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Kellogg Company

Kellogg Company

Kellogg Company
One Kellogg Square
Battle Creek, Michigan 49016-3599
U.S.A.
Telephone: (616) 961-2000
Fax: (616) 961-2871
Web site: http://www.kelloggs.com

Public Company
Incorporated: 1906 as Battle Creek Toasted Corn Flake
Company
Stock Exchanges: New York
Ticker Symbol: K
NAIC: 311230 Breakfast Cereal Manufacturing; 311412 Frozen Specialty Food Manufacturing; 311812 Commercial Bakeries; 311999 All Other Food Manufacturing

Will Keith Kellogg once estimated that 42 cereal companies were launched in the breakfast-food boom during the early years of the 20th century. His own venture, founded as the Battle Creek Toasted Corn Flake Company, was among the last, but it outlasted most of its early competitors and has dominated the ready-to-eat cereal industry. The Kellogg Company, as it was ultimately named, followed a straight and profitable path, avoiding takeovers and diversification, relying heavily on advertising and promotion, and posting profits nearly every year of its existence.

Kelloggs Corn Flakes Are Born

By the time Kellogg launched his cereal company in 1906, he had already been in the cereal business for more than ten years as an employee of the Adventist Battle Creek Sanitarium run by his brother, Dr. John Harvey Kellogg. Dr. Kellogg, a strict vegetarian and the sanitariums internationally celebrated director, also invented and marketed various health foods. One of the foods sold by Dr. Kelloggs Sanitas Food Company was called Granose, a wheat flake the Kellogg brothers had stumbled upon while trying to develop a more digestible form of bread. The wheat flake was produced one night in 1894 following a long series of unsuccessful experiments. The men were running boiled wheat dough through a pair of rollers in the sanitarium basement. The dough had always come out sticky and gummy, until by accident the experiments were interrupted long enough for the boiled dough to dry out. When the dry dough was run through the rollers, it broke into thin flakes, one for each wheat berry, and flaked cereals were born.

Commercial production of the Granose flakes began in 1895 with improvised machinery in a barn on the sanitarium grounds. The factory was soon in continuous production, turning out more than 100,000 pounds of flakes in its first year. A ten-ounce box sold for 15 cents, which meant that the Kelloggs collected $12 for each 60-cent bushel of wheat processed, a feat that did not go unnoticed around Battle Creek, Michigan.

In 1900 production was moved to a new $50,000 facility. When the new factory building was completed, Dr. Kellogg insisted that he had not authorized it, forcing W.K. to pay for it himself.

Meanwhile, other companies were growing quickly, but Dr. Kellogg refused to invest in the companys expansion. Its most notable competitor was the Postum Cereal Company, launched by a former sanitarium patient, C.W. Post. Post added Grape-Nuts to his line in 1898 and by 1900 was netting $3 million a year, an accomplishment that inspired dozens of imitators and turned Battle Creek into the cereal-making capital of the United States.

In 1902 Sanitas improved the corn flake it had first introduced in 1898. The new product had better flavor and a longer shelf life than the 1898 version. By the following year the company was advertising in newspapers and on billboards, sending salesmen into the wholesale market, and introducing an ambitious door-to-door sampling program. By late 1905, Sanitas was producing 150 cases of corn flakes a day with sales of $100,000 a year.

Battle Creek Toasted Corn Flake Company Is Launched

The next year W.K. Kellogg launched the Battle Creek Toasted Corn Flake Company with the help of another enthusiastic former sanitarium patient. Kellogg recognized that advertising and promotion were the keys to success in a market flooded with look-alike productsthe company spent a third of its initial working capital on an ad in Ladies Home Journal.

Orders, fueled by early advertising efforts, continually outstripped production, even after the company leased factory space at two additional locations. In 1907 output had reached 2,900 cases a day, with a net profit of about a dollar per case. In May 1907 the company became the Toasted Corn Flake Company. That July a fire destroyed the main factory building. On the spot, W.K. Kellogg began making plans for a new fireproof factory, and within a week he had purchased land at a site strategically located between two competing railroad lines. Kellogg had the new plant, with a capacity of 4,200 cases a day, in full operation six months after the fire. Thats all the business I ever want, he is said to have told his son, John L. Kellogg, at the time.

By the time of the fire, the company had already spent $300,000 on advertising but the advertising barrage continued. One anonymous campaign told newspaper readers to wink at your grocer and see what your get. Winkers got a free sample of Kelloggs Corn Flakes. In New York City, the ad helped boost Corn Flake sales fifteen fold. In 1911 the advertising budget reached $1 million.

By that time, W.K. Kellogg had finally managed to buy out the last of his brothers share of the company, giving him more than 50 percent of its stock. W.K. Kelloggs company had become the Kellogg Toasted Corn Flake Company in 1909, but Dr. Kelloggs Sanitas Food Company had been renamed the Kellogg Food Company and used similar slogans and packaging. W.K. sued his brother for rights to the family name and was finally successful in 1921.

Company Is Reincorporated as the Kellogg Company

In 1922 the company reincorporated as the Kellogg Company because it had lost its trademark claim to the name Toasted Corn Flakes, and had expanded its product line so much that the name no longer accurately described the company. Kellogg had introduced Krumbles in 1912, followed by 40% Bran Flakes in 1915, and All-Bran in 1916.

Kellogg also made other changes, improving his product, packaging, and processing methods. Many of those developments came from W.K.s son John L. Kellogg, who began working for the company in its earliest days. J.L. Kellogg developed a malting process to give the corn flakes a more nut-like flavor, saved $250,000 a year by switching from a waxed paper wrapper on the outside of the box to a waxed paper liner inside, and invented All-Bran by adding a malt flavoring to the bran cereal. His father credited him with more than 200 patents and trademarks.

Kellogg Expands into Canada

Sales and profits continued to climb, financing several additions to the Battle Creek plant and the addition of a plant in Canada, opened in 1914, as well as an ever-increasing advertising budget. The one exception came just after World War I, when shortages of raw materials and railcars crippled the once-thriving business. W.K. Kellogg returned from a world tour and canceled advertising contracts and sampling operations, and, for six months, he and his son worked without pay. The company issued $500,000 in gold notes in 1919, and in 1920 posted the only loss in its history. Still, Kellogg rejected a competitors buyout offer.

At that point the Battle Creek plant had 15 acres of floor space, production capacity of 30,000 cases a day, and a shipping capacity of 50 railcars a day. Each day it converted 15,000 bushels of white southern corn into Corn Flakes. The company had 20 branch offices and employed as many as 400 salesmen. During the next decade the Kellogg Company more than doubled the floor space at its Battle Creek factory and opened another overseas plant in Sydney, Australia, in 1924.

Also during that period, W.K. Kellogg began looking for a successor since in 1925 he had forced his son, who had served briefly as president, out of the company after J.L. had bought an oat-milling plant and divorced his wife to marry an office employee. W.K. Kellogg objected both to his sons moral lapse and to his preference for oats. Several other presidents followed, but none could manage well enough to keep W.K. Kellogg away. During the Great Depression the companys directors decided to cut advertising, premiums, and other expenses. When Kellogg heard of it, he returned from his California home, called a meeting, and told the officers to press ahead. They voted again, this time adding $1 million to the advertising budget. The companys upward sales curve continued right through the Depression, and profits improved from around $4.3 million a year in the late 1920s to $5.7 million in the early 1930s.

In 1930 W.K. Kellogg established the W.K. Kellogg Foundation to support agricultural, health, and educational institutions. Kellogg eventually gave the foundation his majority interest in Kellogg Company. The company, under W.K.s control, also did its part to fight unemployment, hiring a crew to landscape a ten-acre park on the Battle Creek plant grounds and introducing a six-hour, four-shift day.

Company Perspectives:

Kellogg is a global company committed to building long-term growth in volume and profit and to enhancing its worldwide leadership position by providing nutritious food products of superior value.

Vanderploeg is named President of Kellogg Company

In 1939 Kellogg finally found a permanent president, Watson H. Vanderploeg, who was hired away from a Chicago bank. Vanderploeg led the company from 1939 until his death in 1957. Vanderploeg expanded Kelloggs successful advertise-and-grow policy, adding new products and taking them into new markets. In 1941 the company began a $1 million modernization program, updating old steam-generation equipment and adding new bins and processing equipment. The company also added new plants in the United States and abroad. Domestic plants were established in Omaha, Nebraska; Lockport, Illinois; San Leandro, California; and Memphis, Tennessee. Additional foreign operations were established in Manchester, England, in 1938, followed by plants in South Africa, Mexico, Ireland, Sweden, the Netherlands, Denmark, New Zealand, Norway, Venezuela, Colombia, Brazil, Switzerland, and Finland. During the five years after World War II, Kellogg expanded net fixed assets from $6.6 million to $20.6 million. As always, this expansion was financed entirely out of earnings.

The company also continued to add new products, but it never strayed far from the ready-to-eat cereal business. In 1952 more than 85 percent of sales came from ten breakfast cereals, although the company also sold a line of dog food, some poultry and animal feeds, and Gold Medal pasta. Barrons noted that Kelloggs profit margins, consistently between 6 and 7 percent of sales, were more than double those of other food companies. The company produced 35 percent of the nations ready-to-eat cereal and was the worlds largest manufacturer of cold cereal. Kelloggs success came from its emphasis on quality products; high-speed automated equipment, which kept labor costs to about 15 percent of sales; and substantial foreign earnings that were exempt from the excess-profits tax. Dividends tended to be generous and had been paid every year since 1908; sales, which had been $33 million in 1939, began to top $100 million in 1948. By the early 1950s an estimated one-third of those sales were outside the United States.

Kelloggs Begins Television Advertising

In the early 1950s Kelloggs continued success was tied to two outside developments: the postwar baby boom and television advertising. To appeal to the new younger market, Kellogg and other cereal makers brought out new lines of presweetened cereals and unabashedly made the key ingredient part of the name. Kelloggs entries included Sugar Frosted Flakes, Sugar Smacks, Sugar Corn Pops, Sugar All-Stars, and Cocoa Crispies. The company created cartoon pitchmen to sell the products on Saturday morning television. Tony the Tiger was introduced in 1953 following a contest to name the spokesperson for the new cereal, Kelloggs Sugar Frosted Flakes of Corn. Sales and profits doubled over the decade and in 1960 Kellogg earned $21.5 million on sales of $256.2 million and boosted its market share to 40 percent.

The company continued adding new cereals, aiming some at adolescent baby boomers and others, like Special K and Product 19, at their parents. Kelloggs Corn Flakes still led the cereal market and got more advertising support than any other cereal on grocers shelves. Kellogg poured nearly $10 million into Corn Flakes advertising in both 1964 and 1965, putting more than two-thirds of those dollars into television.

In 1969 Kellogg finally made a significant move away from the ready-to-eat breakfast-food business, acquiring Salada Foods, a tea company. The following year Kellogg bought Fearn International, which sold soups, sauces, and desserts to restaurants. Kellogg added Mrs. Smiths Pie Company in 1976 and Pure Packed Foods, a maker of nondairy frozen foods for institutional customers, in 1977. Kellogg also bought several small foreign food companies.

Key Dates:

1894:
The wheat flake is first produced by Dr. John Harvey Kellogg and Will Keith Kellogg at the Sanitas Food Company.
1898:
Kelloggs corn flake is introduced.
1905:
Granose (corn) flakes begin commercial production.
1906:
Battle Creek Toasted Corn Flake Company is founded in Battle Creek, Michigan, by Will Keith Kellogg.
1907:
The company is renamed Toasted Corn Flake Company; the main factory building is destroyed by fire.
1909:
Company is renamed the Kellogg Toasted Corn Flake Company.
1914:
International expansion begins in Canada.
1915:
Bran Flakes cereal is introduced.
1916:
All-Bran cereal is introduced.
1922:
Company is incorporated as the Kellogg Company.
1924:
Kellogg opens overseas plant in Sydney, Australia.
1928:
Rice Krispies are introduced.
1930:
The W.K. Kellogg Foundation is established.
1938:
International expansion begins in the United Kingdom.
1939:
Watson H. Vanderploeg becomes president of Kellogg.
1964:
The Pop-Tart is introduced.
1969:
Kellogg acquires a tea company, Salada Foods.
1970:
Kellogg acquires Fearn International.
1976:
Kellogg acquires Mrs. Smiths Pie Company.
1977:
Pure Packed Foods is acquired.
1979:
William E. LaMothe becomes CEO.
1982:
Nutri-Grain cereals are marketed.
1988:
Kellogg sells its U.S. and Canadian tea operations.
1992:
Arnold G. Langbo replaces LaMothe as chairman and CEO.
1993:
Kellogg sells Mrs. Smiths Frozen Foods, Cereal Packaging, Ltd., and its Argentine shack food business; Kellogg opens a plant in Riga, Latvia.
1994:
Kellogg teams with ConAgra to create a cereal line sold under the Healthy Choice label; Kellogg opens a plant in Taloja, India.
1995:
Kellogg opens a plant in Guangzhou, China.
1999:
Carlos Gutierrez becomes CEO; Kellogg sells the Lenders division to Aurora Foods and acquires Worthington Foods.
2000:
Kellogg acquires convenience food maker Kashi Company; Kellogg reorganizes its operations into two divisions (USA and International).
2001:
General Mills passes Kellogg as the number one cereal maker; Kellogg acquires Keebler Foods.

The diversification may have been motivated in part by increasing attacks on Kelloggs cereal business. Criticism boiled over in 1972 when the Federal Trade Commission (FTC) accused Kellogg and its leading rivals General Mills and General Foods of holding a shared monopoly and overcharging consumers more than $1 billion during the previous 15 years. The FTC said the companies used massive advertising (12 percent of sales), brand proliferation, and allocation of shelf space to keep out competitors and maintain high prices and profit margins. There was no disputing the profit margins, but the companies argued that the advertising and product proliferation were the result of competition, not monopoly. The cereal companies won their point following a lengthy hearing. During the same period, the industrys presweetened cereals and related advertising also took a beating. The American Dental Association accused the industry of obscuring the sugar content of those cereals, and Action for Childrens Television lodged a complaint with the FTC, saying that the mostly sugar cereals were equivalent to candy. Kellogg flooded consumer groups and the FTC with data playing down the sugar content by showing that only three percent of a childs sugar consumption comes from presweetened cereals. This publicity caused sugared-cereal sales to fall 5 percent in 1978, the first decline since their introduction in the 1950s.

The biggest threat to Kelloggs continued growth wasnt criticism, but rather the aging of its market. By the end of the 1970s growth slowed dramatically as the baby boom generation passed from the under-25 age group, which consumes an average of 11 pounds of cereal a year, to the 25 to 50 age group, which eats less than half as much cereal. Cereal-market growth dropped, and Kellogg lost the most. Its market share fell from 43 percent in 1972 to 37 percent in 1983.

New Chairman LaMothe Continues to Push Cereal Business

While Wall Street urged the company to shift its growth targets into anything but the stagnating cereal market, Kellogg continued to put its biggest efforts into its cereal business, emphasizing some of the same nutritional concepts that had given birth to the ready-to-eat breakfast business. And Kellogg was less unwilling than unable to diversify. It made three unsuccessful bids for the Tropicana Products orange juice company and another for Binney & Smith, makers of Crayola crayons. Despite its problems, Kellogg believed the cereal business still represented its best investment opportunity. When you average 28 percent return on equity in your own business, its pretty hard to find impressive acquisitions, said Chairman William E. LaMothe, a onetime salesman who became CEO in 1979.

