After the plant-based protein market collapses, Kellogg's will no longer divest Morningstar.

Kellogg's will no longer spin-off Morningstar Farms after a competitor lost 90% of its market value.

What to know

In 2018, Kellogg's refocused its Morningstar Farms brand around plant-based protein. Originally, Morningstar Farms offered breakfast meats and chicken nuggets, but by 2021, the brand's offerings were 86% plant-based. "We like the sustained growth and potential for this brand," Sara Young, the Kellogg VP in charge of the brand, told investors. "In many ways, plant-based protein represents an emerging market right here in North America."

At the time, strategic logic was sound. Beyond Meat, the first and perhaps best-known offering, was a media darling. It used the buzz to catapult itself to a market capitalization of $7 billion. Rumors revealed that a private competitor, Impossible Foods, was valued at nearly $10 billion. It made sense that legacy food companies entered the space.

The pitch was simple. Industrial agriculture, specifically protein, is a huge contributor to climate change. Some estimates attribute 26% of greenhouse gas emissions to our food system—with animal protein being the biggest cultprit. What if you could reduce those emissions by producing an equivalent protein—that tasted the same—in a lab?

Making things sweeter for business, the technology could be patented. Meaning a business could hold a monopoly on protein. It was a compelling narrative. Suddenly, it was conventional wisdom that plant-based proteins were a trillion-dollar market waiting for capture.

By 2021 Morningstar Farms generated around $340 million a year in sales for Kellogg's. Given the anticipated growth, management announced it would spin the company off. Early estimates placed the value of the new company between $5-$10 billion.

The problem was that the new protein wasn't cheaper or healthier than animal-based protein. The category has yet to have mass appeal. Sales for each major competitor topped off at half a billion a year. Beyond Meat, the only public company in the space lost nearly 90% of its market value.

"When we began this process, valuations for peer companies were stratospheric compared to where they are today," CEO Steven Cahillane said in an investor call. "If we could attract the same types of multiples in the public market, we should pursue that. The environment has clearly changed."

Kellogg's expects consolidation in the plant-based protein space.

• "We see an imminent shakeout coming," Cahillane continued. "And there'll be a couple of players left standing, and Morningstar Farms still has some of the highest household penetration, highest name recognition, fantastic foods, strong in the freezer space where the consumer is migrating back to, and profitable, unlike many of the peers."

Kellogg's had a solid year and expects margins to stay flat.

• For the year, the Michigan-based company saw organic net sales reach $15.8 billion, an increase of 11.5% from the previous year.

• Adjusted for currency fluctuations, the company earned an operating margin of 7%. Next year, margins should stay similar. "I think on a full-year basis, it will be flat to slightly up," CFO Amit Banati said.

Kellogg's managed to maintain volume for the year despite significant price increases.

• Price increases boosted the company's sales by nearly 16% while volume stayed flat.

• In North America, price contributed to a 13% sales increase, while volume rose nearly 2%.

They said it:

CEO Steven Cahillane on the choice not to divest Morningstar Farms.

And if you recall, when we began this process, valuations for peer companies were stratospheric compared to where they are today. They've come down quite substantially. So the thesis when we started the process was to truly unlock shareholder value. If we could attract the same types of multiples in the public market, we should pursue that. The environment has clearly changed.

And when we look at what's on the horizon for this category, we see an imminent shakeout coming. It's happening already. And there'll be a couple of players left standing, and Morningstar Farms still has some of the highest household penetration, highest name recognition, fantastic foods, strong in the freezer space where the consumer is migrating back to, and profitable, unlike many of the peers. So as we step back and look at it, we are the best parent for Morningstar Farms. And when we shared with our people this morning that we were keeping the business, there was elation.

And so there's a lot of momentum underlying in our people, in their plans, and we're optimistic for 2023. And more importantly, we're optimistic beyond that because when the shakeout continues, there'll be a few left standing. And the underlying consumer drivers around health and wellness, around environmental concerns, around moving away from animal proteins, all still remain. And Morningstar Farms has one of the cleanest labels out there. And so there's a lot going for Morningstar Farms, and we're excited to keep it.