Thursday, May 6, 2010

Kellogg Company

Kellogg Company

Fact File:

Founder: Will Keith (W.K.) Kellogg.

Distinction: Invented and popularized toasted grain flake


Primary business: Breakfast cereals and other grain-based


Annual Sales: $6.8 billion.

Number of Employees, League: 14,500.

Major Competitors: General Mils, Kraft Foods, Quaker Oats.

President and CEO: Carlos Gutierrez.

Headquarters: Battle Creek, Mich.

Year founded: 1906.

Website :

In more than 160 countries around the world, people of all ages

reach enthusiastically for a box of Kellogg's ready-to-eat breakfast cereal

as soon as they awaken each morning. Products like Corn Flakes,

Special K, and Rice Krispies—not to mention the advertising icons with

which they are associated, including Tony the Tiger and Snap!,

Crackle!, and Pop!—have become more prevalent on kitchen tables than

those of any other company in the business. In fact, in the mid-1980s,

Kellogg commanded a larger share of the cereal market than both of its

two closest competitors combined. Since first developing the toasted grain

flake in Battle Creek, Mich., almost a century ago, the company has

indeed carved a formidable niche for itself through these popular items

and others with familiar brand names like Eggo, Pop Tarts, and

Morningstar Farms.

However, despite decades of uninterrupted sales growth and its

impressive place in food history, Kellogg found itself seriously floundering

by the end of the 20th century. As competition intensified and taste in

breakfast foods shifted, its one-time 42 percent share of the United States'

$7.3 billion cereal market fell to 32 percent. Even more depressing to folks

in the "cereal bowl of the world," arch rival General Mills actual overtook

it as the number-one cereal seller.

Three months after the June 1998 opening of Cereal City U.S.A.

(the combined corporate monument and tourist attraction where visitors

can follow a corn kernel through a simulated production line to see it

cooked, dried, pressed, toasted and sprayed with vitamins before

emerging as a corn flake) the grit began to hit the fan. The president of

Kellogg North America and the head of European operations stepped

down. A new CEO was named. And shortly thereafter, the company's 92-

year-old South Plant was shuttered and 550 jobs in Battle Creek were


Considering how much they valued employees and their

contributions, founders J.H. and W.K. Kellogg might not have approved.

But stockholders and financial analysts certainly did, for the moves finally

allowed the Kellogg Company to begin the process of regaining its place

at the head of the world's breakfast table.

In the mid-19th century, America breakfast cereal of choice was a

cooked blend of salt, water and grain (usually oats). John Harvey "J.H."

Kellogg, a physician from Tyrone, Mich., decided to try something

different when he became superintendent of the Western Health Reform

Institute in 1876 (later renamed Battle Creek Sanitarium). A Seventhday

Adventist who avoided consumption of animal-based products, J.H.

developed numerous nut and vegetable foods to vary the diet of his

patients. One began as a corn mean biscuit about half-an-inch thick; this

was toasted until it was almost dry and slightly brown, then ground and re

baked. Flakes of this kind were not new but J.H. was arguably the first to

present them as a breakfast food.

Patients were instantly drawn to the concoction. (One, C.W. Post,

saw business opportunities in the new item and ultimately started a

company that thrives today as a unit of Philip Morris' Kraft Foods.) Will

Keith "W.K." Kellogg, who assisted his older brother J.H. at the

Sanitarium, also saw commercial possibilities. Together, the two siblings

founded the Sanitas Food Company in 1900 to produce these flakes

made of corn. W.K. soon bought out J.H., and in 1906 he established the

Battle Creek Toasted Corn Flake Company. By heavily advertising his

new product and improving its quality, W.K. increased sales from 33 to

2,900 cases a day by the end of the first year. His business continued to

prosper, and its current name was adopted in 1922 when the company

began producing cereals other than corn flakes. Its new granular,

shredded, and puffed varieties soon proved equally popular, as did those

featuring added sugar and those roasted rather than flaked.

Kellogg's personal relationships did not always fare as well. He

appointed his son company president but fired him upon learning that he

abandoned his wife in favor of an employee. He then prepared a grandson

for the job, but eventually drove him from the company and even sued

him for copying one of its patented processes. The business continued to

soar, however, and Kellogg cereal boxes carrying the founder's bright red

signature were increasingly seen on grocery store shelves and kitchen

tables across the land.

But the cereal tycoon was not content to be just a wildly successful

entrepreneur. With an endowment of $47 million, he established the

philanthropic W.K. Kellogg Foundation in 1930. He also became one of

two major business leaders during that decade (the other was Paul

Litchfield of Goodyear Tire) to adopt a six-hour work-day for employees in

the belief that it would decrease inefficiency and increase productivity.