In 1984 Kellogg bought about 20 percent of its own stock back from the W.K. Kellogg Foundation, a move that increased profits and helped defend the company against future takeover attempts, while satisfying a legal requirement limiting the holdings of foundations without giving potential raiders access to the stock.

Meanwhile, the companys response to generally sagging markets in the late 1970s was much like W.K. Kelloggs during the Depression: more advertising. Kellogg also boosted product research and stepped up new-product introductions. In 1979 the company rolled out five new products and had three more in test markets. By 1983 Kelloggs research-and-development budget was $20 million, triple the 1978 allotment. Targeting a more health-conscious market, Kellogg spent $50 million to bring three varieties of Nutri-Grain cereal to market in 1982. Kellogg added almost as many products in the next two years as it had in the previous four. And in 1984 Kellogg sparked a fiber fad when it began adding a health message from the National Cancer Institute to its All-Bran cereal.

By the mid-1980s the results of Kelloggs renewed assault on the cereal market were mixed. The companys hopes of raising per capita cereal consumption to 12 pounds by 1985 fell flat. But Kellogg did regain much of its lost market share, claiming 40 percent in 1985, and it continued to outperform itself year after year. In 1986 Kellogg posted its 30th consecutive dividend increase, its 35th consecutive earnings increase, and its 42nd consecutive sales increase.

Kellogg Sells Tea Companies

In 1988 the company sold its U.S. and Canadian tea operations, in a demonstration of Kelloggs renewed commitment to the cereal market. In the early 1990s, however, Kellogg failed to move fast enough to profit from the oat bran craze and lost market share in the United States, primarily to General Mills, Inc.s oat-heavy brands such as Cheerios and Honey Nut Cheerios. Further erosion resulted from an upsurge in sales of private-label store brands, notably those produced by Ralston Purina Company spinoff Ralcorp Holdings Inc.. By developing knockoffs of such Kellogg standbys as Corn Flakes and Apple Jacks and selling them for as much as a dollar less per box, Ralcorp and other companies increased private-label cereal market share to 6 percent by 1994 at the expense of Kellogg and other makers of brand-name cereals. Sales of branded cereals increased only 3 percent in 1994 over 1993; in this flat market, Kelloggs U.S. market share fell to as low as 33.8 percent in 1994.

In order to hold on to as much of its market share as it could, Kellogg management once again turned to increased marketing and advertising in 1990. Even in the face of the pressure from lower-priced private-label products, the company also continued to raise its prices in the early 1990s to generate sufficient revenue. This trend was finally reversed in 1994, however, when General Mills lowered its prices, forcing Kellogg to do the same.

In the midst of these difficulties, LaMothe retired in 1992 and was replaced as chairman and CEO by the president of Kellogg, Arnold G. Langbo. Under Langbos direction, the company underwent a reengineering effort in 1993 that committed the company to concentrate its efforts on its core business of breakfast cereal. That year and the next, Kellogg divested itself of such noncore assets as its Mrs. Smiths Frozen Foods pie business, Cereal Packaging, Ltd., based in England, and its Argentine snack food business.

Its emphasis on its core business was also extended to its operations outside the United States, where company officials saw the greatest potential for future growth. By 1991 Kellogg held 50 percent of the non-U.S. cereal market, and 34 percent of its profits were generated outside the United States. In most of the markets in which it operated, it had at least six of the top ten cereal brands. Looking to the future, Kelloggs primary target markets of Europe, Asia, and Latin America had not yet reached the more mature levels of the United States. While per capita cereal consumption in the United States was ten pounds per year, in most other markets it was less than two pounds. After expanding into Italy in the early 1990s, Kellogg became the first major cereal company to open plants in three markets: the former Soviet Union with a plant in Riga, Latvia, in 1993; India with a plant in Taloja, in 1994; and China with a plant in Guangzhou, in 1995. With these new operations, Kellogg had 29 plants operating in 19 countries and could reach consumers in almost 160 countries.

Kellogg Competes with General Mills for Market Share

Although Kellogg had a commanding position internationally, it faced a new and more formidable international competitor starting in 1989. General Mills and the Swiss food titan Nestle S.A. established a joint venture called Cereal Partners Worldwide (CPW), which essentially combined General Mills cereal brands and cereal-making equipment with Nestles name recognition in numerous markets and vast experience with retailers there. By 1994, CPW was already beginning to eat into Kelloggs market share in various countries.

Overall, Kelloggs 1990s difficulties had only slowednot stoppedthe firms tradition of continual growth. Net sales increased at the modest rates of 7 percent, 2 percent, and 4 percent in 1992, 1993, and 1994, respectively (1994 was Kelloggs 50th consecutive year of sales growth). With U.S. sales still accounting for 59 percent of the overall total, however, and competition heating up overseas, Kellogg faced its most challenging environment since the early 1920s. In addition to its aggressive expansion into overseas markets with huge potential for growth, another promising sign for a bright future for Kellogg was a revitalized new product development program. More disciplined than the scattershot approach of the 1980s, the program was beginning to produce such winners as Low Fat Granola, Rice Krispies Treats, and a line of cereal developed as a result of the 1994 partnership with ConAgra, Inc., under the food conglomerates Healthy Choice brand.

In 1997 and 1998 operations were expanded in Australia, the United Kingdom, Asia, and Latin America, but extremely competitive market conditions resulted in declines in sales and earnings in 1998. The result was a refocusing in two key areas: new product development and the complete overhaul of corporate headquarters and the North American organization structure. Product development included the addition of new cereals, innovative convenience foods, and new grain-based products; product improvement measures added to the nutritional value of all products. The Ensemble line of heart-healthy foods was introduced in November 1998 and included frozen entrees, bread, dry pasta, baked potato crisps, frozen miniloaves, cookies, and a ready-to-eat cereal similar to General Mills Cheerios line.

An increase in overall marketing investments was targeted for the seven largest cereal markets: the United States, the United Kingdom, Mexico, Canada, Australia, Germany, and France. In response to the growth of on-the-go convenience foods, geographic distribution was expanded for such products as Nutri-Grain bars, Rice Krispies Treats squares, and Pop-Tarts toaster pastries.

New Chairman Gutierrez Reorganizes Company

In an effort to reduce costs and create a more focused and accountable workforce, about 25 percent of its North American workforce was let go and steps were taken toward the reorganization of the corporate structure. As a result, several top officers left in 1998 and 1999. In April 1999, Cuban-born and 25-year veteran of the company Carlos M. Gutierrez became CEO. Gutierrezs vision for Kellogg was to begin a process of renewal designed to strengthen significantly the ability of the Kellogg Company to compete and prosper in the 21st century. His new team included eight new top executives, including four who joined the company in 1999 and 2000.

Gutierrez took many bolds steps to hold on to the companys position as the worlds leading producer of ready-to-eat cereal in spite of declining stock value, including selling the Lenders bagel division to Aurora Foods and shutting down the Ensemble line of cholesterol-reducing foods. Despite protestations from the community and workforce, the historic hometown plant in Battle Creek was closed and 550 jobs were eliminated. In late 1999, Kellogg acquired Worthington Foods, Inc., manufacturer of meat alternatives, frozen egg substitutes, and other healthy food products, under the brands of Morningstar Farms, Natural Touch, Worthington, and Loma Linda.

As in 1999, Kellogg continued the process of renewal in 2000, with its second consecutive year of earnings growth. Sales, however, declined by 0.4 percent and share performance was again disappointing. With sales falling or remaining stagnant in the ready-to-eat cereal business, the strategy of the company involved allocating resources first to the United States markets, and then to other core markets in the United Kingdom/Republic of Ireland, Mexico, Canada, and Australia/New Zealand; setting targets for long-term growth; and executing a sound business plan.

To strengthen their competitive position, in 2000 Kellogg acquired Kashi Company, a natural cereal company in the United States; two convenience food businesses in Australia; and the Mondo Baking Company, a manufacturer of convenience foods in Rome, Georgia. On October 26, the company announced that an agreement had been reached to acquire Keebler Foods Company, the largest acquisition in the 95-year history of the company. The acquisition, completed in March 2001, brought to Kellogg not only Keeblers cookie and cracker business, but also their direct store door (DSD) delivery system, which was expected to increase the growth potential of snack foods such as Kelloggs Nutri-Grain bars and Rice Krispies Treats squares.

In the fourth quarter of 2000, Kelloggs operations were restructured into two major divisionsUSA and Internationalto streamline operations and reduce costs. Kellogg International was further delineated into Europe, Latin America, Canada, Australia, and Asia. In U.S. operations, Kelloggs Raisin Bran Crunch cereal remained the most successful new U.S. cereal product since the mid-1990s, with a 0.9 percent market share. Consumer promotions included American Airlines frequent flyer miles, and affiliations with NASCAR, the Olympics, and Major League Soccer. Other advertising connections were made with the movie How the Grinch Stole Christmas and Pokemon. Kellogg also launched Eet & Ern, an Internet-based consumer loyalty program.

The Kellogg International division had responsibility for all markets outside the United States, providing products to more than 160 countries on six continents worldwide. The four largest Kellogg International markets were the United Kingdom/Republic of Ireland, Mexico, Canada, and Australia/New Zealand. The United Kingdom/Republic of Ireland remained Kelloggs largest market outside the United States, and experienced a 3 percent increase in cereal sales during 2000. The fastest growing international market was Mexico, where the direct store delivery system was effectively implemented.

Cereal competitor General Mills had closed the gap in the U.S. market share, and passed Kellogg in 2001 as the number one cereal maker. According to Kellogg CEO Gutierrez, after a year of change, a stronger Kellogg is emerging. The change marked the building of a better business model in which short-term sales and earnings growth were sacrificed to lay the foundation for great value creation in the future. In Kellogg USA, the acquisition of Keebler was completed in 2001 resulting in a more profitable sales mix. Advertising through brand-building was increased with tie-ins with Disney, American Airlines, and the Cartoon Network. In the cereal category, Special K Red Berries cereal was launched in March and proved to be the most successful new product in this category since the 1998 introduction of Raisin Bran Crunch. Pop-Tarts increased its sales and category share and benefited from the introduction of Chocolate Chip Pop-Tarts. A number of products in the snacks category benefited from the inclusion in Keeblers direct store delivery system. Growth was also evident in the natural and frozen foods category, with Kashi proving to be the fastest growing brand in the natural cereals category.

Like Kellogg USA, Kellogg Internationals focus on volume to value in 2001 was applied to sales, marketing, and new-product initiatives. In the United Kingdom, the most important brands and innovation projects were prioritized. Successful product campaigns were launched for Crunchy Nut Red cereal and Special K bars. Kellogg India Ltd. was permitted by the Foreign Investment Promotion Board to launch new products, Cheez-It Crackers, Keebler Cookiers, and Special K cereal. In other parts of Europe, Kellogg pulled back on investments in smaller markets and attempted to bring prices in line in preparation of the launch of the Euro currency.

By 2002 the Kellogg team, headed by Chairman Gutierrez, remained optimistic for the future of the Kellogg Company. After a year of significant changes, the company emerged a stronger organization, (with) a tighter focus and revitalized employees whose determination is greater than ever. The year 2002 indicated progress in the form of sustainable, reliable sales and earnings growth. With products manufactured in 19 countries and marketed in more than 160 countries worldwide, Kellogg showed more focus than ever to regain and retain its position as the worlds leading producer of cereal and a leading producer of convenience foods.

Principal Subsidiaries

Kellogg USA Inc.; Kellogg Company Argentina S.A.C.I.F.; Kellogg (Aust.) Proprietary Ltd. (Australia); Kellogg Brasil & CIA; Kellogg Canada Inc.; Kellogg de Colombia S.A.; Nordisk Kelloggs A/S (Denmark); Kelloggs Produits Alimentaires, S.A. (France); Kellogg (Deutschland) Gesellschaft mit beschrankter Haftung (GmbH); Kellogg de Centro America S.A. (Guatemala); Kellogg (Japan) K.K.; Nhong Shim Kellogg Co. Ltd. (Korea); Kellogg de Mexico S.A. de C.V.; Kellogg Company of South Africa (Proprietary) Limited; Kellogg Espana, S.A.; Kellogg Company of Great Britain, Ltd.; Alimentos Kellogg S.A. (Venezuela); Kellogg India Ltd.

Principal Competitors

General Mills; Kraft Foods; Quaker Oats.

Further Reading

Brown, Gerald, J.B. Keegan, and K. Wood Vigus, The Kellogg Company Optimizes Production, Inventory, and Distribution, Interfaces, November/December 2001, pp. 1-15.

Carson, Gerald, Cornflake Crusade, Salem, N. H.: Ayer, 1976, 305 pp.

Energy, Diet Bars Show High Growth, National Petroleum News, June 2002, p. 20.

Gould, William, Kelloggs: The Greatest Name in Cereals (VGMs Business Portraits), Lincolnwood, 111: VGM Career Horizons, 1997, 48 pp.

The History of Kellogg Company, Battle Creek, Mich.: Kellogg Company, 1986.

Hunnicutt, Benjamin Kline, Kelloggs Six Hour Day, Philadelphia: Temple University Press, 1996, 261 pp.

Kellogg Company, Frozen Food Age, March 2001, p. 1.

Kellogg Company, Hoovers Handbook of American Business 2002, 2001, pp. 816-17.

Knowlton, Christopher, Europe Cooks Up a Cereal Brawl, Fortune, June 3, 1991, pp. 175-78.

Mukherjee, Abarish, India: Kellogg Gets FIPB Nod for Four New Products, Businessline, December 27, 2001, p. 1.

Powell, Horace B., The Original Has This Signature: W.K. Kellogg, Englewood Cliffs, N. J.: Prentice-Hall, 1956, 358 p.

Serwer, Andrew E., What Price Brand Loyalty?, Fortune, January 10, 1994, pp. 103-04.

Treece, James B., and Greg Burns, The Nervous Faces around Kelloggs Breakfast Table, Business Week, July 18, 1994, p. 33.

Woodruff, David, Winning the War of Battle Creek, Business Week, May 13, 1991, p. 80.

updates: David E. Salamie, Carol D. Beavers

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Kellogg Company

Kellogg Company

One Kellogg Square
Battle Creek, Michigan 49016-3599
U.S.A.
(616) 961-2000
Fax: (616) 961-2871

Public Company
Incorporated: 1906 as Battle Creek Toasted Corn Flake
Company
Employees: 15,657
Sales: $6.56 billion
Stock Exchanges: New York Boston Cincinnati Midwest
Philadelphia
SICs: 2043 Cereal Breakfast Foods; 2038 Frozen Specialties Nec; 2099 Food Preparations Nec; 2051 Bread, Cake, & Related Products

Will Keith Kellogg once estimated that 42 cereal companies were launched in the breakfast-food boom during the early years of the twentieth century. His own venture, founded as the Battle Creek Toasted Corn Flake Company, was among the last, but it outlasted most of its early competitors and has dominated the ready-to-eat cereal industry every since. The Kellogg Company, as it was ultimately named, followed a straight and profitable path, avoiding takeovers and diversification, relying heavily on advertising and promotion, and posting profits nearly every year of its existence.

