Kraft, Kellogg Beat Analyst Expectations

Despite Quarterly Earnings Tumble, Marketers Stick With Upping Ad Spending

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CHICAGO ( -- In the face of rising commodity costs and cautious consumers, most brand-name food manufacturers are continuing to increase marketing investment. Kraft and Kellogg, which both reported earnings this morning, credited advertising and marketing with the strength of the companies' respective brand portfolios. Both marketers saw profits drop and simultaneously beat analyst expectations.
Kellogg CEO David Mackay
Kellogg CEO David Mackay Credit: Shawano Cleary

"We continue to increase our investment in advertising with first-quarter growth at mid-single digits on top of last year's double-digit first-quarter growth and ahead of our long-term sales growth target," said Kellogg CEO David Mackay. "We remain committed to both advertising and promotions to help drive sustainable and dependable growth. We're spending more in absolute terms."

Consumers not trading down
Mr. Mackay has said Kellogg tends to do well in a recessionary environment, and the company hasn't seen consumers trading down to private-label brands. Advertising has been a key part of his company's offensive line. Kellogg's spent more than $1 billion on advertising in 2007. The company does not report its overall marketing budget.

Although earnings were down 2% from the year earlier, Wall Street continues to look upon Kellogg's ad spending with favor.

"Another quarter of healthy advertising investment should keep Kellogg at the head of the packaged food advertising pack," Wachovia analyst Jonathan Feeney wrote in a report. "And its brand know-how, marketing muscle, and distribution strength should help ensure accretive integration of recent acquisitions (Bear Naked, Wholesome & Hearty, United Bakers) as well as sustained momentum around its core."

Credit Suisse analyst Robert Moskow noted, "It is rare to see operating leverage in today's inflationary environment, but Kellogg is doing it. Having strong brands, a consistent strategy, and good management helps."

Kraft brands get boost
At Kraft, CEO Irene Rosenfeld has said that increased marketing support has helped Oscar Mayer Deli Fresh cold cuts, DiGiorno pizza, Jell-O and Oreo, among others, gain share. More recently, advertising has also helped move the needle on Planters, Singles Select and, perhaps most surprisingly, Maxwell House. Investors were clamoring for the brand's divestiture last summer.

Kraft's first-quarter earnings fell 13%.

"In processed cheese, the introduction of Singles Select helped to turn around our market share, and Planters gained share in snack nuts fueled by more effective marketing and a higher level of support," Ms. Rosenfeld said.

Next on the company's marketing agenda is its salad dressing business, another segment that had been all but written off. Kraft recently repackaged its salad dressings following a reformulation that removed preservatives.

"Going forward, we'll continue to invest behind key brands and as the year progresses we expect to add two other large U.S. businesses, pour-able salad dressings and crackers to our list of categories gaining share," Ms. Rosenfeld said.

Kraft is in the second year of what Ms. Rosenfeld has dubbed its "three-year turnaround." As part of her plan, Kraft's marketing spending will increase slightly each year. She has projected a budget between 8% and 9% of 2008 net revenue. In 2007, Kraft spent 7% of sales, about $2.6 billion. The company has not disclosed its 2006 spend, which Ad Age has estimated at $1.4 billion.
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