Under 50% of snack sales: Keebler has not proved boon to Kellogg stable

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Three years after acquiring Keebler, Kellogg Co. is moving the Hollow Tree from Elmhurst, Ill., to Battle Creek, Mich. The uprooting of the Keebler team from its longtime home to a floor in Kellogg's corporate headquarters is indicative of how 150-year-old Keebler name has become just one more brand-and not a particularly important one-in Kellogg's growing line of snacks.

Keebler as a brand has not exactly thrived under its new owner. Today, Keebler accounts for less than 50% of overall Kellogg snack sales, and has experienced steep declines. When Kellogg bought Keebler in 2001 for $4.4 billion, it reported 2000 sales for the snack company of $2.7 billion. Kellogg's recent 2003 annual report showed its U.S. retail snacks segment-which includes the addition of Kellogg brands Nutri-Grain and Rice Krispies Treats as well as new cereal bars-totaled just $2.1 billion.

no sales growth

While Brad Davidson, president of Kellogg U.S. snacks, points out that the lower number reflects the breaking apart of the business into separate units for channels including vending and club stores, Prudential Securities analyst John McMillin said sales haven't grown.

Mr. McMillin and other analysts still view the acquisition of Keebler as more of a positive than a negative. But they cite mainly the direct-store-delivery system Kellogg gained with the buy and the success of brands such as Cheez-It crackers, now over $400 million in sales. The namesake Keebler brand is rarely mentioned.

It is no wonder Keebler doesn't come up as a positive, since 2003 sales of top Keebler brand Chips Deluxe fell 13% to $136 million while Keebler Fudge Shoppe dropped 9% to $106 million, according to IRI.

Mr. Davidson blames the declines on the growing concerns over obesity, trans fats and carbs and said Kellogg is tweaking Keebler products to reflect the trends with a Carb Sensible line of Chips Deluxe and a Fruit Delights line for Keebler Sandies, among other efforts.

But the bigger opportunities for wholesome snacks, a priority for the company, clearly will come from within Kellogg's own heavily advertised cereal equities. The combination of the snack division with the morning-foods division under one roof later this summer is expected to foster that. Kellogg this month will leverage its popular Fruit Harvest brand to, as Mr. Davidson said, "bring the wholesome goodness of Kellogg into the cookie aisle" with a line of trans-fat-free Fruit Harvest Oatmeal Cookies that cater to the 55-year-old-plus set, heavy cookie consumers, looking for "wholesome delights."

Though the new brand will get its own dedicated print campaign in August from Publicis Groupe's Leo Burnett USA, Chicago, which handles all of Kellogg's advertising, it will more importantly benefit from the $31 million in ad spending that Kellogg put toward Fruit Harvest cereal in 2003, according to TNS Media Intelligence/CMR. Comparatively, Kellogg spent a mere $15 million in advertising on the portfolio of Keebler brands and their spokescharacters, the Elves, last year. The move follows the success Kellogg has had extending its cereal brands into portable bar form, such as Special K bars.

will nabisco follow?

Longtime Keebler rival Nabisco, now a unit of Kraft Foods, might well follow in Kellogg's footsteps. A sales executive from the unit said that while Nabisco does twice the business of Kellogg in cookies and crackers, Kellogg has been successful at building a good portfolio of items in the breakfast aisle, which Nabisco is now eyeing as well.

According to one analyst, the reasoning may be what Hershey Foods calls "permissibility." He said, "Moms feel better about giving kids a cereal bar rather than a cookie."

The consolidation at Battle Creek is intended to further drive synergies between Kellogg and Keebler in marketing, the supply chain and the innovation pipeline, Mr. Davidson said. "The melding of the Kellogg culture and the Keebler culture makes us stronger," he said.

merger

To reflect the shift, Kellogg has merged the 35-year-old "Uncommonly Good" tagline created around the Keebler Elves with its Tony the Tiger's "Grrreat!" for a new corporate mantra: "Uncommonly Great."

As Kellogg prepares the second floor of its Battle Creek offices to house the snack division, a special conference room is being dedicated to elf icon, Ernie Keebler, just as there is one dedicated to Tony the Tiger. But meanwhile, back in Ernie's old Elmhurst home, a recent storm blew down a large tree in front of the offices. A sign?

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