's your purse when you show up for the event and actually have the fight. And then a $10,000 bonus to win. And you're signed to four, I think it's a four or five fight deal. I can't remember the exact number right now. But I think it's four fights in the UFC when you're entering from contenders. and all these other provisions in it that now you're, you also have to sign away your video game rights,

all your image rights, your merchandise rights the UFC gets to do. So you give up a lot. Our guest is John S. Nash. He is a mixed martial arts journalist writing for the bloody elbow. His podcast, it's called Hey, Not the Face. In his free time, he enjoys debating the legitimacy of credit rating agencies with mixed martial arts pioneer Pat Militich.

John, thank you so much for joining us on Motley Full Money. Appreciate it, yes, and I won that debate. As always, people on the program may have interest in the stocks they talk about. And the Motley Fool may have formal recommendations for or against. So don't buy ourselves stocks based solely on what you hear. I'm Deiduel Willard. Thanks for listening. We'll see you tomorrow.