By the time Kellogg launched his cereal company in 1906 he had already been in the cereal business for more than ten years, as an employee of the Adventist Battle Creek Sanitarium run by his brother, Dr. John Harvey Kellogg. Dr. Kellogg, a strict vegetarian and the sanitariums internationally celebrated director, also invented and marketed various health foods. One of the foods sold by Dr. Kelloggs Sanitas Food Company was called Granose, a wheat flake the Kellogg brothers had stumbled upon while trying to develop a more digestible form of bread. The wheat flake was produced one night in 1894 following a long series of unsuccessful experiments. The men were running boiled wheat dough through a pair of rollers in the sanitarium basement. The dough had always come out sticky and gummy, until by accident the experiments were interrupted long enough for the boiled dough to dry out. When the dry dough was run through the rollers, it broke into thin flakes, one for each wheat berry, and flaked cereals were born.

Commercial production of the Granose flakes began in 1895 with improvised machinery in a barn on the sanitarium grounds. The factory was soon in continuous production, turning out more than 100,000 pounds of flakes in its first year. A ten-ounce box sold for 15 cents, which meant that the Kelloggs collected $12 for each 60-cent bushel of wheat processed, a feat that did not go unnoticed around Battle Creek, Michigan.

In 1900 production was moved to a new $50,000 facility. When the new factory building was completed, Dr. Kellogg insisted that he had not authorized it, forcing W. K. to pay for it himself.

Meanwhile, other companies were growing quickly, but Dr. Kellogg refused to invest in the companys expansion. Its most notable competitor was the Postum Cereal Company, launched by a former sanitarium patient, C. W. Post. Post added Grape-Nuts to his line in 1898 and by 1900 was netting $3 million a year, an accomplishment that inspired dozens of imitators and turned Battle Creek into the cereal-making capital of the United States.

In 1902 Sanitas improved the corn flake it had first introduced in 1898. The new product had better flavor and a longer shelf life than the 1898 version. By the following year the company was advertising in newspapers and on billboards, sending salesmen into the wholesale market, and introducing an ambitious door-to-door sampling program. By late 1905, Sanitas was producing 150 cases of corn flakes a day with sales of $100,000 a year.

The next year W. K. Kellogg launched the Battle Creek Toasted Corn Flake Company with the help of another enthusiastic former sanitarium patient. Kellogg recognized that advertising and promotion were key to success in a market flooded with look-alike productsthe company spent a third of its initial working capital on an ad in Ladies Home Journal.

Orders, fueled by early advertising efforts, continually outstripped production, even after the company leased factory space at two additional locations. In 1907 output had reached 2,900 cases a day, with a net profit of about a dollar per case. In May 1907 the company became the Toasted Corn Flake Company. That July a fire destroyed the main factory building. On the spot, W. K. Kellogg began making plans for a new fireproof factory, and within a week he had purchased land at a site strategically located between two competing railroad lines. Kellogg had the new plant, with a capacity of 4,200 cases a day, in full operation six months after the fire. Thats all the business I ever want, he is said to have told his son, John L. Kellogg, at the time.

By the time of the fire, the company had already spent $300,000 on advertising but the advertising barrage continued. One anonymous campaign told newspaper readers to wink at your grocer and see what your get. Winkers got a free sample of Kelloggs Corn Flakes. In New York City, the ad helped boost Corn Flake sales fifteenfold. In 1911 the advertising budget reached $1 million.

By that time, W. K. Kellogg had finally managed to buy out the last of his brothers share of the company, giving him more than 50 percent of its stock. W. K. Kelloggs company had become the Kellogg Toasted Corn Flake Company in 1909, but Dr. Kelloggs Sanitas Food Company had been renamed the Kellogg Food Company and used similar slogans and packaging. W. K. sued his brother for rights to the family name and was finally successful in 1921.

In 1922 the company reincorporated as the Kellogg Company because it had lost its trademark claim to the name Toasted Corn Flakes, and had expanded its product line so much that the name no longer accurately described the company. Kellogg introduced Krumbles in 1912, followed by 40% Bran Flakes in 1915 and All-Bran in 1916.

Kellogg also made other changes, improving his product, packaging, and processing methods. Many of those developments came from W. K.s son John L. Kellogg, who began working for the company in its earliest days. J. L. Kellogg developed a malting process to give the corn flakes a more nut-like flavor, saved $250,000 a year by switching from a waxed paper wrapper on the outside of the box to a waxed paper liner inside, and invented All-Bran by adding a malt flavoring to the bran cereal. His father credited him with more than 200 patents and trademarks.

Sales and profits continued to climb, financing several additions to the Battle Creek plant and the addition of a plant in Canada, opened in 1914, as well as an ever-increasing advertising budget. The one exception came just after World War I, when shortages of raw materials and rail cars crippled the once-thriving business. W. K. Kellogg returned from a world tour and canceled advertising contracts and sampling operations, and, for six months, he and his son worked without pay. The company issued $500,000 in gold notes in 1919 and in 1920 posted the only loss in its history. Still, Kellogg rejected a competitors buyout offer.

At that point the Battle Creek plant had 15 acres of floor space, production capacity of 30,000 cases a day, and a shipping capacity of 50 rail cars a day. Each day it converted 15,000 bushels of white southern corn into Corn Flakes. The company had 20 branch offices and employed as many as 400 salesmen. During the next decade the Kellogg Company more than doubled the floor space at its Battle Creek factory and opened another overseas plant in Sydney, Australia, in 1924.

Also during that period, W. K. Kellogg began looking for a successor since in 1925 he had forced his son, who served briefly as president, out of the company after John Kellogg bought an oat-milling plant and divorced his wife to marry an office employee. W. K. Kellogg objected both to his sons moral lapse and to his preference for oats. Several other presidents followed, but none could manage well enough to keep W. K. Kellogg away. During the Great Depression the companys directors decided to cut advertising, premiums, and other expenses. When Kellogg heard of it, he returned from his California home, called a meeting, and told the officers to press ahead. They voted again, this time adding $1 million to the advertising budget. The companys upward sales curve continued right through the Depression, and profits improved from around $4.3 million a year in the late 1920s to $5.7 million in the early 1930s.

In 1930 W. K. Kellogg established the W. K. Kellogg Foundation to support agricultural, health, and educational institutions. Kellogg eventually gave the foundation his majority interest in Kellogg Company. The company, under W. K.s control, also did its part to fight unemployment, hiring a crew to landscape a ten-acre park on the Battle Creek plant grounds and introducing a six-hour, four-shift day.

In 1939 Kellogg finally found a permanent president, Watson H. Vanderploeg, who was hired away from a Chicago bank. Vanderploeg led the company from 1939 until his death in 1957.

Vanderploeg expanded Kelloggs successful advertise-and-grow policy, adding new products and taking them into new markets. In 1941 the company began a $1 million modernization program, updating old steam-generation equipment and adding new bins and processing equipment. The company also added new plants in the United States and abroad. Domestic plants were established in Omaha, Nebraska; Lockport, Illinois; San Leandro, California; and Memphis, Tennessee. Additional foreign operations were established in Manchester, England, in 1938, followed by plants in South Africa, Mexico, Ireland, Sweden, the Netherlands, Denmark, New Zealand, Norway, Venezuela, Colombia, Brazil, Switzerland, and Finland. During the five years after World War II, Kellogg expanded net fixed assets from $6.6 million to $20.6 million. As always, this expansion was financed entirely out of earnings.

The company also continued to add new products, but it never strayed far from the ready-to-eat cereal business. In 1952 more than 85 percent of sales came from ten breakfast cereals, although the company also sold a line of dog food, some poultry and animal feeds, and Gold Medal pasta. Barrons noted that Kelloggs profit margins, consistently between six and seven percent of sales, were more than double those of other food companies. The company produced 35 percent of the nations ready-to-eat cereal and was the worlds largest manufacturer of cold cereal. Kelloggs success came from its emphasis on quality products; high-speed automated equipment, which kept labor costs to about 15 percent of sales; and substantial foreign earnings that were exempt from the excess-profits tax. Dividends tended to be generous and had been paid every year since 1908; sales, which had been $33 million in 1939, began to top $100 million in 1948. By the early 1950s an estimated one-third of those sales were outside the United States.

In the early 1950s Kelloggs continued success was tied to two outside developments: the postwar baby boom, and television advertising. To appeal to the new younger market Kellogg and other cereal makers brought out new lines of presweetened cereals and unabashedly made the key ingredient part of the name. Kelloggs entries included Sugar Frosted Flakes, Sugar Smacks, Sugar Corn Pops, Sugar All-Stars, and Cocoa Crispies. The company created Tony the Tiger and other cartoon pitchmen to sell the products on Saturday-morning television. Sales and profits doubled over the decade. In 1960 Kellogg earned $21.5 million on sales of $256.2 million and boosted its market share to 40 percent.

The company continued adding new cereals, aiming some at adolescent baby boomers and others, like Special K and Product 19 at their parents. Kelloggs Corn Flakes still led the cereal market and got more advertising support than any other cereal on grocers shelves. Kellogg poured nearly $10 million into Corn Flakes advertising in both 1964 and 1965, putting more than two-thirds of those dollars into television.

In 1969 Kellogg finally made a significant move away from the ready-to-eat breakfast-food business, acquiring Salada Foods, a tea company. The following year Kellogg bought Fearn International, which sold soups, sauces, and desserts to restaurants. Kellogg added Mrs. Smiths Pie Company in 1976 and Pure Packed Foods, a maker of non-dairy frozen foods for institutional customers, in 1977. Kellogg also bought several small foreign food companies.

The diversification may have been motivated in part by increasing attacks on Kelloggs cereal business. Criticism boiled over in 1972 when the Federal Trade Commission (FTC) accused Kellogg and its leading rivals General Mills and General Foods of holding a shared monopoly and overcharging consumers more than $1 billion during the previous 15 years. The FTC said the companies used massive advertising (12 percent of sales), brand proliferation, and allocation of shelf space to keep out competitors and maintain high prices and profit margins. There was no disputing the profit margins, but the companies argued that the advertising and product proliferation were the result of competition, not monopoly. The cereal companies won their point following a lengthy hearing. During the same period, the industrys presweetened cereals and related advertising also took a beating. The American Dental Association accused the industry of obscuring the sugar content of those cereals and Action for Childrens Television lodged a complaint with the FTC, saying that the mostly sugar cereals were equivalent to candy. Kellogg flooded consumer groups and the FTC with data playing down the sugar content by showing that only three percent of a childs sugar consumption comes from presweetened cereals. This publicity caused sugared-cereal sales to fall five percent in 1978, the first decline since their introduction in the 1950s.

The biggest threat to Kelloggs continued growth wasnt criticism, but rather the aging of its market. By the end of the 1970s growth slowed dramatically as the baby boom generation passed from the under-25 group, which consumes an average of 11 pounds of cereal a year, to the 25-50 age group, which eats less than half as much cereal. Cereal-market growth dropped, and Kellogg lost the most. Its market share fell from 43 percent in 1972 to 37 percent in 1983.

While Wall Street urged the company to shift its growth targets into anything but the stagnating cereal market, Kellogg continued to put its biggest efforts into its cereal business, emphasizing some of the same nutritional concepts that had given birth to the ready-to-eat breakfast business. And Kellogg was less unwilling to diversify than unable. It made three unsuccessful bids for the Tropicana Products orange juice company and another for Binney & Smith, makers of Crayola Crayons. Despite its problems, Kellogg believed the cereal business still represented its best investment opportunity. When you average 28 percent return on equity in your own business, its pretty hard to find impressive acquisitions, said Chairman William E. LaMothe, a onetime salesman who became CEO in 1979.

In 1984 Kellogg bought about 20 percent of its own stock back from the W. K. Kellogg Foundation, a move that increased profits and helped defend the company against future takeover attempts while satisfying a legal requirement limiting the holdings of foundations without giving potential raiders access to the stock.

Meanwhile, the companys response to generally sagging markets in the late 1970s was much like Will Kelloggs during the Depression: more advertising. Kellogg also boosted product research and stepped up new-product introductions. In 1979 the company rolled out five new products and had three more in test markets. By 1983 Kelloggs research-and-development budget was $20 million, triple the 1978 allotment. Targeting a more health-conscious market, Kellogg spent $50 million to bring three varieties of Nutri-Grain cereal to market in 1982. Kellogg added almost as many products in the next two years as it had in the previous four. And in 1984 Kellogg sparked a fiber fad when it began adding a health message from the National Cancer Institute to its All-Bran cereal.

By the mid-1980s the results of Kelloggs renewed assault on the cereal market were mixed. The companys hopes of raising per capita cereal consumption to 12 pounds by 1985 fell flat. But Kellogg did regain much of its lost market share, claiming 40 percent in 1985, and it continued to outperform itself year after year. In 1986 Kellogg posted its 30th consecutive dividend increase, its 35th consecutive earnings increase, and its 42nd consecutive sales increase.

In 1988 the company sold its U.S. and Canadian tea operations, in a demonstration of Kelloggs renewed commitment to the cereal market. In the early 1990s, however, Kellogg failed to move fast enough to profit from the oat bran craze and lost market share in the United States, primarily to General Mills Inc.s oat-heavy brands such as Cheerios and Honey Nut Cheer-ios. Further erosion resulted from an upsurge in sales of private-label store brands, notably those produced by Ralston Purina Co. spin-off Ralcorp Holdings Inc. By developing knockoffs of such Kellogg standbys as Corn Flakes and Apple Jacks and selling them for as much as a dollar less per box, Ralcorp and other companies increased private-label cereal market share to six percent by 1994 at the expense of Kellogg and other makers of brand-name cereals. Sales of branded cereals increased only three percent in 1994 over 1993; in this flat market, Kelloggs U.S. market share fell to as low as 33.8 percent in 1994.

In order to hold on to as much of its market share as it could, Kellogg management once again turned to increased marketing and advertising in 1990. Even in the face of the pressure from lower-priced private-label products, the company also continued to raise its prices in the early 1990s to generate sufficient revenue. This trend was finally reversed in 1994, however, when General Mills lowered its prices, forcing Kellogg to do the same.

In the midst of these difficulties, LaMothe retired in 1992 and was replaced as chairman and CEO by the president of Kellogg, Arnold G. Langbo. Under Langbos direction, the company underwent a reengineering effort in 1993 that committed the company to concentrate its efforts on its core business of breakfast cereal. That year and the next, Kellogg divested itself of such noncore assets as its Mrs. Smiths Frozen Foods pie business, Cereal Packaging, Ltd., based in England, and its Argentine snack food business.

Its emphasis on its core business was also extended to its operations outside the United States, where company officials saw the greatest potential for future growth. By 1991 Kellogg held 50 percent of the non-U.S. cereal market, and 34 percent of its profits were generated outside the United States. In most of the markets in which it operated, it had at least six of the top ten cereal brands. Looking to the future, Kelloggs primary target markets of Europe, Asia, and Latin America had not yet reached the more mature levels of the United States. While per capita cereal consumption in the United States was ten pounds per year, in most other markets it was less than two pounds. After expanding into Italy in the early 1990s, Kellogg became the first major cereal company to open plants in three markets: the former Soviet Union with a plant in Riga, Latvia, in 1993; India with a plant in Taloja, in 1994; and China with a plant in Guangzhou, in 1995. With these new operations, Kellogg had 29 plants operating in 19 countries and could reach consumers in almost 160 countries.

