by Greg Thain
The Kellogg approach to new product development – plenty of it – was soon brought to bear on the Eggo brand with Eggo Blueberry Frozen Waffles, Eggo French Toast and a host of other variants. All these appeared within the first couple of years of Kellogg stewardship. It was good that the company had something to focus on other than cereals; as the category that had seemed would grow forever hit problems in the early 1970s. In 1972, the Federal Trade Commission fired a shot across the bows, accusing Kellogg and its competitors, General Mills and General Foods (who owned the Post brand), of operating a cartel that had overcharged consumers by a collective billion dollars in the previous fifteen years. The FTC also correctly surmised that exceptionally high advertising spends, product proliferation and an overbearing attitude to the retail trade formed highly effective barriers to entry. No one denied this part of the charge – it had been company strategy since day one – but the company counter-argued that it wasn’t actually illegal. The price-fixing charge was harder to shake off, but the industry eventually won. However, it was a warning that the cereal category was no longer immune from criticism.
A more harmful salvo would be fired by the American Dental Association, which accused the industry of being less than clear with the paying public as to the sugar content of many of its brands. Kellogg led the fight back; producing arguments to show just how small a percentage of children’s daily sugar consumption came from its products. But some mud was bound to stick: they had a host of products sporting the word sugar in the brand name, which were promoted ceaselessly on children’s television programmes. Sales of sugared cereals declined in 1978 for the first time since they had begun appearing twenty years earlier.
While more new cereal brands were launched, there were no blockbusters. Kellogg was encouraged to put more focus on its Eggo brand, although it was a bit of a loner for the company in the freezer. The company decided it needed an enhanced frozen foods brand portfolio and infrastructure to have the same clout with the frozen foods buyers it was used to having with the cereals buyers. In 1976, it purchased the Mrs. Smith’s Pies Company and transferred across the Eggo brand from the Fearn subsidiary to the newly renamed Mrs. Smith’s Frozen Food Company. This soon developed new products, launching Kellogg’s Diner’s Choice range of frozen meals. In 1977, Pure Packed Foods was also acquired to add more oomph to the category.
Coming into the 1980s, it is not clear that Kellogg understood the scale of the challenge now building up for the cereal category. The glory days of the baby boom and a nation glued to television commercials was slowly but inexorably fading. The baby boomers were growing up and, no matter how many new children’s brands the company launched or spent on advertising them, baby boomers ate less and less cereal as they grew into adulthood. The 25–49 age group ate half as much cereal per capita as the under-25s. And there were fewer and fewer kids entering the market as the birth rate started contracting. Kellogg had a shrinking target market and, even worse, steadily lost market share: from 43% in 1972 to 36.7% in 1983. Even with annual sales of $2.4 billion and a 28% return on equity, the Kellogg Company was looking every bit a fading star, especially when the company failed in bids to buy Tropicana and (luckily, as it turns out) Crayola Crayons.
That year, 1983, was the turning point. The market stagnation and its own share losses convinced Kellogg it had to aggressively target the 80 million baby boomers who had largely grown out of the Kellogg’s child-orientated product range. These people had grown up with Kellogg and had a strong bond with the Kellogg name, but the company was not offering products that appealed to their changed needs. These were people who jogged or worked out at the gym in the mornings. They needed to be persuaded anew that breakfast cereals could be a part of their lifestyle. The company massively ramped up its R&D budget to $20 million – triple the level five years previously – and was soon churning out three varieties of the new Kellogg’s Nutri-Grain cereal. Kellogg’s Raisin Squares was joined by Kellogg’s Apple Cinnamon Squares and Kellogg’s Strawberry Squares. Kellogg’s Just Right was borrowed from its Australian operation. Kellogg’s Mueslix from its German company was launched with a $33 million advertising budget, which was an industry record. Kellogg’s Crispix was added. Even old brands joined the party, with Kellogg’s All-Bran packaging trumpeting a message from the National Cancer Institute about the benefits of bran in avoiding bowel cancer.
