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Kellogg Credits 17% Ad Spending Boost for Increased Earnings

With Cereal Sales Up 2%, Food Marketer Continues Its Focus on Eight Best-Performing Brands

By Emily Bryson York
Published: October 29, 2009

CHICAGO (AdAge.com) -- Kellogg Co. bested industry expectations with third-quarter earnings released this morning, thanks in part to higher ad spending. Sales slipped slightly on currency conversion, to $3.3 billion, but the company's earnings per share grew 5% during the quarter, as it also boosted advertising by a whopping 17%. The company also forecast another double-digit increase for ad spending for the fourth quarter.

"Our commitment to investing in advertising continues to be a key to our business model and to achieving our goals," Kellogg Chief Financial Officer John Bryant said during the call. "Rather than take advantage of lower rates to reduce the cost of our advertising investment, we see this as a great opportunity to increase our investment and build even stronger brands in the future. Higher spend combined with media deflation and a push on efficiency is driving a significant increase in advertising pressure."

Kellogg has continually doubled down on advertising in the recession, citing brand loyalty as the best buffer to private-label penetration. While it has increased spending, the company is also driving efficiency in its spend by way of bundling products, reducing the number of TV commercial shoots and driving more projects online, where ROI has proven to surpass that of TV, in some cases by a factor of more than two.

As a result, Kellogg continues to build sales in the highly competitive and very mature ready-to-eat cereal category, up 2%, but lapping a stunning gain of 7% a year ago. Some iconic Kellogg cereals such as Corn Flakes, Frosted Flakes and Raisin Bran have spawned a host of lower-priced competitors. But CEO David MacKay said the company now focuses on its eight best-performing cereals, including the Kashi organic brand, and this strategy has been integral to Kellogg's continued success.

"During the quarter, these brands grew net sales at a strong 8%, with Special K, Rice Krispies brand and Kashi each delivering double-digit growth," he said. "This strong growth from our top brands was driven by double-digit increase in our advertising investment, as well as successful promotions."

The cereal business was not all rosy, however. Kellogg will be discontinuing its on-the-go single-serving cereal packages due to lack of demand from more value-conscious consumers. Campbell's Soup has encountered similar problems with its on-the-go soup packages, which are generally priced at a premium to the traditional red-and-white label cans.

"The Kellogg story would be much more exciting if the company were over-delivering on sales and volume growth," Credit Suisse analyst Robert Moskow wrote in a research note. "Nonetheless, no other company has a more tested business strategy of cost-cutting and brand reinvestment than Kellogg, and no other company has consistently grown returns on invested capital."