Although Kellogg had a commanding position internationally, it faced a new and more formidable international competitor starting in 1989. General Mills and the Swiss food titan Nestlé S.A. established a joint venture called Cereal Partners Worldwide (CPW), which essentially combined General Millss cereal brands and cereal-making equipment with Nestlés name recognition in numerous markets and vast experience with retailers there. By 1994, CPW was already beginning to eat into Kelloggs market share in various countries.

Overall, Kelloggs 1990s difficulties had only slowednot stoppedthe firms tradition of continual growth. Net sales increased at the modest rates of seven percent, two percent, and four percent in 1992, 1993, and 1994, respectively (1994 was Kelloggs 50th consecutive year of sales growth). With U.S. sales still accounting for 59 percent of the overall total, however, and competition heating up overseas, Kellogg faced its most challenging environment since the early 1920s. In addition to its aggressive expansion into overseas markets with huge potential for growth, another promising sign for a bright future for Kellogg was a revitalized new product development program. More disciplined than the scattershot approach of the 1980s, the program was beginning to produce such winners as Low Fat Granola, Rice Krispies Treats, and a line of cereal developed in partnership with ConAgra, Inc., under the food conglomerates Healthy Choice brand.

Principal Subsidiaries

Kellogg USA Inc.; Kellogg Company Argentina S.A.C.I.F.; Kellogg (Aust.) Proprietary Ltd. (Australia); Kellogg Brasil & CIA; Kellogg Canada Inc.; Kellogg de Colombia S.A.; Nordisk Kelloggs A/S (Denmark); Kelloggs Produits Alimentaires, S.A. (France); Kellogg (Deutschland) Gesellschaft mit beschrankter Haftung (GmbH); Kellogg de Centro America S.A. (Guatemala); Kellogg (Japan) K.K.; Nhong Shim Kellogg Co. Ltd. (Korea); Kellogg de Mexico S.A. de C.V.; Kellogg Company of South Africa (Proprietary) Limited; Kellogg Espana, S.A.; Kellogg Company of Great Britain, Ltd.; Alimentos Kellogg S.A. (Venezuela).

Further Reading

Carson, Gerald, Cornflake Crusade, Salem, New Hampshire: Ayer, 1976, 305 p.

The History of Kellogg Company, Battle Creek, Michigan: Kellogg Company, 1986.

Knowlton, Christopher, Europe Cooks up a Cereal Brawl, Fortune, June 3, 1991, pp. 17578.

Powell, Horace B., The Original Has This Signature: W. K. Kellogg, Englewood Cliffs, New Jersey: Prentice-Hall, 1956, 358 p.

Serwer, Andrew E., What Price Brand Loyalty?, Fortune, January 10, 1994, pp. 10304.

Treece, James B., and Greg Burns, The Nervous Faces around Kelloggs Breakfast Table, Business Week, July 18, 1994, p. 33.

Woodruff, David, Winning the War of Battle Creek, Business Week, May 13, 1991, p. 80.

updated by David E. Salamie

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Kellogg Company

Kellogg Company

One Kellogg Square
Battle Creek, Michigan 49016-3599
U.S.A.
(616) 961-2000

Public Company
Incorporated: 1906 as Battle Creek Toasted Corn Flake Company
Employees: 17,461
Sales: $4.65 billion (1989)
Stock Index: New York Boston Cincinnati Midwest Pacific Philadelphia

Will Keith Kellogg once estimated that 42 cereal companies were launched in the breakfast-food boom during the early years of the 20th century. His own venture, chartered as the Battle Creek Toasted Corn Flake Company, was among the last, but it outlasted most of its early competitors and has dominated the ready-to-eat cereal industry every since. The Kellogg Company, as it was ultimately named, followed a straight and profitable path, avoiding takeovers and diversification, relying heavily on advertising and promotion, and posting profits nearly every year of its existence.

By the time Kellogg launched his cereal company in 1906 he had already been in the cereal business for more than ten years, as an employee of his brothers Adventist Battle Creek Sanitarium. Dr. John Harvey Kellogg, a strict vegetarian and the sanitariums internationally celebrated director, also invented and marketed various health foods. One of the foods sold by Dr. Kelloggs Sanitas Food Company was called Granose, a wheat flake the Kellogg brothers had stumbled upon while trying to develop a more digestible form of bread. The wheat flake was produced one night in 1894 following a long series of unsuccessful experiments. The men were running boiled wheat dough through a pair of rollers in the sanitarium basement. The dough had always come out sticky and gummy, until by accident the experiments were interrupted long enough for the boiled dough to dry out. When the dry dough was run through the rollers, it broke into thin flakes, one for each wheat berry, and flaked cereals were born.

Commercial production of the Granose flakes began in 1895 with improvised machinery in a barn on the sanitarium grounds. The factory was soon in continuous production, turning out more than 100,000 pounds of flakes in its first year. A ten-ounce box sold for 15 cents, which meant that the Kelloggs collected $12 for each 60-cent bushel of wheat processed, a feat that did not go unnoticed around Battle Creek, Michigan.

In 1900 production was moved to a new $50,000 facility. When the new factory building was completed, Dr. Kellogg insisted that he had not authorized it, forcing W. K. to pay for it himself.

Meanwhile, other companies were growing quickly, but Dr. Kellogg refused to invest in the companys expansion. Its most notable competitor was the Postum Cereal Company, launched by a former sanitarium patient, C. W. Post. Post added Grape-Nuts to his line in 1898 and by 1900 was netting $3 million a year, an accomplishment that inspired dozens of imitators and turned Battle Creek into the cereal-making capital of the United States.

In 1902 Sanitas improved the corn flake it had first introduced in 1898. The new product had better flavor and a longer shelf life than the unsuccessful 1898 version. By the following year the company was advertising in newspapers and on billboards, sending salesmen into the wholesale market, and introducing an ambitious door-to-door sampling program. By late 1905, Sanitas was producing 150 cases of corn flakes a day with sales of $100,000 a year.

The next year W. K. Kellogg launched the Battle Creek Toasted Corn Flake Company with the help of another enthusiastic former sanitarium patient. Kellogg recognized that advertising and promotion were key to success in a market flooded with look-alike productsthe company spent a third of its initial working capital on an ad in Ladies Home Journal.

Orders, fueled by early advertising efforts, continually outstripped production, even after the company leased factory space at two additional locations. In 1907 output had reached 2,900 cases a day, with a net profit of about a dollar per case. In May, 1907 the company became the Toasted Corn Flake Company. That July a fire destroyed the main factory building. On the spot, W. K. Kellogg began making plans for a new fireproof factory, and within a week he had purchased land at a site strategically located between two competing railroad lines. Kellogg had the new plant, with a capacity of 4,200 cases a day, in full operation six months after the fire. Thats all the business I ever want, he is said to have told his son, John L. Kellogg, at the time.

By the time of the fire, the company had already spent $300,000 on advertising but the advertising barrage continued. One anonymous campaign told newspaper readers to wink at your grocer and see what your get. (Winkers got a free sample of Kelloggs Corn Flakes.) In New York City, the ad helped boost Corn Flake sales fifteenfold. In 1911 the advertising budget reached $1 million.

By that time, W. K. Kellogg had finally managed to buy out the last of his brothers share of the company, giving him more than 50% of its stock. W. K. Kelloggs company had become the Kellogg Toasted Corn Flake Company in 1909, but Dr. Kelloggs Sanitas Food Company had been renamed the Kellogg Food Company and used similar slogans and packaging. W. K. sued his brother for rights to the family name and was finally successful in 1921.

In 1922 the company reincorporated as the Kellogg Company because it had lost its trademark claim to the name Toasted Corn Flakes, and had expanded its product line so much that the name no longer accurately described the company. Kellogg introduced Krumbles in 1912, followed by 40% Bran Flakes in 1915 and All-Bran in 1916.

Kellogg also made other changes, improving his product, packaging, and processing methods. Many of those developments came from W. K.s son John L. Kellogg, who began working for the company in its earliest days. J. L. Kellogg developed a malting process to give the corn flakes a more nut-like flavor, saved $250,000 a year by switching from a waxed paper wrapper on the outside of the box to a waxed paper liner inside, and invented All-Bran by adding a malt flavoring to the bran cereal. His father credited him with more than 200 patents and trademarks.

Sales and profits continued to climb, financing several additions to the Battle Creek plant and the addition of a plant in Canada, opened in 1914, as well as an ever-increasing advertising budget. The one exception came just after World War I, when shortages of raw materials and rail cars crippled the once-thriving business. W. K. Kellogg returned from a world tour and canceled advertising contracts and sampling operations, and, for six months, he and his son worked without pay. The company issued $500,000 in gold notes in 1919 and in 1920 posted the only loss in its history. Still, Kellogg rejected a competitors buyout offer.

At that point the Battle Creek plant had 15 acres of floor space, production capacity of 30,000 cases a day, and a shipping capacity of 50 rail cars a day. Each day it converted 15,000 bushels of white southern corn into Corn Flakes. The company had 20 branch offices and employed as many as 400 salesmen. During the next decade the Kellogg Company more than doubled the floor space at its Battle Creek factory and opened another overseas plant in Sydney, Australia, in 1924.

Also during that period, W. K. Kellogg began looking for a successor since in 1925 he had forced his son, who served briefly as president, out of the company after John Kellogg bought an oat-milling plant and divorced his wife to marry an office girl. W. K. Kellogg objected both to his sons moral lapse and to his preference for oats. Several other presidents followed, but none could manage well enough to keep W. K. Kellogg away. During the Great Depression the companys directors decided to cut advertising, premiums, and other expenses. When Kellogg heard of it, he returned from his California home, called a meeting, and told the officers to press ahead. They voted again, this time adding $1 million to the advertising budget. The companys upward sales curve continued right through the Depression, and profits improved from around $4.3 million a year in the late 1920s to $5.7 million in the early 1930s.

In 1930 W. K. Kellogg established the W. K. Kellogg Foundation to support agricultural, health, and educational institutions. Kellogg eventually gave the foundation his majority interest in Kellogg Company. The company, under W. K.s control, also did its part to fight unemployment, hiring a crew to landscape a ten-acre park on the Battle Creek plant grounds and introducing a six-hour, four-shift day.

In 1939 Kellogg finally found a permanent president, Watson H. Vanderploeg, who was hired away from a Chicago bank. Vanderploeg led the company from 1939 until his death in 1957.

Vanderploeg expanded Kelloggs successful advertise-and-grow policy, adding new products and taking them into new markets. In 1941 the company began a $1 million modernization program, updating old steam-generation equipment and adding new bins and processing equipment. The company also added new plants in the United States and abroad. Domestic plants were established at Omaha, Nebraska; Lockport, Illinois; San Leandro, California; and Memphis, Tennessee. Additional foreign operations were established in Manchester, England in 1938, followed by plants in South Africa, Mexico, Ireland, Sweden, the Netherlands, Denmark, New Zealand, Norway, Venezuela, Colombia, Brazil, Switzerland, and Finland. During the five years after World War II, Kellogg expanded net fixed assets from $6.6 million to $20.6 million. As always, this expansion was financed entirely out of earnings.

The company also continued to add new products, but it never strayed far from the ready-to-eat cereal business. In 1952 more than 85% of sales came from ten breakfast cereals, although the company also sold a line of dog food, some poultry and animal feeds, and Gold Medal pasta. Barrons noted that Kelloggs profit margins, consistently between 6% and 7% of sales, were more than double those of other food companies. The company produced 35% of the nations ready-to-eat cereal and was the worlds largest manufacturer of cold cereal. Kelloggs success came from its emphasis on quality products; high-speed automated equipment, which kept labor costs to about 15% of sales; and substantial foreign earnings that were exempt from the excess-profits tax. Dividends tended to be generous and had been paid every year since 1908; sales, which had been $33 million in 1939, began to top $100 million in 1948. By the early 1950s an estimated one-third of those sales were outside the United States.

In the early 1950s Kelloggs continued success was tied to two outside developments: the postwar baby boom, and television advertising. To appeal to the new younger market, Kellogg and other cereal makers brought out new lines of presweetened cereals and unabashedly made the key ingredient part of the name. Kelloggs entries included Sugar Frosted Flakes, Sugar Smacks, Sugar Corn Pops, Sugar All-Stars, and Cocoa Crispies. The company created Tony the Tiger and other cartoon pitchmen to sell the products on Saturday-morning television. Sales and profits doubled over the decade. In 1960 Kellogg earned $21.5 million on sales of $256.2 million and boosted its market share to 40%.

The company continued adding new cereals, aiming some at adolescent baby boomers and others, like Special K and Product 19 at their parents. Kelloggs Corn Flakes still led the cereal market and got more advertising support than any other cereal on grocers shelves. Kellogg poured nearly $10 million into Corn Flakes advertising in both 1964 and 1965, putting more than two-thirds of those dollars into television.

In 1969 Kellogg finally made a significant move away from the ready-to-eat breakfast-food business, acquiring Salada Foods, a tea company. The following year Kellogg bought Fearn International, which sold soups, sauces, and desserts to restaurants. Kellogg added Mrs. Smiths Pie Company in 1976 and Pure Packed Foods, a maker of non-dairy frozen foods for institutional customers, in 1977. Kellogg also bought several small foreign food companies.

The diversification may have been motivated in part by increasing attacks on Kelloggs cereal business. Criticism boiled over in 1972 when the Federal Trade Commission (FTC) accused Kellogg and its leading rivals General Mills and General Foods of holding a shared monopoly and overcharging consumers more than $1 billion during the previous 15 years. The FTC said the companies used massive advertising (12% of sales), brand proliferation, and allocation of shelf space to keep out competitors and maintain high prices and profit margins. There was no disputing the profit margins, but the companies argued that the advertising and product proliferation were the result of competition, not monopoly. The cereal companies won their point following a lengthy hearing. During the same period, the industrys presweetened cereals and related advertising also took a beating. The American Dental Association accused the industry of obscuring the sugar content of those cereals and Action for Childrens Television lodged a complaint with the FTC, saying that the mostly sugar cereals were equivalent to candy. Kellogg flooded consumer groups and the FTC with data downplaying the sugar content by showing that only 3% of a childs sugar consumption comes from presweetened cereals. This publicity caused sugared-cereal sales to fall 5% in 1978, the first decline since their introduction in the 1950s.

But the biggest threat to Kelloggs continued growth wasnt criticism but the aging of its market. By the end of the 1970s growth slowed dramatically as the baby-boom generation passed from the under-25 group, which consumes an average of 11 pounds of cereal a year, to the 25-50 age group, which eats less than half as much cereal. Cereal-market growth dropped, and Kellogg lost the most. Its market share fell from 43% in 1972 to 37% in 1983.

While Wall Street urged the company to shift its growth targets into anything by the stagnating cereal market, Kellogg continued to put its biggest efforts into its cereal business, emphasizing some of the same nutritional concepts that had given birth to the ready-to-eat breakfast business. And Kellogg was less unwilling to diversify than unable. It made three unsuccessful bids for the Tropicana Products orange juice company and another for Binney & Smith, makers of Crayola Crayons. Despite its problems, Kellogg believed the cereal business still represented its best investment opportunity. When you average 28% return on equity in your own business, its pretty hard to find impressive acquisitions, said Chairman William E. LaMothe, a onetime salesman who became CEO in 1979.