The results of this pivot were impressive. By 1988, consumers aged 25–49 were eating 26% more breakfast cereal than they had been doing five years previously. This helped grow the US cereal category, previously branded as mature, from $3.7 billion to $5.4 billion – a rate of increase three times the average for other grocery categories. Increases accrued to the Kellogg Company, whose US market share was now comfortably north of 40%. Most came at the expense of the smaller competitors. General Foods’ Post brand - unable to keep up with the Kellogg onslaught on adults - lost over three share points in the same five-year period. With an R&D budget doubled again to $40 million, Kellogg was launching twice as many new brands than it had in 1983. The majority were aimed at adult consumers. The marketing budget had tripled within five years, up to an eye-watering $865 million – which was 20% of sales. The old brands were not entirely forgotten; a doubling of the ad spend for Kellogg’s Frosted Flakes grew sales by 40%. A nostalgia advertising campaign got dads to introduce this brand to their children. Many of the adult brands introduced sold at much higher prices per box than the range of children’s cereals. This improved the Kellogg sales mix and thus gross margins, up to 49% from 41% five years previously.
With the cereal business seemingly back on track, attention turned to the remainder of the portfolio. Some hard decisions had to be taken. To date, the company’s acquisition record had been lacklustre. To be fair, the company had avoided the wild excesses of the diversification craze that had gripped some of its competitors, but only the Eggo brand could be judged to have added something worthwhile to the Kellogg brand portfolio. Thus, in 1988 its tea business was sold off, followed in 1992 by the now Eggo-less Fearn International. A year later the company said goodbye to Mrs. Smith’s Frozen Food brands. Seeking to replicate the Eggo success, another rising breakfast favourite, bagels, was added to the company mix with a 1996 purchase. Lender’s produced a range of frozen, refrigerated and fresh bagels. However, this would be a short-lived venture, with Kellogg selling the unit just four years later.
Back in the main portfolio, new trends were reshaping the business once again. In the cereal category Kellogg had completely missed the oat craze of the early 1990s, which worked much to the benefit of General Mills’ Cheerios brand. The rise of retailer private label offerings aimed at staples such as the Kellogg’s Cornflakes, Frosted Flakes and Rice Krispies brands was hurting the company. The Kellogg market share reached a new low in 1994 of 33.4%, a mere 0.1% ahead of the surging General Mills. The usual company response to such pressure was more new products, more advertising and more price increases. For once these failed to do the trick. Private label prices stayed where they were, which opened up too big a price gap, forcing first General Mills and then Kellogg to roll prices back again.
Kellogg’s annual sales were still increasing marginally but were mostly driven by its still booming international division. A new trend benefited Kellogg’s Pop-Tarts (now the company’s biggest brand) and the newly launched Kellogg’s Nutri-Grain snack bars. This was a surging demand for on-the-go snack options that were healthier than chocolate bars. It was at this point that the 1940 recipe for Kellogg’s Rice Krispies marshmallow bars made the transition from the back of the cereal box into a new product launched by the company, under the name Kellogg’s Rice Krispies Treats. The pressure from private label on its big cereal brands remained inexorable: by 1998, private label market share was estimated to be as high as 20%, mostly having come at the expense of Kellogg brands. The low technical barriers to entry had finally come back to haunt the company. No amount of innovation or advertising was going to sto
p retailers putting their own products on their shelves.
In 1998, the company embarked on a new direction, cutting its workforce by 25% and entering the functional food category mostly outside of the cereal aisle. They launched Kellogg’s Ensemble, a family of foods designed to lower cholesterol. Initially in test market with a planned rollout in late 1999, the brand consisted of seven categories: frozen entrees, bread, dry pasta, ready-to-eat cereal, baked potato crisps, frozen breakfast/dessert mini-loaves and cookies. These were marketed by a newly created division, the Kellogg Ensemble Functional Food Company. The active ingredient in the Ensemble line was psyllium, a soluble fiber proven to reduce cholesterol. Psyllium needed to be consumed in bulk for a person to benefit from its cholesterol-lowering effects: hence the wide product range. It was going to be a tough sell to persuade people to change their entire diets and buy enough of this range.
