Kellogg squeezes media in save-to-spend scheme

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Kellogg Co.'s $400 million media-buying review is part of a productivity plan that could help the cereal giant grow its marketing spending by $300 million over the next five years.

When Kellogg confirmed that the account, handled by Publicis Groupe's Starcom USA and predecessor agencies for decades, was under review "to look for opportunities to strengthen our business," Wall Street was not at all surprised. Analysts see the pitch as part of the company's commitment to raise revenue to pour back into brand building. Lehman Bros.' analyst Andrew Lazar estimated that such initiatives will result in more than $290 million in incremental advertising resources for Kellogg by 2010.

"Kellogg is in a very enviable, virtuous cycle of cost-cutting, reinvesting for growth and then cost-cutting," said D.A. Davidson analyst Tim Ramey. The idea of using margin expansion to fund increased marketing spending and drive growth sounds simplistic, Mr. Ramey said, but very few companies in the food sector have been able to put such a cycle in place. That, he said, helps explain why Kellogg has been the top-performing, large-cap food company over the last five years.

Confidence in Starcom

It wasn't clear which other media agencies will be invited to pitch the account. The review is being handled by the cereal giant's procurement department. The company wouldn't comment directly, but a Kellogg spokeswoman seemed to indicate the company would like Starcom to come through with cost savings sufficient to retain the business, noting, "We have confidence in them."

"We remain committed to our partnership with Kellogg," said a Starcom spokeswoman. In an internal memo, Starcom USA CEO John Muszynski, characterized the move as a "due-diligence exploration of [Kellogg's] buying practices in the U.S." and said that such an effort is "not unprecedented, particularly in light of current procurement pressures and competitive practices which promise unsubstantiated lower rates."

Benefit of retention

Should Starcom retain the account, it will likely benefit from higher Kellogg spending. Nearly a year into his tenure as Kellogg CEO, Jim Jenness has pleased analysts by keeping largely intact the successful strategies of his popular predecessor, Carlos Gutierrez. Following a long stretch in which the company seriously underperformed under CEO Arnold Langbo, Mr. Gutierrez was able to drive revenue up nearly 10% during his four-year tenure as chief executive, largely through reinvestment in marketing spending and brand building. Mr. Jenness has committed to continuing that cycle, aiming to grow ad spending faster than sales.

Lehman's Mr. Lazar estimates that Kellogg, which ranks as the second-biggest ad spender in the food sector, behind Wm. Wrigley Jr. Co., will grow its ad budget to 11.5% of sales vs. its current 8.4% by 2010. That reinvestment is especially important now as cereal rival General Mills (which slipped to No. 2 during Mr. Gutierrez's tenure) is expected to ramp up its own marketing spending by double-digits in the coming year to combat volume declines of 6% in its most recent first fiscal quarter.

"General Mills has been asleep at the switch and Kellogg has benefited," said Neuberger Berman analyst Bill Leach. But, he suggested, "if No. 2 gets mad, it could have ramifications for No. 1."

Kellogg is taking no chances that General Mills could make headway on its nearly four-point share lead in the $6 billion cereal category. According to an executive close to Kellogg, the company's sales teams have been issued a "call to action" to finish the year out strong with higher-than-usual fourth-quarter trade efforts.

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