In 1984 Kellogg bought about 20% of its own stock back from the W. K. Kellogg Foundation, a move that increased profits and helped defend the company against future takeover attempts while satisfying a legal requirement limiting the holdings of foundations without giving potential raiders access to the stock.

Meanwhile, the companys response to generally sagging markets in the late 1970s was much like Will Kelloggs during the Depression: more advertising. Kellogg also boosted product research and stepped up new-product introductions. In 1979 the company rolled out five new products and had three more in test markets. By 1983 Kelloggs research-and-development budget was $20 million, triple the 1978 allotment. Targeting a more health-conscious market, Kellogg spent $50 million to bring three varieties of Nutri-Grain cereal to market in 1982. Kellogg added almost as many products in the next two years as it had in the previous four. And in 1984 Kellogg sparked a fiber fad when it began adding a health message from the National Cancer Institute to its All-Bran cereal.

By the mid 1980s the results of Kelloggs renewed assault on the cereal market were mixed. The companys hopes of raising per capita cereal consumption to 12 pounds by 1985 fell flat. But Kellogg did regain much of its lost market share, claiming 40% in 1985. And it continued to outperform itself year after year. In 1986 Kellogg posted its 30th consecutive dividend increase, its 35th consecutive earnings increase, and its 42nd consecutive sales increase.

In 1988 the company sold its U.S. and Canadian tea operations, in a demonstration of Kelloggs renewed commitment to the cereal market. This commitment has taken on new life at Kellogg as a result of the movement in the 1980s away from fatty foods and toward grain-based products. This is a trend Kellogg has helped escalate with the introduction of healthier breakfast foods and advertisements stressing the importance of grains and grain products such as oat bran and other fiber.

Another key facet of Kelloggs strategy continues to be the aggressive marketing and advertising support it gives it products in order to keep them growing in a fairly mature market. Kellogg also routinely spends lavish amounts to expand and modernize its production facilities, keeping actual production costs low and the companys plants well positioned for growth.

Consumer demands for healthier and more convenient food will help Kellogg sustain growth during the 1990s. With an evergrowing U.S. market share, more than double the 20.5% share of closest-competitor General Mills, and an even-faster-growing 50% share of the foreign cereal market, Kellogg should remain in a strong condition even without diversification, but it will continue to look for ways to enlarge its market. More than once Kellogg has averted disaster by use of timely advertisements. It is a good bet that, like W. K. Kellogg himself, the company will continue to foster growth in trying times by the use of aggressive and innovative product development and marketing.

Principal Subsidiaries

Fearn International Inc.; Mrs. Smiths Frozen Foods Co.

Further Reading

Powell, Horace B. The Original Has This Signature: W. K. Kellogg, Englewood Cliffs, N.J., Prentice-Hall, 1956; Carson, Gerald. Cornflake Crusade, Salem, New Hampshire, Ayer, 1976; The History of Kellogg Company, Battle Creek, Michigan, Kellogg Company, 1986.

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Kellogg Company

Kellogg Company

One Kellogg Square, Box 3599
Battle Creek, Ml 95014-3599
(616) 961-2000
www.kelloggs.com

For millions of people around the world, breakfast includes a bowl of Kellogg's cereal. Starting with just one product, the Kellogg Company added many other items over the years, targeting sugar-coated cereal at children and offering bran and other healthy grains to adults. In recent years, the company has moved beyond cereal, selling snack bars and other foods that can be eaten on the run.

Since its founding in 1906, the Kellogg Company has relied heavily on advertising to stir demand for its products. The company has also created several well-known cartoon mascots for its leading brands. Generations of children know Tony the Tiger, who roars about Kellogg's "Gr-r-reat" Frosted Flakes, and Toucan Sam, the colorful "spokesbird" for Froot Loops. Even as Kellogg's expands its offerings, cereal remains its most successful product, making the company the world's top cereal producer.

Health Food for Breakfast

The Kellogg Company was born in Battle Creek, Michigan, "the cereal capital of the world." Starting in 1876, Dr. John Harvey U. H.) Kellogg ran the Battle Creek Sanitarium, a health spa that promoted a vegetarian diet and forbid its guests from drinking alcohol or smoking cigarettes. Kellogg began experimenting with breakfast foods made from grain, to replace the typical late-nineteenth century breakfast centered around meat, eggs, and other heavy foods. One of Kellogg's first inventions was granola, which combined wheat, oatmeal, and corn meal.

After trying granola at the sanitarium, many guests wanted to eat the cereal at home, so Kellogg established the Sanitas Food Company to make and sell the product. Dr. Kellogg had help running Sanitas from his younger brother Will Keith (W. K.). In 1894, the Kelloggs wanted to make a new wheat product that would be easy to digest. They tried putting boiled wheat through large rollers, hoping to make wheat flakes, but the process was a failure. After one batch of boiled wheat was accidentally left out to dry, the Kelloggs put it through the rollers, and this time the wheat formed small flakes. The brothers then baked the flakes, resulting in the first flaked cereal, which the Kelloggs called Granose.

Kellogg at a Glance

  • Employees: 28,000
  • CEO: Carlos M. Gutierrez
  • Subsidiaries: Argkel; CELNASA; Favorite Food Products; Garden City Bakery Ltd.; Gollek B.V.; K-One Inc.; KFSC, Inc.; Kelarg; Kelcone Ltd.; Kelmill Ltd.; Mountaintop Baking Company; Portable Foods Manufacturing Company Ltd.; Specialty Foods Investment Company; The Eggo Company; Worthington Foods, Inc.
  • Major Competitors: General Foods; General Mills; Ralston-Purina; Quaker Oats
  • Notable Products: Com Flakes; Rice Krispies; Special K; Froot Loops; Frosted Flakes; Pop Tarts; Eggo waffles; Keebler cookies and crackers; Cheez-lt crackers; Nutri-Grain bars

Dr. Kellogg served his new cereal at the sanitarium, and Sanitas sold it by mail to former guests. By 1905, the company was also selling corn flakes, producing 150 cases a day. Sanitas had more than forty competitors by then, as other cereal companies sprang up in Battle Creek. W. K. Kellogg wanted to expand the business even more, but his brother disagreed. A biography of the younger Kellogg, The Original Has This Signature W K. Kellogg, quotes his early thoughts on the business: "If given the opportunity, the food company would develop in such a manner that the sanitarium would be only a side show as to the food business."

Kellogg's and Corn Flakes

In 1906, W. K. Kellogg left his brother's sanitarium and founded the Battle Creek Toasted Corn Flake Company, selling a corn flake he had perfected at Sanitas. With his new company, Kellogg had the freedom he wanted to expand the business. He had already shown a genius for marketing, introducing the idea of offering cereal samples door-to-door. With his own company, Kellogg spent one-third of his money on a full-page ad in the Ladies Home Journal. Within a year, the Battle Creek Toasted Corn Flake Company sold more than 175,000 cases of its cereal. By 1909, annual sales of Toasted Corn Flakes reached one million cases.

Timeline

1906:
W. K. Kellogg starts the Battle Creek Toasted Corn Flake Company.
1909:
Annual sales of Toasted Corn Flakes reach one million cases.
1914:
Kellogg's opens a plant in Canada.
1928:
Rice Krispies are introduced.
1938:
W. K. Kellogg retires.
1952:
Tony the Tiger is first used to promote Frosted Flakes.
1964:
Kellogg's introduces Pop Tarts.
1970:
Kellogg's buys the Eggo Waffle Company.
1989:
Kellogg's sells its first cereal bars.
1999:
Carlos M. Gutierrez is named CEO of Kellogg's.
2001:
Kellogg's completes its purchase of Keebler Foods.

In 1907, Kellogg shortened his company's name to the Toasted Corn Flake Company (later he changed it to the Kellogg Company). The same year, the company's factory was destroyed by fire, but Kellogg quickly built a bigger and better plant. In 1910, Kellogg's gave consumers their first premiuma free gift inside the cereal boxcalled "The Funny Jungleland Moving Pictures Book." Two years later, the company introduced its second product, Krumbles, a shredded wheat cereal. Over the next several years, Kellogg's brought out two news cereals, 40% Bran Flakes and All-Bran.

Except for a brief time after World War I (1914-18), the Kellogg Company continued to grow. By 1920, the company produced thirty thousand cases of cereal per day in Battle Creek. A Canadian factory had opened in 1914, and the company expanded overseas in 1923, opening a plant in Sydney, Australia.

Depression Years and Beyond

In 1929, stock prices crashed, leading to the Great Depression. At a time when many businesses cut advertising costs, Kellogg doubled its budget for ads and profits rose. Kellogg's began sponsoring radio shows for children and introduced cartoon elves called Snap, Crackle, and Pop to sell Rice Krispies, which hit the market in 1928. By the end of the decade, the company had ensured its place as the world's largest cereal company, selling 40 percent of all cereal purchased in the United States and holding more than half of the international market.

By 1939, W. K. Kellogg had stepped down as head of his company, and Chicago banker Watson H. Vanderploeg became president. Kellogg had once hoped to turn control of Kellogg's to his son, John L., who had worked at the company during its early years. In 1925, however, a personal dispute between the two men led to John L. Kellogg's departure from the company. Kellogg then groomed his grandson, John Jr., as the next company head, but that plan did not work either. After a series of health problems, the younger Kellogg committed suicide in 1938. Vanderploeg, however, proved a fine successor, adding new products and taking them into new markets.

Guests at the Battle Creek Sanitarium included such business leaders as Harvey Firestone (1868-1938) and Henry Ford (see Ford Motor Company entry) and the explorer Richard Byrd (1888-1957). Another guest, C. W. Post (1854-1914), ate Kellogg's cereal and then launched his own successful cereal company.

In the 1950s, Kellogg's introduced its first sweetened cereals aimed at children. These products included Sugar Smacks and Sugar Frosted Flakes. To sell these new products, the company advertised heavily on television and introduced cartoon characters identified with each brand. The first, Tony the Tiger, appeared in 1952. The company also focused on the diet concerns of adults, launching Special K as a healthy, low-calorie cereal. Later in the decade, Kellogg's introduced a new slogan: "The Best to You Each Morning."

Moving beyond Cereal

In 1964, Kellogg's introduced a new breakfast product, Pop Tarts. Heated in a toaster, these fruit pastries provided a sweet alternative to cold cereal. The company also began adding new products by purchasing other companies. In 1969, it bought Salada Foods, best known for its tea; the next year Kellogg's bought Eggo Waffles, another breakfast food designed for the toaster. Kellogg's also took over Fearn International, a company that sold soups and other foods to restaurants, and several small foreign food companies.

Some of this expansion came as Kellogg's faced problems with its core cereal business. In 1972, the Federal Trade Commission (FTC) accused Kellogg's and its two major competitors, General Mills and General Foods, of keeping smaller companies out of the cereal market and of overcharging customers. The companies denied the charges and were not penalized. Cereal companies also faced criticism from dentists and other groups who blasted the high sugar content of cereals designed for children. In 1978, sales of Kellogg's sugar-coated cereals fell for the first time. Overall cereal sales were also slowing, as the number of young people in the United States decreased. This segment of the population was traditionally Kellogg's best market. In addition, the company faced competition from store-brand cereals, which cost less than name brands such as Kellogg's.

During the early 1980s, Kellogg's tried to fight slumping sales in several ways. It returned to its Depression-era tactic of spending more on advertising. It also introduced new products. Some were targeted at children. Others, meant for adults, stressed good nutrition. In 1985, company chairman William LaMothe told Forbes, "[Health] is our thing. Where else can you get such nutrition for twenty cents a serving?" By 1988, Kellogg's increased its annual sales more than 50 percent, going from $2.4 billion (in 1983) to $3.8 billion.

The company also had success with a new type of product, cereal and snack bars. It launched Smart Start Cereal Bars in 1989, then changed the name to Nutri-Grain in 1991. Other bars followed, and Kellogg's eventually became the leading seller of cereal and snack bars. These products were a response to changing eating habits. Fewer Americans were eating breakfast sitting at a table; they wanted food they could eat on their way to school or work. Snack bars promised quick energy boosts or a tasty treat any time during the day.

Problems with Modern
Food Technology?

To j. H. and W. K. Kellogg, their cereals were health food. Starting in the 1930s, Kellogg's was the first company to put nutritional information on its packages. Later, during the 1980s, it introduced a number of cereals made from whole grains. While grains are healthier than grain that is heavily processed before it is cooked.

In recent years, however, Kellogg's and other large food companies have been questioned about using genetically modified foods. Scientists can change a crop's genes, the basic chemicals that control how all plants and animals develop and function. Genetically modified plants might grow faster, taste better, or resist insects. Some environmental groups believe these modified foods may be dangerous to humans. The organization Greenpeace has criticized Kellogg's for using genetically modified corn and soybeans in some of its products. In 2001, Kellogg's recalled corn dogs sold under its Morningstar Farms brand, after tests showed it contained traces of modified corn not approved for use in foods.

Surviving in a Constantly Changing Industry

During the early 1900s, Kellogg's sold some of the food companies it had bought earlier to focus on cereal and other breakfast foods. Competition was again tough, as consumers bought even more store-brand products, and major rival General Mills lowered its prices, forcing Kellogg's to follow suit. Overseas, a new partnership between General Mills and Nestle was stealing some of Kellogg's customers.

Once again, Kellogg's fought back with more advertising and new products. In 1997, it opened the W. K. Kellogg Institute for Food and Nutrition Research, where food experts tried to create new items. In 1999, a Kellogg's researcher told Fortune the company wanted "to make foods that are tastier, healthier, and easier." The Kellogg Institute's efforts included Rice Krispies Treats, snack bars based on the popular cereal, and an improved Raisin Bran that did not get soggy in milk.

Despite its innovations, Kellogg's saw its cereal sales remain basically flat after 1994. In 2001, the company tried to bolster sales by announcing a deal with the Walt Disney Company (see entry). Kellogg's began selling cereal featuring several popular Disney characters on the boxes, including Winnie the Pooh and Mickey Mouse. Kellogg's also took a major step into a new market when it bought Keebler, the second-largest cookie-and-cracker manufacturer in the United States.

After adding Keebler's products, Kellogg's made 60 percent of its sales from cereal, compared to 75 percent before the deal. The year before the Keebler purchase, Kellogg ventured into another new area, buying Worthington Foods, the manufacturer of vegetarian "meat" products. A company founded on corn flakes has moved far beyond breakfast, while remaining a major international food corporation.

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Kellogg Company

KELLOGG COMPANY


By the time Will Keith Kellogg (18601951) launched his cereal companyoriginally known as the Battle Creek Toasted Corn Flake Companyin 1906, he had already been in the cereal business for more than 10 years as an employee of his brother's Adventist Battle Creek Sanitarium. Dr. John Harvey Kellogg, a strict vegetarian and the sanitarium's internationally celebrated director, also invented and marketed various health foods. One of the foods sold by Dr. Kellogg's Sanitas Food Company was called Granose, a wheat flake the Kellogg brothers had stumbled upon while trying to develop a more digestible form of bread. The wheat flake was produced one night in 1894 following a long series of unsuccessful experiments. The men were running boiled wheat dough through a pair of rollers in the sanitarium basement. The dough had always come out sticky and gummy, until by accident the experiments were interrupted long enough for the boiled dough to dry out. When the dry dough was run through the rollers, it broke into thin flakes. Thus were flaked cereals born.