The CEO appointment of 25-year company veteran Carlos Gutierrez in April 1999 signalled a new change in direction for Kellogg. One of his first acts was to pull the plug on the Ensemble initiative, quickly followed by the offloading of the bagel division. These moves were counterbalanced by the acquisition in late 1999 of Worthington Foods, Inc., a manufacturer of meat alternatives, egg substitutes and other healthy/vegetarian food products. Gutierrez correctly divined that the trend towards healthier eating wasn’t going to go away, but that there were better ways to get on the bandwagon than via Ensemble.
Gutierrez had also inherited a company overly focused on the chasing of volume. Any volume at any level of profit: it was a culture developed under the inexorable pressure on sales volume created by the rise of private label. Although it would take a couple of years to address, the re-orientating of the company culture towards the pursuit of profitable volume would be a very important step. Initially, it led to General Mills overtaking Kellogg as the number-one cereal manufacturer. Gutierrez was not too bothered. The foundations were being put in place for a quite different Kellogg Company. In any event, market share cannot be taken to the bank. Kellogg continued its pivot towards more adult-friendly brands, with the launches of Kellogg’s Raisin Bran Crunch and Kellogg’s Special K Red Berries.
Two very important acquisitions were made in 2000 and 2001. The first, of Kashi Foods, was a recognition that there were newly emerging parts of the cereal market in which Kellogg could not credibly compete under its own name, given its heritage and continued reliance on highly processed sugared cereals. Kashi was a 16-year-old American manufacturer of natural breakfast cereals based around seven whole grains and sesame. Kashi Foods would run completely independently from the mainstream Kellogg cereal business as a stand-alone company. The second major acquisition in 2001, of the Keebler Company, was more transformative. It brought Kellogg a very well established range of cookie and cracker brands, distributed by Keebler’s own DSD system. This system got products into stores faster and gave the delivery staff access to shelf merchandising. Kellogg wasted no time in moving its impulse purchase snack lines, such as Kellogg’s Rice Krispies Treats and Kellogg’s Nutri-Grain Bars, into the Keebler system. Keebler’s product innovation team moved to Battle Creek to bolster a newly-created Snacking division. Keebler was by far the largest acquisition in the company’s history, costing $4.56 billion, and it completely changed the company’s product mix. Breakfast cereals now contributed 53% of sales, 32% from snacks and 15% from other grain-based foods. Keebler was the second-largest cookie and cracker manufacturer in the US, with brands such as Cheez-It, Famous Amos, Plantation, Zoo Animal Crackers, Murray and Keebler. Keebler had been bought in 1974 by the British company United Biscuits, which had all but run it into the ground by 1996. Then a leveraged buyout installed new management who had executed an impressive turnaround. The Cheez-It brand had doubled its volume in five years by the time Kellogg took ownership. Keebler also came with significant overseas operations, which would prove more than useful. Kellogg had a thriving, but geographically limited, international profile.
How Is It Structured?
For the most part of its history, Kellogg has been, organisationally speaking, a very simply structured company. A handful of large cereal businesses operated virtually autonomously until things got a little more complicated, and the company went on the acquisition trail in the 1970s. The Keebler acquisition and the imposition of ‘Volume to Value’ prompted Gutierrez to simplify the structure into two core divisions: Kellogg North America and Kellogg International. These were subdivided as follows:
· Kellogg North America
· North American Retail Cereal (the main cereal brands plus Kashi, which still runs autonomously)
· North American Retail Snacks (Keebler brands plus Pop-Tarts and Nutri-Grain Bars)
· Frozen and Speciality Channels (Eggo, Morningstar Farms and Worthington in the frozen section plus all products sold through convenience stores, drug stores and vending)
· Kellogg International
· Kellogg Europe (headquartered in the UK)
· Kellogg Latin America (headquartered in Mexico)
· Kellogg Asia Pacific (a broad region also including Africa and the Middle East, run out of Australia)
What Has It Been Doing Recently?
