Kellogg, Kraft Forge Ahead Through Market Turmoil

Both Report Higher Earnings, but Numbers Tell a Mixed Story

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CHICAGO ( -- The sour economy continues to be sweet for package-food marketers, as Kellogg Co. reported double-digit increases in third-quarter earnings today. It credited stepped-up marketing support for the gains -- but a slowdown looks to be on the horizon.

Kellogg's net earnings were up 12% to $342 million. Kraft Foods, which also reported today, saw earnings more than double to $2.6 billion. However, Kraft's boost reflects the company's Post cereal sale; with Post and other one-time items stripped out, earnings were flat.

'Solid' results
"Our success was driven by price realization, effective advertising and continued business momentum," Kellogg CEO David Mackay told analysts during the earnings call. "We achieved solid [third-quarter] results, which were above their long-term targets despite the economic slowdown, commodity inflation and higher tax rate."

Kellogg has been aggressively increasing advertising over the past year, spending nearly 9% of sales, or more than $1 billion. John A. Bryant, exec VP-chief financial officer, noted that competitors spend about 5% of sales on advertising. But moving forward, he said, the company said it is scaling back in terms of increase and will be focusing on the efficiency of its spending.

"We are also driving a series of initiatives across brand building to further improve the efficiency and effectiveness of lead investments in the new media environment," he said. "We began to see the benefits of these initiatives during the third quarter."

Wal-Mart helps out
Luckily for Kellogg, some of its retail partners are willing to advertise its products and value proposition for free. While the company has been advertising its cereals with milk as a meal for 50 cents, Wal-Mart has taken up this messaging as a way to pitch its own in-store value proposition.

"Wal-Mart has been constantly pushing their angle as being the retailer that gives the best value," Mr. Mackay said. "They paid for the advertising that I think featured an array of Kellogg products, and suggested that the consumers could save $900-plus a year."

At Kraft, CEO Irene Rosenfeld said that while the economy has worsened, she's grown more confident about the company's business. "We've invested to improve product quality and rebuild brand equity since 2007, and that has given us renewed pricing power," she said. "As a result, 2008 represents an important landmark. It will be the first year in many that Kraft will fully offset input-cost inflation through a combination of pricing and productivity."

Ms. Rosenfeld added that while the tough economy has forced consumers back to the grocery store, value-priced offerings such as Mac n' cheese, Jell-O, Kool-Aid and DiGiorno frozen pizzas are boosting the business. The company has also begun to reverse years of declines in Maxwell House coffee and its salad dressings. "Going forward, we'll continue to invest in our brand equities and the value positioning of key brands," Ms. Rosenfeld said. "We'll benefit further from product news in core categories like crackers, and as a result we expect to see market shares continue to improve."

Chief Financial Officer Tim McLevish added that advertising has boosted sales of Kraft Singles, Velveeta and Ritz crackers. Kraft had originally projected to increase marketing spending to nearly 8% of sales by the end of 2008. The company now projects that spending will come in around 7% again, but given higher-than-anticipated sales, the dollar value will be in the same range as the earlier projection. On sales of $37 billion last year, 7% translated into roughly $2.6 billion.

"I feel very good about the investments that we've made over the past two years, and I think we've given out an exceptionally strong base from which to build," Ms. Rosenfeld said. "You'll see our [spending] will be up again in 2008. Despite the challenging cost environment, we should come in at about 7% of net revenue, and I feel particularly good about that, as we've watched some of our peers take their spending down."
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