KELLOGG'S REGAINS CEREAL SUPERIORITY FROM BIG G

Boost in Sales Helped by Heavily Hyped Diet Plan

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NEW YORK (AdAge.com) -- Kellogg Co.'s nearly 2-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.

New products and advertising
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."

Jeff Montie, president of Kellogg's Morning Foods division, said the company's upswing in cereal is a result of clearly aligned business teams (reorganized by highly regarded 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.

Swimsuit season
More than $12 million

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of Kellogg's total was spent on a hugely successful Kick-Start diet promotion for its Special K and Smart Start brands that lured consumers with a way to lose six pounds in two weeks. The effort is back on air this month as part of pre-swimsuit season, 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. Instead of "multi-gazillion dollar ad budgets," Kellogg will aim to gain store displays for those brands with promotions such as the upcoming American flag packaging for Corn Flakes surrounding Memorial Day and Fourth of July.

Prioritization is also key in determining what segments of the cereal category merit innovation. For example, Mr. Montie said, children-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 a line of Disney cereals (and display-driving promotions such as upcoming ties to the video release of Monsters, Inc. for Crispix and a Beauty and the Beast tie with Corn Flakes). It's also touting new entries surrounding hot kid movies Columbia Pictures' Spider-Man and Warner Bros.' Scooby Doo and pushing efforts behind Cocoa Krispies.

"Kellogg has been tying in to a lot of consumer stuff recently, and it just seems to be working," said one East Coast retail executive, who added, however, that Disney entries "haven't set the world on fire" as some expected.

Credit Suisse First Boston's Mr. Nelson said some of Kellogg's past innovation, such as Breakfast Mates milk and cereal kits, were "incredibly poorly conceived," adding Kellogg now seems "more in touch with consumers."

100 new products
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, the emphasis will not necessarily be on cereal. General Mills spent $39 million on cereal advertising in the first two months of this year, according to CMR.

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 the focus necessary, after acquiring Pillsbury, is in the areas of meals and refrigerated dough.

Within Big G, one of the biggest areas of concentration is convenience products, such as its successful new Milk 'n Cereal bars and slow-building Chex Morning Mix, which are not measured as part of the traditional cereal category, 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 continue funding 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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