Commercial production of the Granose flakes began in 1895 with improvised machinery in a barn on the sanitarium grounds. The factory was soon in continuous production, turning out more than 100,000 pounds of flakes in its first year. A ten-ounce box sold for 15 cents, which meant that the Kelloggs collected $12 for each 60-cent bushel of wheat processed, a feat that did not go unnoticed around Battle Creek, Michigan.

Meanwhile, other cereal companies were growing quickly. Kellogg's most notable competitor was the Postum Cereal Company, launched by a former sanitarium patient, C. W. Post. Post added Grape-Nuts to his line in 1898 and by 1900 was netting $3 million a year, an accomplishment that inspired dozens of imitators and turned Battle Creek into the cereal-making capital of the United States.

In spite of the competition, Dr. Kellogg was slow in funding the company's expansion of cereal production. His brother, W.K. Kellogg assumed the leadership of that branch of the business and in 1902 Sanitas improved the corn flake that it had first introduced in 1898. The new product had better flavor and a longer shelf life than the unsuccessful 1898 version. By the following year the company was advertising in newspapers and on billboards, sending salesmen into the wholesale market, and introducing an ambitious door-to-door sampling program. In late 1905, Sanitas was producing 150 cases of corn flakes a day with sales of $100,000 a year.

The next year W. K. Kellogg went into business for himself and launched the Battle Creek Toasted Corn Flake Company. Kellogg recognized that advertising and promotion were key to success in a market flooded with look-alike products, so the company spent a third of its initial working capital on an ad in Ladies Home Journal. The result was that sales jumped from 33 cases per day to 2,900 cases per day in 1907.

In July 1907 a fire destroyed the main factory building. On the spot, W. K. Kellogg began making plans for a new fireproof factory, and within a week he had purchased land at a site strategically located between two competing railroad lines. Kellogg had the new plant, with a capacity of 4,200 cases a day, in full operation six months after the fire. "That's all the business I ever want," he is said to have told his son, John L. Kellogg, at the time.

By the time of the fire, the company had already spent $300,000 on advertising but the advertising barrage continued. One campaign told newspaper readers to "wink at your grocer and see what you get." (Winkers got a free sample of Kellogg's Corn Flakes.) In New York City, the ad helped boost Corn Flake sales fifteen-fold. In 1911 the annual advertising budget reached $1 million.

By that time, W. K. Kellogg had finally managed to buy out the last of his brother's share of the company, giving Will Kellogg more than 50 percent of the company's stock. W. K. Kellogg's company had become the Kellogg Toasted Corn Flake Company in 1909, but Dr. Kellogg's Sanitas Food Company had been renamed the Kellogg Food Company and used similar slogans and packaging. Will Kellogg sued his brother for rights to the family name and finally prevailed in 1921.

In 1922 the company reincorporated as the Kellogg Company because it had lost its trademark claim to the name "Toasted Corn Flakes," and had expanded its product line so much that the name no longer accurately described what the company produced. Kellogg introduced Krumbles in 1912, followed by 40% Bran Flakes in 1915 and All-Bran in 1916. Kellogg also made other changes, improving his product, packaging, and processing methods. Many of those developments came from W. K.'s son John L. Kellogg, who had been working for the company since its earliest days. J. L. Kellogg developed a malting process to give the corn flakes more of a nutlike flavor. He also saved the company $250,000 a year by switching from a waxed paper wrapper on the outside of the box to a waxed paper liner inside, and invented All-Bran by adding a malt flavoring to the bran cereal. He held more than 200 patents and trademarks.

In subsequent decades the company continued to add new products, but it never strayed far from the ready-to-eat cereal business. In the early 1950s Kellogg's continued success was tied to two external developments: the postwar baby boom and television advertising. To appeal to the younger market, Kellogg and other cereal makers brought out new lines of presweetened cereals and unabashedly made the key ingredient part of the name. Kellogg's entries included Sugar Frosted Flakes, Sugar Smacks, Sugar Corn Pops, Sugar All-Stars, and Cocoa Crispies. The company created Tony the Tiger and other cartoon pitchmen to sell the products on Saturday-morning television. Sales and profits doubled over the decade.

In the 1980s Kellogg targeted a more health-conscious market. The company spent $50 million to bring three varieties of Nutri-Grain cereal to market in 1982. Two years later, Kellogg sparked a fiber fad when it began adding a health message from the National Cancer Institute to its All-Bran cereal. By the late 1990s Kellogg held about one-third of the U.S. cereal market and produced 12 of the world's top 15 cereal brands.

See also: Advertising, Will Keith Kellogg, Charles Post


FURTHER READING

"Breakfast at Battle Creek." Forbes, September 13, 1982.

Carson, Gerald. Cornflake Crusade. Salem, NH: Ayer, 1976.

Hunnicutt, Benjamin Kline. Kellogg's Six-Hour Day. Philadelphia, PA: Temple University Press, 1996.

Kellogg Company. The History of Kellogg Company. Battle Creek, MI: Kellogg Company, 1986.

Powell, Horace B. The Original Has This Signature: W. K. Kellogg. Englewood Cliffs, NJ: Prentice Hall, 1956.

Serwer, Andrew E. "What Price Brand Loyalty." Fortune, January 10, 1994.

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Kellogg Company

Kellogg Company

founded: 1906 as battle creek toasted corn flakecompany


Contact Information:

headquarters: 1 kellogg sq.
battle creek, mi 49016-3599 phone: (616)961-2000 fax: (616)961-2871 toll free: (800)962-1413 url: http://www.kelloggs.com

OVERVIEW

Kellogg Company is the world's largest producer of breakfast cereals and an industry leader in the production of grain-based convenience foods. Despite forays into non-cereal product types, the company has ultimately made its fortune through a commitment to the cereal and grain-based convenience food market. Kellogg's success in this mature and diversified market can be attributed to its aggressive advertising, product innovation, and constant expansion of its consumer base.


COMPANY FINANCES

Growth for the Kellogg Company was slow for the year-ending 1997. Net sales were $6.8 billion, up 2 percent from 1996 sales of $6.67 billion. However, even this modest increase represented improvement over the 1996 year-end loss of 5 percent from 1995 net sales of $7 billion. The company's stock price ranged from $32 to $50 per share through 1997, representing some improvement over its 1996 range of $31 to $40. Net earnings per share for 1997 were $1.32, slightly higher than 1996 earnings per share of $1.25 (however, this modest change also reflects the stock-split that took place on August 22, 1997). The company reported first quarter 1998 earnings per share of $.42, up 11 percent over $.38 reported in the first quarter of 1997.

Operating profits for the company as reported in 1997 were $1 billion, up 5 percent from 1996's total $958.9 million. Of 1997 profits, $706.8 million was earned in the United States (vs. $611.2 million in 1996), $158.9 in Europe (vs. $204.4 million in 1996), and $143.4 million in all other markets (vs. $143.3 million in 1996).


ANALYSTS' OPINIONS

According to Zacks, current analyst opinion recommends a "hold" on Kellogg stock, meaning for solid investment performance investors should keep what they currently own. A few analysts recommended a "buy" or "strong buy" rating for the company, meaning they would recommend that investors pick up more shares (as of May 1998). Moody's Investors Service, however, was considering a downgrade of Kellogg's long-term debt rating. This was in part due to highly competitive conditions in the United States for the ready-to-eat cereal market, and in part to Kellogg's weaker market share in the United States.


HISTORY

Despite inventing the toasted grain flake in 1894, brothers Will Keith (W.K.) and Dr. John Harvey Kellogg were slow to capitalize on the discovery. W.K. worked for his brother in the Seventh-Day Adventist homeopathic sanitarium at Battle Creek, Michigan. In an effort to produce more digestible bread—one more product in Dr. Kellogg's long line of health foods—the brothers ran boiled wheat dough through rollers. Unfortunately, the mixture was too wet and sticky. One day, after an interruption resulted in dried-out dough, they again ran it through the rollers—this time, it came out in bite-sized flakes, which they then toasted. The grain flake cereal was born.

The brothers' partnership sold the Granose flakes by mail order, until W.K. left to start his own Battle Creek Toasted Corn Flake Company in 1906. At that time, Battle Creek was the undisputed cereal capital of the United States, with close to 40 separate companies. Dr. Kellogg himself continued to sell a similar product until W.K. successfully sued him for rights to the Kellogg name. One of the biggest competitors of the time was C.W. Post, who was once a patient at the Battle Creek Sanitarium.


STRATEGY

If there has been one successful strategy characterizing the history of the Kelloggs company, it is advertising. Upon its founding in 1906, W.K. Kellogg spent more than 30 percent of the company's working capital on an advertisement in Ladies Home Journal. The strategy paid off, with demand soon outstripping supply. One racy campaign told consumers to "wink at their grocer and see what you get;" consumers got a free taste test and Kellogg increased its sales. During the Great Depression, despite falling sales, the company followed the retired W.K. Kellogg's advice and added $1 million to its advertising budget. As a result, sales continued to increase throughout the 1930s. In the 1950s, the company capitalized on the postwar baby boom and doubled sales and profits with the introduction of Tony the Tiger and other animated hucksters who pitched products on Saturday morning television. Stepped-up advertising was also the solution for sluggish sales in the 1970s. When the company returned to its roots, with renewed emphasis on high-fiber, health-oriented cereals in the 1980s, advertising was again key in capturing health-conscious consumers.

In addition, the company has put a constant emphasis on market expansion and research and development (R&D). Kellogg's R&D expenditures were approximately $106.1 million in 1997, $84.3 million in 1996, and $72.2 million in 1995. Earnings are typically rein-vested to keep the company's facilities and technology up to date.

In 1996, after suffering a substantial decline in sales and earnings, the company placed emphasis on strengthening and repositioning itself for long-term growth. Kellogg's strategy featured the company's continued movement towards a goal of improved consumer value combined with pricing restraint and rigorous cost reduction. One major part of the repositioning process was the 1996 purchase of the Asian Ralston Purina Company. Also in 1996, the company repurchased $535.7 million in shares of Kellogg stock, with the Board of Directors authorizing up to $415.1 million in additional purchases for 1997. These purchases, the company asserts, will put long-term upward leverage on earnings per share and provide a "tax-efficient means of transferring cash to our shareholders."

To protect new advanced technology, Kellogg ended their popular plant tours in 1986, Kellogg saw the need for a new public relations resource and the community expressed the need for a new visitor attraction. The notfor-profit Heritage Center Foundation was created to develop, own, and operate the $18-million Cereal City USA complex in Battle Creek. The new complex was scheduled to open in Summer 1998. The 45,000-square-foot complex, a sort of homage to the history and process of cereal production, will include sets, a theater, and other recreational attractions. Backed with contributions from several local foundations, Heritage hired a veteran of the amusement park industry to manage the operation, which it hopes will bring in 400,000 ticket-buying visitors per year. The company lacks a strong merchandise or licensing presence so it will apply for a license to create souvenir merchandise using its cartoon hucksters, like Tony the Tiger and Snap, Crackle, and Pop for advertising and promotional purposes.


INFLUENCES

In 1996, competitive challenges in the U.S. market, and aggressive store brand competition in the United Kingdom dealt a serious blow to the company's historic performance level. This unprecedented turbulence in Kellogg's two largest cereal markets resulted in a decline in sales and earnings. Though earnings picked up slightly in 1998, the Kellogg Company continues to expand its global markets, partially to compensate for dropping domestic market share.


CURRENT TRENDS

The Kellogg Company's plans for the twenty-first century are to leverage what the company calls its "positive health image." Growing awareness of the benefits of fiber have led Kellogg's to redesign packaging and expand global marketing of bran products such as Kellogg's All-Bran and Kellogg's Complete wheat and oat bran cereals. The company is heavily promoting these products through its Age+5 campaign, designed to increase children's consumption of fiber.

PRODUCTS

Kellogg is, without a doubt, the cereal king—it is the number one seller of cereals. Its principal sales come from ready-to-eat cereals. The company generally markets its products with company-owned trademarks. Products are usually sold directly to the grocery trade for re-sale to consumers, though broker and distribution arrangements are made in less developed markets. Through its history, the company has acquired several convenience food companies, which account for nearly 20 percent of global sales. In addition to the Kellogg cereals the company also sells Kellogg's Pop-Tarts toaster pastries and Kellogg's Eggo frozen waffles. Most recently, Kellogg broadened its global potential with the purchase of the Lender's Bagel Bakery business from Kraft Foods, Inc.


CORPORATE CITIZENSHIP

Kellogg established the W.K. Kellogg Foundation in 1930 and gave it majority interest in his company (the company bought back about 20 percent in 1984). The private grant-making organization was established "to help people help themselves through the practical application of knowledge and resources to improve their quality of life and that of future generations." It provides seed money to organizations and institutions with solution-based programs in the areas of volunteerism, philanthropy, youth, leadership, community-based health services, rural development, and higher education. Grants go mostly to Latin America, the Caribbean, southern Africa, and the United States (particularly Michigan and the Great Lakes region). Early in 1997 the company commenced operations at the new W.K. Kellogg Institute for Food and Nutrition Research in Battle Creek.


CHRONOLOGY: Key Dates for Kellogg Company


1894:

Will Keith Kellogg and Dr. John Harvey Kellogg (brothers) invent the toasted grain flake

1906:

Kellogg founded as Battle Creek Toasted Corn Flake Co.

1907:

Company becomes the Toasted Corn Flake Company

1909:

Company becomes the Kellogg Toasted Corn Flake Company

1911:

Kellogg has an advertising budget of $1 million

1915:

40% Bran Flakes are introduced

1916:

All-Bran is introduced

1921:

W.K. Kellogg wins rights to family name

1922:

Company becomes the Kellogg Company

1925:

W.K. Kellogg begins searching for his replacement as president

1928:

Rice Krispies are introduced

1930:

W.K. Kellogg Foundation is established

1939:

Watson H. Vanderploeg finally fills the role as permanent president

1951:

W.K. Kellogg dies

1952:

Tony the Tiger is introduced

1969:

Kellogg acquires Salada Foods

1976:

Purchases Mrs. Smith's Pie Company

1982:

The Nutri-Grain line is introduced

1994:

Sells Mrs. Smith's frozen pie business

1996:

Purchases Ralston Purina Company

FAST FACTS: About Kellogg Company


Ownership: Kellogg Company is a publicly owned company traded on the New York Stock Exchange.

Ticker symbol: K

Officers: Arnold G. Langbo, 60, Chmn. & CEO, 1997 base salary $980,000; Thomas A. Knowlton, Exec. VP, 1997 base salary $535,000; Donald W. Thomason, Exec. VP Corp. Services. & Technology, 1997 base salary $431,250; Donald G. Fritz, Exec. VP, 1997 base salary $430,000

Employees: 14,339

Chief Competitors: As a leading producer and marketer of grain-based convenience foods, Kellogg's main competitors include: General Mills; Philip Morris; CPC; Malt-O-Meal; Quaker Oats; and Sara Lee.

