News Column

He's Grrreat!

January/February 2004, HISPANIC BUSINESS Magazine

Nancie Hudson

The advertising slogan for Kellogg's cereal is "Breakfast is back," but a more appropriate slogan for the company itself might be "Kellogg is back." Since Carlos M. Gutierrez became CEO in April 1999, Kellogg has posted increased sales and earnings and regained its position as the world's top cereal seller.

The turnaround is a vindication of Mr. Gutierrez's emphasis on diversifying Kellogg's product offerings in a bid to return the Battle Creek, Michigan–based cereal manufacturer to profitability.

As more consumers sought healthier breakfast foods, Kellogg's market share of the intensely competitive ready-to-eat cereals market had fallen from more than 40 percent in 1990 to 31 percent by 1999. In response, Mr. Gutierrez spearheaded Kellogg's acquisition of privately held Kashi Co., a natural-cereal and convenience-foods company based in La Jolla, California, in July 2000.

Kashi had grown 100 percent during 1999 (the natural and organic foods market was growing rapidly at the time) and consumers welcomed the opportunity to taste new products made with a blend of sesame and whole grains. As a result of the deal, Kellogg came to learn Kashi's trade secrets while expanding its presence in the cereal aisle.

The acquisition also complemented its existing natural-food-product capability. Kellogg had acquired the veggie burger manufacturer Morningstar Farms when it purchased Worthington Foods in 1999 for $307 million.

But Kellogg's most significant acquisition was cookie and cracker manufacturer Keebler Foods Co., which the cereal maker purchased for $4.4 billion in March 2001.

"I've had many proud moments related to the performance and results of Kellogg people around the world, but one of the highlights of the last four years has been the Keebler acquisition," Mr. Gutierrez says. "That's been the largest acquisition in our 97-year history, and it was a significant milestone in my own career." (For more on Mr. Gutierrez, see the Hispanic Business 2004 Corporate Elite Directory in this issue.)

The acquisition helped Kellogg diversify its product offerings in the United States – the company's largest market – and provided it with a national direct-store-delivery distribution system for its convenience food products, such as Nutri-Grain snack bars and Rice Krispies Treats.

Furthermore, adding Ernie the Keebler Elf to Kellogg's stable of well-recognized advertising icons fit perfectly into the company's brand-building strategy. Kellogg is aggressively leveraging consumer awareness of its advertising characters and campaigns with an expanded licensing program. Last summer Tony the Tiger and Friends performed a live production show at fairs and festivals across the country. All of the Kellogg icons, including Toucan Sam, Snap! Crackle! and Pop!, and Dig'Em, are being featured in Modern Publishing's new series of children's coloring and activity books. Retail shoppers can buy Tony the Tiger boxer shorts in adult sizes, and in November, Kellogg will launch a line of Special K women's apparel in conjunction with Bruce Brown Fashions Inc.

"Brand-building is a very important component of our strategy," Mr. Gutierrez says. "On one hand, it prevents our brands from turning into commodities, whereby it doesn't really matter what product you buy, they're all the same. In the case of brand-building and differentiation of brands, that also enables us to sustain higher margins because we have stronger brands, and then we rely less on discounting prices. Just constantly selling on the basis of who has the lowest price – if you do that, for the long term, eventually you're not going to have a very healthy business, and brand-building helps to prevent falling into that trap."

Kellogg's resurgence has not been without challenges, however. Only five months after becoming CEO, Mr. Gutierrez made the decision to sell the company's least-profitable product line, Lender's Bagels, which Kellogg had purchased from Philip Morris three years earlier for $466 million. By September 1999 consumers were expressing a clear preference for less-expensive offerings from competitors, so Mr. Gutierrez opted out of the bagel business.

The decision to close the company's historic South Battle Creek plant in 1999 – because retrofitting the outdated Corn Flakes manufacturing equipment would have been economically unfeasible – also was difficult. In late December, Kellogg purchased a convenience foods manufacturing plant in Rome, Georgia, from the Mondo Baking Co. division of Southeastern Mills Inc. and transferred its Corn Flakes production there.

Developing a game plan for turning Kellogg around was no less of a major undertaking, Mr. Gutierrez now says.

"One of the biggest challenges, of course, is to get everyone in the company on board with that direction," he says. "And of equal importance, we had to make sure we had the best people in the right jobs to make it happen and execute the strategy. So the combination of those three things is a sizable challenge at the beginning of any tenure."

Twice in the past four years Mr. Gutierrez has reorganized Kellogg's executive management team, making use of his extensive firsthand knowledge of the company's operations. A native of Havana, he joined Kellogg in 1975 as a sales representative in Mexico City and subsequently worked his way up.

As CEO, he has presided over impressive sales and earnings gains. Kellogg's sales climbed from $6.7 billion in 1998 to $6.9 billion in 1999 and 2000, then jumped to $8.8 billion in 2001 and $8.3 billion in 2002, according to Value Line. Earnings per share rose from $1.35 in 1998 to $1.50 in 1999, then increased to $1.61 in 2000 and dipped to $1.31 in 2001 before escalating to $1.73 in 2002. Projected sales and earnings per share for 2003 are $8.7 billion and $1.90, respectively.

Perhaps the company's biggest coup was regaining market share in the ready-to-eat cereals market, from 31 percent in 1999 to 33.4 percent as of September 2003, according to Information Resources Inc. Kellogg regained its No. 1 industry ranking when it overtook General Mills' share of the cereal market in April 2002.

Earlier this year Mr. Gutierrez announced that Kellogg had improved profitability, generated more cash flow than anticipated, and reduced its debt. He says the company expects to grow marginally because of increased sales. First- and second-quarter 2003 sales and earnings exceeded Wall Street's expectations, and in August, Value Line analyst Jeffrey B. Levit forecast "solid long-term growth" for the company.

Founded in 1906, Kellogg has manufacturing facilities in 19 countries and sells its products in more than 180 countries. Its brands also include Eggo, Pop-Tarts, and Krave.


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