2004
The strategy imposed at the beginning of the 21st century - growing the cereal business, expanding the Snacks business and seeking selected growth opportunities; governed by the twin disciplines of ‘Volume to Value’ and the symbiotic ‘Manage for Cash’ (a focus on reducing working capital to pay for fund the growth) - was by now in full swing and delivering impressive results. The low point had been in 2000, when sales had fractionally declined to just over $6 billion. In 2004, sales rose for the fourth consecutive year to reach $9.6 billion, rising a reported 9% in the year itself. The company, however, prefers to focus on what it calls internal growth. This strips out the effect of currency exchange (significant for Kellogg), acquisitions and divestitures, and changes to the number of shipping days in the year. ‘Internal growth’ showed a more sedate but still good increase of 5% over the previous year. The operating profit was only slightly behind at 4%, the difference reflecting the funding of a double-digit increase in brand-building expenditures.
While both the US and International divisions grew at 5%, the heroes were the US Snacks and Latin America sub-divisions. These grew by 8% and 11% respectively. The Snacks business benefited from several good innovations. They borrowed the idea of Kellogg’s All-Bran Bars from Mexico and launched Cheez-It Twisters, a unique dual-flavoured twisted cracker. Then they ventured into the fruit snacks category. This last innovation made good strategic sense. The category was fast growing, and was sold in the same aisle as the snack bars. Kellogg was a trustworthy name in fruit, given their long experience of launching cereals with fruit inclusions. The company launched in the US, with Disney fruit snacks in the shape of popular Disney characters and Fruit Twistables. These were launched under Froot Loops branding in Canada. Aided by the company’s DSD system, the fruit lines quickly established a significant in-store presence and market share.
In Latin America, while doing well in most markets, the greatest growth came from the dominant Mexican market. This was thanks mainly to the Snacks category, which had been launched there in 2003 and was boosted by the 2004introduction of Pop-Tarts. Other significant events were the introduction of reduced-sugar versions of Kellogg’s Frosted Flakes and Kellogg’s Froot Loops; and the international rollout of the highly successful ‘Lose up to 6 lb in 2 weeks’ promotion on Kellogg’s Special K. This was developed in Venezuela, which had helped drive the brand to be the company’s largest globally. Without doubt, the biggest change in the year was the invitation of President Bush to Carlos Gutierrez to serve as Secretary of Commerce in his new administration. The invitation reflected the highly successful turnaround of the Kellogg business. As Gutierrez accepted the invitation, a change of leadership, but not of strategy, resulted.
2005
While the reported sales i
ncrease fell from 9% to 6%, the internal growth rate actually inched ahead from 5% to 6%. It was again driven by: the US Snacks business at 7%; Latin America at an impressive 11%; with a helping hand from the US Frozen and Speciality Division. The latter weighed in with an 8% increase, driven by Eggo and the frozen vegetarian food brand Morningstar. The US cereal business inched ahead 2%, gaining market share for the sixth consecutive year in a sluggish market. The European and Asia-Pacific regions both trod water.
In the North American Snacks Division, almost everything did well. Pop-Tarts led, recording its 26th consecutive year of sales growth to reach a staggering 86% share of a somewhat tightly defined toaster pastry category. It was helped by the introduction of yet another new flavour, Cinnamon Roll Pop-Tarts. The DSD-distributed snack bars boomed. Special K bars posted a double-digit increase and the range was extended with the introduction of Oatmeal Raisin All-Bran Bars. The fruit snack business grew again, prompting the company to acquire more manufacturing capability. In Latin America the company still had a mostly free run at the ready-to-eat cereal category and recorded strong share gains in Venezuela, the Caribbean, Columbia and especially the huge Mexican market. Here the company again gained share, to reach 71%.
Elsewhere, the North American Retail Cereal division, which accounted for almost 25% of total company sales, gained 0.4% share on top of a similar gain the previous year. The increase came from the good old strategy of lots of innovation, supported by even more advertising. The successful Kellogg’s Raisin Bran Crunch was joined by two new variants, while the Special K brand was broadened with the addition of Special K Fruit and Yoghurt. Meanwhile, the natural and now organic Kashi brand grew by double digits to reach a 2% share of the overall cereal market. This was an excellent achievement in the highly fragmented cereal category. In Asia-Pacific, the only really good news was the three-brand Indian cereal portfolio growing by double digits, albeit from a small base. It would be fair to say that Kellogg was finding it difficult quickly to establish the breakfast cereal habit in both India and China. At least CPW wasn’t doing it ahead of them.