Despite the company's charitable activities, its role as the leading cereal maker has not been bereft of criticism. In 1972, the Federal Trade Commission accused Kellogg and other major cereal producers of monopoly business practices, overcharging consumers by more than $1 billion between 1957-72. The American Dental Association blasted the industry for downplaying the sugar content of its presweetened cereals. Kellogg's, to its credit, made no secret of its sugar use, with bold product names like Sugar Smacks , Sugar Corn Pops, and Sugar Frosted Flakes. By the 1990s Kellogg's had changed the names to those lines, calling them Kellogg's Smacks, Kellogg's Corn Pops, and Kellogg's Frosted Flakes. Again, in 1995, U.S. Representative Charles Schumer accused Kellogg and others of price collusion.

GLOBAL PRESENCE

Kellogg is truly a global company, with 29 manufacturing plants in 20 countries and distribution of 120 countries. It currently holds an estimated 39 percent of worldwide volume in the ready-to-eat cereal market. The company's cereal business shows formidable growth both in developing markets of Asia, Latin America, and southern Europe, and in established markets like Canada, Australia, and Mexico. Faced with widespread competition at home, the company aggressively courted European consumers, who in 1995 accounted for 26 percent of total sales. An additional 16 percent of sales came from Asia, Australia, Africa, and Latin America. Kellogg's 1996 decision to reduce prices domestically may increase sales at home, but this may be hampered somewhat by a competitive U.S. market. Overall growth in sales may ultimately depend on success in the global marketplace.

Kellogg is building from a strong global base. Of the top 15 cereal brands in the world, 12 are Kellogg products. In early 1997, the company bought cereal plants in Ecuador and Brazil and finished building a new plant in Thailand. In the eyes of Kellogg's CEO Arnold Langbo, ready-to-eat cereal will be a global growth business for the twenty-first century. In the grain-based food industry, Kellogg Company's global infrastructure goes unmatched. The company's position became even stronger with the 1996 addition of the three Lender's plants, plus the purchase of a Kentucky convenience foods plant. Roll-outs of convenience foods such as its Kellogg's Nutri-Grain cereal bars and Kellogg's Rice Krispie Treats Squares in the United Kingdom and Austrlia, with plans to move into Latin America during 1998, also helped to accelerate global growth.

BATTLE CREEK ATTRACTION!

On June 1, 1998, Kellogg opened Cereal City USA, a cereal-oriented theme park that they call "the Midwest's newest attraction." After a video tour conducted by a cartoon character with the festive name of "Mr. Grit," tourists can take in the wonders of the "Simulated Cereal Production Line." Warm Corn Flakes are available as you tour the facility, and if that's not enough, you can also top off your visit with a snack of ice-cream and Fruit Loops as you meet Tony the Tiger in person. This "family attraction celebrating cereal" is located in Battle Creek, Michigan. Make your reservations now.


EMPLOYMENT

On its web site, the Kellogg's company states, "We are committed to helping Kellogg people reach their full potential and to recognizing their achievements." Toward that end the company provides training and development opportunities, tries to promote from within the company, and works to provide an environment where equal opportunity is awarded and diversity is respected.


SOURCES OF INFORMATION

Bibliography

"kellogg company." international directory of company histories. detroit: st. james press, 1988.

"kellogg company completes lender's(r) bagels purchase." kellogg company press release, 16 december 1997. available at http://www.prnewswire.com/k.

"kellogg corporate headquarters." available at http://www.kelloggs.com/corp_hq/.

"kellogg eps increases by 11 percent in first quarter." pr newswire, 24 april 1998.

kellogg's 1997 annual report. kellogg company, 1998. available at http://www.prnewswire.com/cnoc/areports/483375.6.

"letter to shareholders." kellogg's 1997 annual report. kellogg company, 1998.

moody's industrial manual. new york: moody's investors service, inc., 1996.

"moody's may cut kellogg co long-term debt." moody's investors service press release, 28 april 1998.

o'brien, tim. "construction under way for kellogg's $18 million cereal city usa center." amusement business, 13 january 1997.


For an annual report:

on the internet at: http://www.prnewswire.com/cnoc/are-ports/483375.6or telephone: (800)962-1413 or write: kellogg company, po box camb, battle creek, mi 49016-1986


For additional industry research:

investigate companies by their standard industrial classification codes, also known as sics. kellogg's primary sics are:

2041 flour & other grain mill products

2043 cereal breakfast foods

2051 bread, cake & related products

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Kellogg Company

Kellogg Company

GOTTA HAVE MY POPS CAMPAIGN
SPECIAL K KICK-START DIET PLAN CAMPAIGN

1 Kellogg Square
Battle Creek, Michigan 49016-3599
USA
Telephone: (616) 961-2000
Fax: (616) 961-2871
Web site: www.kelloggcompany.com

GOTTA HAVE MY POPS CAMPAIGN

OVERVIEW

The Kellogg Company's humorous "Gotta Have My Pops" campaign, which had been airing on television since 1988, continued to increase brand awareness of Kellogg's Corn Pops ready-to-eat cereal throughout 1997. Like many cereal ads, the campaign was aimed primarily at children. The advertisements depicted friendly scheming among people who wanted to make sure they got their Corn Pops, particularly if the cereal was in short supply. In one spot a teenage boy searched for a box of Corn Pops while his grandmother sat nearby at the kitchen table with a bowl of cereal. Realizing that she was about to eat the last of the Corn Pops, the boy tried to think of a plan to take them away from her. She guarded the bowl and laughed to herself, knowing what he was thinking, but when he gave her a mournful, pleading look, she handed them over to him.

Although Kellogg led the cold-cereal industry in the United States and worldwide, it had been losing market share gradually since 1988. Consumers were switching to generic brands, in part because of the rising price of name-brand cereals. In fact, the four dominant cereal companies had raised their prices so often that the U.S. Congress had considered launching an investigation of the industry. After a competitor slashed its prices in 1996, Kellogg followed suit and suffered a loss of revenues as a result, but the company's profits began to rise again in 1997. Kellogg said the "Gotta Have My Pops" campaign had helped the brand gain market share and had increased sales of Corn Pops.

HISTORICAL CONTEXT

Kellogg had been in business since 1906. It made more ready-to-eat cereal than any other company in the world and sold its products in about 160 countries. Cereal constituted 80 percent of its sales, but Kellogg also made other grain-based foods, including Eggo frozen waffles, Pop-Tarts toaster pastries, Lender's bagels, Kellogg's Nutri-Grain cereal bars, and a cereal-based snack called Rice Krispies Treats. In 1997 the company made 12 of the top 15 brands of cold cereal. But its share of the $8 billion U.S. market had dropped to 33.2 percent from a peak of 40.5 percent in 1988, and its net income had fallen by about 20 percent since 1992, to $546 million. Although competition in the industry was intense, with more than 200 brands of cereal on the market, the top four manufacturers had raised their prices steadily for years. Kellogg had increased its prices as often as twice a year, until some of its brands cost about $5 a box. In response, consumers began buying less expensive generic cereals available at supermarkets and large stores such as Wal-Mart. In addition, growth had almost leveled off in the cereal market as consumers turned to muffins, bagels, and other breakfast foods they could eat on the way to work or school. Although Americans were buying 2.7 billion packages of cereal each year, Kellogg's sales had increased by only 3 percent annually from 1992 to 1996.

Like some of its competitors, the company ran expensive coupon promotions to encourage consumers to buy its brands, even as the price of the cereal continued to rise. But analysts said the strategy was not cost-efficient. One professor of agricultural economics at Purdue University said manufacturers who used coupon promotions spent an amount equivalent to 20 percent of their sales for coupon distribution, reimbursement to retailers and clearing-houses, and executive salaries. In November 1996 Kellogg Chief Executive Officer Arnold Langbo said that the company would do whatever it took to regain its market share. Since 1995 he had closed some of the company's manufacturing plants and laid off 1,000 workers to reduce costs. He had also bought back $2.4 billion worth of the company's stock to keep the price from falling. In response to price cuts by competitors, Kellogg had reduced the price of two-thirds of its products by an average of 19 percent in 1996. To increase sales further, the company launched two new line extensions, Honey Crunch Corn Flakes in 1996 and Cocoa Frosted Flakes in May 1997.

Kellogg's Corn Flakes and Kellogg's Frosted Flakes were the most popular brands of ready-to-eat cereal in the world in 1997. Frosted Flakes had been advertised for years with a cartoon character named Tony the Tiger, who enthusiastically proclaimed that Frosted Flakes were "grrrrrreat." Well-known characters associated with other Kellogg brands included Toucan Sam, Corny the rooster, Dig 'Em the frog, and a trio of elves called Snap, Crackle, and Pop. Kellogg's best selling cereal brands included Frosted Flakes, Corn Flakes, Rice Krispies, Raisin Bran, Special K, and Corn Pops.

TARGET MARKET

Young people had been the only target for Kellogg's Corn Pops advertising until 1993, and they were the primary target of the "Gotta Have My Pops" campaign in 1997. But like Kellogg's Frosted Flakes campaign, the Corn Pops campaign sought to appeal to adults as well as children. The "Gotta Have My Pops" campaign portrayed Corn Pops as a food that was so fun to eat and so flavorful that people would plot to take the cereal away from each other. Cold cereal was a favorite breakfast for children, since all but the youngest of them could prepare it without help from an adult. It provided a quick meal before the early morning rush to school, and some children and adults ate it as a snack at other times of the day. Not all cereals were popular with children, however. The "Gotta Have My Pops" campaign featured young people of various ages having a good time as they ate Corn Pops instead of reluctantly eating some other brand at the insistence of an adult.

COMPETITION

More than 85 percent of the ready-to-eat cereal sold in the United States was made by four companies: Kellogg, General Mills, Inc., Post Cereals, and the Quaker Oats Company.

General Mills, in second place behind Kellogg, had sales of $5.6 billion in 1997. The company made the nation's most popular cold cereal, Cheerios, in addition to Wheaties, Chex, Total, Lucky Charms, Cocoa Puffs, and other brands. General Mills also made Betty Crocker and Bisquick desserts and baking mixes, Hamburger Helper dinner mixes, Gold Medal flour, Fruit Roll-Ups and Bugles snacks, Yoplait yogurt, and Pop Secret microwave popcorn. In 1997 the company continued its long history of promoting the health benefits of Wheaties, "The Breakfast of Champions," by featuring sports stars on the cereal boxes. General Mills had sponsored the first televised sports broadcast in 1938, and through the years its products had been promoted by such television and radio personalities as the Lone Ranger, George Burns and Gracie Allen, and cartoon characters Rocky and Bullwinkle. In 1997 another well-known cartoon character, the Trix Rabbit, continued its 20-year quest for a taste of Trix cereal, only to be foiled as usual. The commercials ended with one of the most famous lines in advertising: "Silly rabbit. Trix are for kids." General Mills had reduced prices on more than 90 percent of its brands four times since 1993, including a cut that averaged 11 percent in 1994, but the company adjusted for inflation by raising prices an average of 2.6 percent in July 1997.

INTERNET ADVERTISING

Kellogg's "Gotta Have My Pops" campaign was featured on Sony Corporation of America's "The Station," an interactive, entertainment website (http://www.station.sony.com). Kellogg was one of eight major advertisers that signed on when the network was launched in March 1997. The site featured shopping, games, music, chat rooms, children's programs, and online versions of the popular game show Wheel of Fortune and the television soap opera Days of Our Lives.

In third place was Post (a division of Kraft Foods, which was owned by Philip Morris Companies, Inc.), the manufacturer of brands such as Shredded Wheat and Grape Nuts. Although the company had spent large amounts of money to promote its products, its market share had fallen from 16.8 percent in 1995 to 15.6 percent in 1996. The president of Kraft said that if Post had done nothing to halt the slide, its share would have dropped to 13 percent. In 1996 Post and its sister company Nabisco rocked the industry by cutting prices about 20 percent, an average of $1 a box. Post's market share promptly increased by 4 percent while Kellogg's share dropped. Post had conducted a survey and found that 59 percent of consumers were angry about the steadily rising price of cold cereal. Some of the major brands cost as much as $4 or $5 a box, while the price of similar generic brands was about $1 less. Much of the additional money was being used to finance a marketing war among the nation's top cereal companies. For a package of cereal priced at about $3.50, $1 was spent on advertising and promotions, 40 cents on ingredients, 31 cents on packaging, the manufacturer made a profit of 45 cents, the grocery store made 68 cents, and the remainder went for operating expenses. In 1995 Congress had considered an investigation to determine whether cereal makers were guilty of overpricing their products. Also in that year the U.S. Bureau of Labor Statistics had reported that between 1983 and 1995 retail cereal prices had climbed 93 percent, an increase that was much greater than the increase in the cost of manufacturing cereal. After Post reduced its prices, other major manufacturers were pressured to follow suit and consequently experienced lower profits. Post also cut promotional costs by issuing a single coupon that could be used to purchase any of its brands, instead of running one coupon for each brand.

The fourth-place cereal maker, Quaker Oats, responded to the pricing problem by offering nine of its brands in bags instead of boxes, which reduced the cost by 35 to 40 percent. At $2 a bag, the cereals experienced 73 percent growth during 1997. Quaker's sales of bagged cereal for the year were $160 million, but its profit margin on those cereals was 3 percent, compared to 20 percent for branded cereals in boxes. Although its profit from bagged cereals was only $5 million, Quaker gained 2 percent of cereal market share in 1997. The company also appealed to consumers by manufacturing cereals, such as Frosted Flakers, that were similar to competitors' brands but less expensive. Quaker's top selling brands included Quaker Oats, Cap'n Crunch, and Life Cereal. During 1997 the company revived an ad campaign that had aired more than 20 years earlier. The original ads had featured "Mikey," a picky eater who amazed his brothers by enthusiastically eating Life Cereal. The brothers had exclaimed, "He likes it! Hey, Mikey!" In the new promotion more than 35,000 children entered the "Be the Next 'Mikey' Contest," which ran from January through June 1997. The winner, four-year-old Marli Brianna Hughes, was judged the most photogenic embodiment of the Mikey personality: energetic, independent, and confident. Sales of Quaker's boxed cereals increased 11 percent in 1997, but the company's total sales decreased by 4 percent to $5.02 billion, primarily because Quaker sold its Snapple beverage business in May.

MARKETING STRATEGY

Because most cereals were made from similar basic ingredients—mostly grains and sugars—manufacturers relied to a large extent on advertising, colorful artwork on the boxes, games on the back, sometimes a prize inside, and endorsements from celebrities to persuade consumers to choose their brands. Some companies called attention to the health benefits of eating certain types of cereal. Commercials aimed at children tended to emphasize the taste of the product and to portray cereal as food that was fun to eat. The "Gotta Have My Pops" campaign had been developed in 1988 by the Leo Burnett ad agency as a new creative idea to generate interest and excitement for the Corn Pops brand. It had been airing for nearly 10 years, and new spots had been added as the campaign progressed. Of the four commercials that ran in 1997—"Roofdeck," "Tickets," "Guests," and "Grandma"—two were new, and two had run in 1996. The ads aired on television in the United States and Canada but did not appear in print media.

In the spot called "Guests," a teenage boy was babysitting his younger sister and her friends, who were in the living room eating the last box of Corn Pops. The boy schemed to get some of the Corn Pops and finally went outside and rang the doorbell. Then he opened the door and shouted, "Look! It's Barney!" Thinking that they were about to meet one of their favorite animated characters—a purple dinosaur named Barney—the girls screamed in delight and rushed outside, and the boy hurried to snatch up the box of Corn Pops.

