Food Companies Stay the Course

Kraft, Kellogg Claim That Upping Marketing Spending Allowed Them to Pass on Price Hikes, Boost Sales

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LOS ANGELES ( -- Rather than yank money out of marketing in an ailing economy, several top food players are doing just the opposite -- and reaping the rewards.

Figures are measured-media numbers, not total marketing spending. Data cover April through June for Spanish-language and spot TV, magazines, Sunday and local magazines and network radio as well as April-through- May data for network, cable and syndicated TV, Hispanic magazines, newspapers, internet and spot radio. Comparisons are with prioryear period. Source: TNS Media Intelligence
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Kraft Foods, Hershey, Kellogg Co. and General Mills have all cited increased marketing and advertising spending as one reason for better-than-expected sales gains in the second quarter. And by staying top of mind with marketing, Kraft was able to pull off a 7% price hike, neatly offsetting commodity costs without seeing consumers defect to private-label rivals.

"Our commitment to advertising investment is a key component of our strategy, and our strong execution gives us the confidence that we will continue to achieve our goals," a bullish Kellogg CEO David Mackay told investors during a call last week in which the company reported North American sales up 7.4%. The Battle Creek, Mich., marketer bankrolled a double-digit advertising increase during the quarter on top of last year's double-digit increase. The company said it spent $1.1 billion in 2007.

Kraft, in the midst of a three-year turnaround plan engineered by CEO Irene Rosenfeld, said it has been increasing marketing investment over the past two years and plans to raise overall marketing by $200 million this year. But it appears to have a way to go: According to TNS Media Intelligence, the company's measured-media outlay in the second quarter fell 10% to $259.1 million. Of course, that does not include unmeasured media, which may skew the total much higher. "In terms of building our brand equities, our investments in product quality, marketing and innovation continue to pay off," Ms. Rosenfeld said during the company's second-quarter earnings call last week.

General Mills, which released full-year fiscal results in June, showed U.S. retail sales gains of 9% as that it attributed to consumer-marketing spending that it said grew 20% during the fourth quarter and 13% for the year. According to TNS, General Mills spent $564 million in 2007. In the first three months of 2008, measured media spending was up 13.7%.

Consumer-driven model
Hershey Co., which said it will increase marketing spending 40% in the next two years, reported strong second-quarter sales last month -- up 5%. "Net sales and marketplace performance improved, validating our strategy of increasing advertising and consumer investment behind core U.S. brands," said David J. West, president-CEO. "The consumer-driven model unveiled last month is focusing the company on brands and innovation that offer the greatest potential for sustainable sales and earnings growth."

Even Wall Street, notorious for viewing marketing expenditures as dispensable, is cheering the moves to boost outlays. "In this commodity-inflation environment, these companies need to push pricing through in order to defend their profits," said Edward Jones analyst Matt Arnold. "And it's hard to imagine they'd have had as much success as they have if they hadn't been investing in the business over the last few years to make sure that their relationship with the consumer was as strong as possible."
Sara Lee CEO Brenda Barnes
Sara Lee CEO Brenda Barnes

Investing in brands during a rough economy can not only fend off share loss but also boost the brand's trajectory when things improve, said Larry Light, president of consulting firm Arcature and past global CMO of McDonald's. His research identified "winners" who spent more on advertising and promotion during a recession, and "losers" who made cuts. After the recession, the so-called winners grew much faster.

"Losers cut marketing in a recession, and the result is they simply accelerated their loss in market share after the recession," he said.

Slimming down
Some companies, however, feel compelled to make cuts. Sara Lee is also attempting to orchestrate a dramatic turnaround. The company has been slimming down in a number of ways, and marketing is one of them.

According to TNS, Sara Lee's measured media spending in the first three months of 2008 fell 19% to $19 million, from $23 million during the same period the year before. CEO Brenda Barnes listed lower marketing expenses as one of the ways she plans to meet the company's fourth-quarter target.

Credit Suisse analyst Robert Moskow wasn't impressed. "When a company says it is going to meet its fourth-quarter estimate by cutting marketing spending and laying off 300 people in North America, we take it as a bad sign," he said.
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