Kellogg retakes lead

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Kellogg Co.'s nearly two-year-old plan to build U.S. cereal sales is finally paying off. The longtime category leader, notably eclipsed by General Mills' Big G unit in 1999, has reasserted its top position during a recent three-month period with a strategy that puts ad spending and innovation behind a handful of brands with the most growth potential.

For the 12-week period ended March 24, Information Resources Inc. data show that Kellogg's cereal sales totaled $541 million to Big G's $523 million, with sales for heavily-advertised Special K and Smart Start brands up 22% and 72%, respectively. Kellogg's recent first-quarter earnings showed 9% dollar sales growth and 2% volume growth in U.S. cereals, very positive results for a company used to flat or even declining numbers. Credit Suisse First Boston analyst Dave Nelson attributed the growth to the fact "the company is simply executing better in new product innovation, advertising and marketing."

CLEAR ALIGNMENT

According to Jeff Montie, president of Kellogg's Morning Foods division, the company's upswing in cereal is a result of clearly aligned business teams (reorganized by Kellogg USA President David Mackay in early 2001), prioritization of ad spending on key growth brands and a shift in focus from discounting to innovation.

In the past, he said, "we couldn't part with advertising old brands, so we'd keep them on air with minor spending. Now, our philosophy is `do it, do it right': if we're going to advertise [a brand] we're going to have to spend at least $20 million, because that's what it takes."

As a result of the new strategy, Kellogg spent $32 million in advertising for its cereals during January and February of this year, according to Taylor Nelson Sofres' CMR. General Mills spent $39 million on cereal advertising in the same period.

More than $12 million of Kellogg's total was spent on a hugely successful Kick-Start diet promotion for its Special K and Smart Start. The effort is back on air this month, this time adding to the diet Kellogg's new Special K Red Berries, which has been so popular Kellogg had to pull advertising because it was unable to keep up with production. Bcom3 Group's Leo Burnett USA, Chicago, handles.

While brands with growth potential are getting Kellogg's ad money, Mr. Montie was quick to add that heritage brands like Corn Flakes will not be neglected. Kellogg will aim to gain store displays for those brands with promotions such as the upcoming American flag packaging for Corn Flakes this summer.

Prioritization is also key in determining what segments of the cereal category merit innovation. For example, Mr. Montie said, kid-appealing cereals account for about one-quarter of the $6.8 billion ready-to-eat cereal category, and Kellogg's share there has been minimal. Its answer: A long-term partnership with the Walt Disney Co. for Disney cereals and promotions. It's also touting new entries surrounding hot kid movies like Columbia Pictures' "Spider-Man" and Warner Bros.' "Scooby Doo" and pushing efforts behind Cocoa Krispies.

Credit Suisse First Boston's Mr. Nelson said some of Kellogg's past innovation, like Breakfast Mates milk and cereal kits, were "incredibly poorly conceived," adding Kellogg now seems "more in touch with consumers." Meanwhile, General Mills, long cited as a leading innovator, hasn't applied that skill to cereal brands lately, Mr. Nelson said. In fact, while General Mills is introducing roughly 100 new products this year (AA, April 18), the emphasis will not necessarily be on cereal.

CEO Steve Sanger admitted in a recent conference call with analysts that Big G is one of the divisions "we'd like to do better on" in terms of innovation. But he stressed that the focus necessary, after acquiring Pillsbury, is in the areas of meals and refrigerated dough.

A priority for Big G now is convenience products, such as its successful new Milk `n Cereal bars and slow-building Chex Morning Mix, items not measured as part of ready-to-eat cereal, according to a General Mills spokesman.

"Kellogg certainly has seen gains in their business as a result of innovation," the spokesman said. "When the leading players in the category experience growth, that's obviously good for the category as a whole."

While Kellogg is back on top for now, Mr. Nelson questioned whether two years from now, when the synergy savings from its Keebler Foods acquisition is spent, Kellogg will be able to fund high levels of innovation. Mr. Montie too is concerned: "Our biggest worry now is how we keep that edge, and not become complacent."

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