Kellogg felt the plan, when fully implemented among his 1,500 workers,

would permit him to hire an additional 300 and thereby boost the economy

of Battle Creek.

The experiment proved unsatisfactory for a variety of reasons, so

management began shifting back to the traditional eight-hour schedule

during World War II. Undaunted, the ever-resourceful Kellogg adopted

other broad-minded management principles to improve the living and

working condition of his employees. He built an on-site gymnasium and

recreation facility equipped with the latest in motion picture projection

equipment. He offered employees plots for personal gardens on 40 acres

he owned outside of town. Hew paid bonuses. He even opened a daycare

facility for employee's children. (Despite many changes in these programs,

this philosophy continues and the company still received high marks for its

charitable giving, family benefits, community outreach, and programs for

women and minorities.)

Before his death in 1943 at age 91, brother J.H. went on to write

several medical texts, start Battle Creek College, and open Florida's Miami-

Battle Creek Sanitarium. Ironically, W.K. was exactly the same age when

he died eight years later. To many, the pair's longevity proved their

somewhat radical beliefs about life and health were indeed sound. Few

ever doubted W.K.'s often equally controversial business philosophies,

though, and it was not until nearly two decades after his death that

management even dared to look past the core product mix he initiated and

unturned. In fact, it took unit the 1970s—when the U.S. Government

began an effort to break up the country's big cereal makers—before the

company started diversifying. It introduced teas, desserts, soups, sauces

and nondairy frozen foods through various acquisitions; other takeover

attempts involving 7-UP, Tropicana, and crayon maker Binney & Smith

fell through.

The government dropped its antitrust effort in 1982 with Kellogg still

atop its burgeoning industry. CEO William E. LaMothe, who had come on

board in 1979, claimed this was because the new product lines had little

overall impact on the company's traditional operations. "At Kellogg, the

focus always has been the product," he told Dun's Business Month.

Cereal production and sales remained primary despite the diversification,

and in this vital area Kellogg continued to reign. Profits topped $286 on

revenues of $2.9 billion in 1985, prompting analysts to reconfirm that

"Kellogg knows the cereal business better than anyone else."

Launching an aggressive attempt to recapture the fading allegiance

of children and those aged 20 to 49, the company introduced 10 new

cereals including Apple Raisin Crisp and Nutri-Grain. It increased

promotional budgets for existing products such as Bran Flakes to

emphasize their potential health benefits. And it planned aggressive

expansion outside the Untied States, where nearly one-third of sales were

generated by the mid-1980s. Ultimately, it operated production and

distribution facilities in 20 countries on six continents.

But the road to the future was not as smooth as LaMothe hoped, and

in 1992 Arnold Langbo was tapped as his replacement. Disappointments

continued on several fronts, though, as even the international market

grew sluggish. In response, the company's worldwide workforce was

reduced by about 8 percent.

Annual earnings still dipped 21 percent in 1998, which was

attributed to in creased competition from cheaper store brands and

America's increasing rejection of breakfast cereals. Langbo was replaced

by president and chief operating officer Carlos Gutierrez, who vowed to

improve profits by spending more on advertising and new convenience

foods. He also decided to cut even more employees and close the historic

South Plant in Battle Creek. Rumors abounded that Nabisco, Unilever,

Procter & Gamble, and PepsiCo were interested in acquiring the company,

but the W.K. Kellogg Foundation's 33 percent ownership stake complicated

matters. No moves were formally initiated.

As the century wound down, Gutierrez made more cuts to fund new

products. "We have to drive earnings through innovations," he told

Fortune magazine. In a company where new ideas had never been

developed very quickly, Gutierrez charged the 2-year-old W.K. Kellogg

Institute for Food and Nutrition Research with creating and pushing them

rapidly through the pipeline. Initial results were promising: in one month

along researchers developed 94 packaging proposals and 65 product

concepts, including novel ones related to a food's aromatic appeal. More

than two dozen of these new items were introduced in 1999 along. In

October 2000, Kellogg added cookie and cracker marker Keebler Foods Co.

to their lineup for $3.6 billion. In doing this, they created a company with

almost $10 billion in annual sales, which further extends Kellogg's in a

direction it needs to go: Beyond the breakfast table and into fastergrowing

areas of the food business.

Times are, admittedly, tougher today than they were when J.H. and

W.K. began banking and flaking their corn meal. But he two Kelloggs

overcame long odds then to develop the world's largest cereal company's

and most observers are not willing to count out their legacy just yet.

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