OUTCOME

Kellogg felt that the "Gotta Have My Pops" campaign had succeeded in helping to build the Corn Pops brand, and the campaign was continued into 1998. The company reported that sales of Kellogg's Corn Pops had increased since the campaign began, and the brand had gained market share. Overall, however, Kellogg brands of cold cereal continued to lose market share in the United States, dropping from 33.8 percent in 1996 to 33.2 percent in 1997, according to Fortune magazine. Net sales for all Kellogg products were $6.83 billion in 1997, an increase of 2 percent since 1996. In 1997 Kellogg sold 3.9 percent more cereal in the United States than it had in 1996, when it had weathered the price cuts by Post. But Kellogg was still the number one cereal maker in the nation and in the world. At the end of 1997 the company was promoting its cereals as healthy food with a new television and print campaign called "Cereal. Eat It for Life."

FURTHER READING

Baumohl, Bernard; Jane Van Tassel; William A. McWhirter; and Adam Zagorin. "Cereal Showdown." Time, April 29, 1996.

Carvell, Tim. "Grape-Nuts Monday. Cereal Wars: A Tale of Bran, Oats, and Air." Fortune, May 13, 1996.

Enrico, Dottie. "Frost Flakes Ads Receive Soggy Reviews." USA Today Ad Track, September 9, 1996.

"FDA Finalizes First Food-Specific Health Claim for Oatmeal." PR Newswire, January 21, 1997.

Grant, Linda. "Where Did the Snap, Crackle & Pop Go?" Fortune, August 4, 1997, p. 223.

"Life Cereal Searches for the Next 'Mikey'." PR Newswire, January 7, 1997.

Norton, Rob, and Kerry Hubert. "Are There Too Many Breakfast Cereals?." Fortune, March 3, 1997.

"Quaker Oatmeal Celebrates 120 Years on America's Breakfast Table." PR Newswire, September 17, 1997.

Schay, Alex. "Two Scoops of Competition." Motley Fool, July 31, 1998.

"Schumer, Gejdenson Remarks Don't 'Bag' Everything; Quaker Bagged Cereals Offer Taste, Quality at 40 Percent Less than Boxed Every Day." PR Newswire, July 24, 1997.

Van Tassel, Jane. "Cereal Siege: Kellogg's Answers Post's Cuts, But It's Not a Price War." Time, June 24, 1996.

                                                 Susan Risland

SPECIAL K KICK-START DIET PLAN CAMPAIGN

OVERVIEW

The Kellogg Company had been a dominant force in the ready-to-eat cereal market for a little more than a century, but in 2001 the company's cereal division failed to register a significant profit increase for the company. In order to grow sales quickly for one of its flagship brands, Special K, Kellogg reintroduced a diet plan in 2002 that it had floated successfully a few years before. The Special K Kick-Start Diet instructed participants to replace breakfast and lunch with a bowl of Special K and skim milk, promising a loss of up to six pounds in two weeks. The "Kick-Start" campaign, sometimes called the "Un Testimonials" campaign, offered body-conscious consumers an alternative to complex and unsatisfying weight-loss options.

Ad agency Leo Burnett USA enlisted the help of its media agency, Starcom, to replant the Special K flag. With a budget of approximately $9 million for TV, print, outdoor, and online advertising, the Special K Kick-Start Diet first reached the public at holiday time in late 2002 and early 2003. This period was determined to be the perfect opportunity to reach adults resigned to address their weight concerns in the new year. A set of television commercials dubbed "Un Testimonials" showed everyday men and women discussing all the weight-loss tactics that had failed them in the past, such as "the downsize diet," in which one ate a personal pizza instead of a whole one, or the unappealing "corn juice" diet. Contrasted with these fad diets, the Special K plan was presented as a sensibly delicious weight-loss solution. Starcom was responsible for hundreds of wallboards (indoor billboards) that were placed in locations where women in particular would be thinking about their appearance or health. For instance, in a hair salon the ad would read, "The right hair cut can make you look slimmer. This actually helps make you slimmer."

The ads resonated with consumers. Special K was rewarded with a 22 percent increase in sales by the end of 2002, an important step in resurrecting brand interest. There was also significant improvement for Kellogg's cereal division, which recorded a 7 percent rise in retail sales in 2003. In 2004 Leo Burnett USA won a coveted Gold EFFIE (Packaged Food category), an industry award measuring effectiveness in advertising, for the campaign. The two-week diet was also successfully used to promote Kellogg's new cereal Smart Start.

HISTORICAL CONTEXT

Cereal products got their start in 1894, when W.K. Kellogg stumbled upon the recipe that inspired Corn Flakes in the kitchen of the Battle Creek Sanitarium in Battle Creek, Michigan, where he was employed by his brother, Dr. John Harvey Kellogg, as an accountant, business manager, and jack-of-all trades. An early proponent of "health food," Kellogg later marketed his product, and the Kellogg Company as well as the entire cereal industry was born. In the century that followed, the Kellogg Company, headquartered where it began, in Battle Creek, grew to become a world leader in the production of convenience foods, manufacturing in 17 countries and marketing its brands in 180 countries. The company reported sales nearing $10 billion at the end of 2004.

Throughout the twentieth century Kellogg often touted the nutritional value of its cereals. Special K was introduced in 1955 as a high-protein, quick breakfast alternative. Advertising for many brands was also closely tied to iconic characters, such as Tony the Tiger for Frosted Flakes; Snap! Crackle! and Pop! for Rice Krispies; and the Corn Flake's rooster. Special K's brand images were more body-conscious in nature. One of the brand's most enduring TV images was a lingering shot of the body of a model-thin woman in a white one-piece bathing suit who bent to a position that then allowed her to morph into the Special K logo, a letter K. The vast Kellogg empire used more than one advertising agency to get the message across for all its various brands, chiefly employing Leo Burnett and J. Walter Thompson.

In the late 1990s Kellogg found new ways to emphasize the health aspects of its brands, including Special K. Jon Cashen, vice president and creative director of Leo Burnett, stated in a 1997 New York Times article that the agency's mission was to "weave a tapestry of the goodness of cereal and the goodness of life." It zeroed in on specific health concerns for women. One print ad showed a mother playing with her child; the caption read, "A bowl of cereal may help reduce the risks of osteoporosis," emphasizing that five Kellogg cereals, including Special K, provided recommended daily amounts of calcium. Later in 1999 Kellogg took an even bolder step by positioning its cereal as diet food for the first time. The Special K Two-Week Challenge Diet was developed by Kellogg and backed by Purdue University professor of foods and nutrition Richard Mattes. The plan, which was described on the backs of cereal boxes as well as in print ads and television spots, was simply to replace breakfast and lunch with a bowl of Special K and skim milk in order to lose up to 6 pounds in two weeks. One early TV commercial for the diet proved to be a misstep. It featured a doll named Diet Debbie who followed crash diets and exercised after each meal. This was followed by an image of Special K cereal and the tagline "Let's just eat sensibly all year." Despite the exhortation to eat sensibly, many consumers believed that the use of a Barbie-like doll could be misconstrued as endorsement of dieting to young girls. The company next successfully revisited a "Reshape Your Attitude" campaign directed at women and stressing positive body image, self-worth, and sensible eating. One extremely successful TV spot during this time showed men of all sizes in a bar worrying about their weight. The ending showed an average-looking guy in his late 40s saying, "I have my mother's thighs. I just have to accept that." The tagline that followed stated, "Men don't obsess over these things. Why do we?"

TARGET MARKET

The "Special K Kick-Start Diet" campaign began in late 2002. Kellogg needed to give adults a compelling reason to choose Special K and then keep them coming back for more. Mike Greene, vice president of customer marketing at Kellogg, described the company mindset in a November 2002 article in Progressive Grocer. "From 2001 to 2002 there has been an increase from 21 percent to 35 percent of adults that are dieting," said Greene. He explained that consumers looked for a diet that easily fit into their lifestyles. "We heard back from consumers that using cereal for weight loss had the highest level of satisfaction out of any other form of dieting. It's easy, simple to do, and it tastes good." Women, making up the majority of weight-conscious adults, were particularly on the minds of the marketers at Kellogg.

Starcom's part of the ad push consisted of positioning wallboards and brochures; the agency was even more specific about its target market, describing it as consisting of women who were "concerned with looking and feeling good." Starcom even took into consideration the intended female consumer's state of mind at certain locations, such as the doctor's office or dressing rooms. "We know a lot about our target and its habits around resolution time," said Amy Hume, associate media director of Starcom in a June 2003 issue of Mediaweek. She continued, "People get energized around the holidays—they get a new hairstyle to start the year fresh, they schedule a physical, new health club memberships peak. And it's a huge time for wedding dresses—you order in January for a June wedding." The media team honed in on the places where women tended to think about their weight, thus ensuring that their target consumer viewed the Special K ads when they were probably most receptive to the weight-loss message.

COMPETITION

In the 1990s consumers increasingly left cereal behind for other breakfast alternatives, such as bagels and breakfast bars. In 1997 Kellogg's Jon Wilson, executive vice president for consumer and customer engagement, acknowledged this to the New York Times, saying, "We are cognizant that we have more competition for breakfast than we ever had before." That year all cereal makers, including Kraft Food's Post Cereals brands, had raised prices and then had to cut them again when consumers balked at buying boxes costing $5.00 each. Kellogg had traded the market-share lead back and forth with General Mills for decades and was still locked in a tight battle in 2002. General Mills' Big G cereal division was floundering (its sales had dipped 3.1 percent in 2001, to $2.17 billion), and Kellogg's sales were flat that year at $2.2 billion.

Kellogg's cereals' second-biggest competitor at the time was Post Cereals, which was also founded in Battle Creek, Michigan. After Charles William Post spent a restorative stay at the same sanitarium where W.K. Kellogg had worked, he developed the flagship cereal Grape-Nuts in 1897. At the start of the twenty-first century Special K's direct competition was General Mills' Total. Both cereals made similar claims of offering high protein, low fat and great taste. General Mills was not timid when it came to ad spending. In January and February of 2002 it spent $39 million, compared to Kellogg's $32 million in ad spending for that same period, according to TNS/CMR, a provider of advertising and marketing information.

MARKETING STRATEGY

To reinvigorate interest in and consumer devotion to Special K, the Kellogg Company enlisted the help of mega-agency Leo Burnett USA as well as its media buying partner, Starcom. It was decided that the end of 2002 and the beginning of 2003, a span of months referred to by Amy Hume of Starcom as "resolution time," would be ideal to launch a new incarnation of their two-week diet challenge, the Special K Kick-Start Diet. It was aimed at adults susceptible to fad dieting who felt that most weight-loss options were difficult stick with. A set of television spots called "Un Testimonials" aired showing several examples of the perennial "man or woman on the street" recalling various outrageous diets that they had tried—and failed—to follow. The doomed diets included the "one-meal-a-day," "olive oil," and "all-garlic" diets. Later that year another round of similar spots highlighted the presummer months, when the target audience increased once again as people took stock of their physiques in anticipation of bathing suit season.

COURT TV INVENTS A CEREAL SLEUTH TO FIND AD DOLLARS

In January 2004 the cable television channel Court TV introduced a new advertising vehicle in the form of short vignettes that were aired between prime-time investigative programs. In the segments Linda Lo-Cal, a female detective character created by the network's ad sales team specifically to win Kellogg's ad dollars, was featured taking on her first assignment: the case of unwanted extra holiday pounds. To solve the mystery, advertiser Kellogg stepped in with the Special K two-week diet challenge. Kellogg was so convinced Linda Lo-Cal could do the job that it committed to a seven-figure deal, marking its first ad buy on the network.

Andy Jung, senior director of advertising and media services for Kellogg, stated to Mediaweek that the company spent $8 million to $12 million per year in support of the Special K diet challenge. A standout component of the Kick-Start Diet campaign was designed by media agency, Starcom, and executed for under $1 million. Hundreds of wallboards with brochures, which described the diet and included a progress-tracking grid, were placed in more than a dozen markets. Locations were chosen carefully. In addition to health clubs, the boards went up in dressing rooms, bridal shops, and beauty salons. Ad copy was tailored to the location. In doctor's offices the ads read, "The doctor will see (less of) you now!" and in a bridal salon they stated, "Your bridesmaids' dresses don't have to look bad for you to look good." Jung told Mediaweek that the strategy broke new ground, stating, "It took brand advertising more into immediacy marketing."

The most creative tactic may have been the diet itself. The Kick-Start Diet ensured that each individual following the plan would need to purchase three boxes of cereal over a two-week period. If the consumer did experience weight loss, presumably he or she would go on after the two weeks to include Special K in his or her eating routine, either as a continuation of the diet or because he or she had had a positive experience with the cereal. Kellogg also introduced a website to support its newly created community; at the site Kick-Start dieters could network, keep a progress journal, or find nutrition and exercise information.

OUTCOME

Consumer reaction to the Special K Kick-Start Diet plan translated into positive numbers for the company, which only the year before had seen no sales growth and previous to that had been trailing General Mills. In the markets where Kellogg had concentrated the campaign, Special K in 2002 gained 22 percent in dollar volume over the year before. Smart Start, a newly introduced Kellogg brand, which was also promoting its own two-week challenge, experienced a significant increase as well. By 2003 retail cereal sales as a whole had increased by 7 percent for Kellogg, contributing to the nearly $9 billion the company ultimately took in that year. The "Un Testimonials" spots and Kick-Start campaign were also recognized with a Gold EFFIE Award in 2004 for Leo Burnett and Starcom. These prestigious industry awards were given annually by the New York American Media Association to honor effective ad campaigns. Kellogg's success with weight-conscious Americans did not go unnoticed by the competition. In late 2005 Post Cereals began a weight-loss campaign of its own that was remarkably similar to the Special K plan: replace two meals a day with Post "Healthy Classics" cereals and lose 10 pounds.

FURTHER READING

"Breakfast Smarts." Advertising Age's Creativity, April 1, 2003, p. 25.

Carmichael, Mary. "Third Helping for Kick-Start." Grocer, May 31, 2003 p. 46.

Emerson, Bo. "Crunch Time: For Many, Cereal Is the 24/7 Food of Choice." Atlanta Journal-Constitution, March 7, 2002, p. 1C.

Hellmich, Nanci. "Riding the Subway to Fitness." USA Today, February 5, 2002, p. 1D.

Kane, Courtney. "Kellogg Promotes Its Family of Cereals, Even the Sugary Ones, as Components of a Healthy Diet." New York Times, September 3, 1997, p. D7.

Lafayette, Jon. "Court TV to Feature Ad Vignettes." Television Week, November 17, 2003, p. 3.

"PMA Reggie Awards: Bronze Winners." Brandweek, March 22, 2004, p. R13.

Schmuckler, Eric. "Starcom." Mediaweek, June 23, 2003, p. SR10

Sege, Irene. "Kellogg's Eats Its Ad." Boston Globe, January 20, 1999, p. C1.

Thompson, Stephanie. "Kellogg's Kick-Start." Advertising Age, January 2, 2002, p. 2.

―――――. "Kellogg's Retakes Lead." Advertising Age, May 13, 2002, p. 2.

Turcsik, Richard. "The Battle Plan from Battle Creek." Progressive Grocer, November 15, 2002, p. 48.

                                            Simone Samano

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