Kraft, Kellogg to Boost Ad Spending Despite Earnings Drop

Brand Building a Priority as Food Marketers Look to Raise Prices

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CHICAGO ( -- A lot of marketers look to cut spending during rocky economic times. But not Kraft Foods and Kellogg Co., which told analysts today they will boost their ad outlays despite drops in net income.
Both Kraft Foods and Kellogg Co. said they will boost their ad outlays despite drops in net income.
Both Kraft Foods and Kellogg Co. said they will boost their ad outlays despite drops in net income.

Kellogg CEO David MacKay said his company's loss (net income declined 3% in the fourth quarter) was stemmed by its increased ad spending, to $1.1 billion, or about 9% of sales for the year. Mr. MacKay added that when efforts such as point-of-sale promotions are added in, the company spent about 12% of its total $11.8 billion in sales on advertising.

Distinct marketing budget
Kellogg's marketing budget is distinct from its measured-media outlay, and the company doesn't disclose the investment in overall brand-building. Kellogg also did not provide a year-over-year comparison, but described the spending hike as a "double-digit increase." Advertising Age estimates Kellogg's total 2006 marketing spending at $765 million.

The cereal marketer instituted broad-based price increases in 2007, responding to higher commodity costs. But Mr. MacKay said the company is strong enough to withstand consumers trading down to private label. "We feel pretty good about that, given the strength of that brand equities, the level of our innovation and the support we intend to continue putting behind our brands as we go forward," he said.

At Kraft, where fourth-quarter net income fell 6%, CEO Irene Rosenfeld promised to increase marketing spending to between 8% and 9% of total sales by 2009. In 2007, Kraft spent nearly 7% of total sales, or about $2.6 billion, on marketing. While the company would not disclose a precise amount for 2006 marketing, Ad Age estimated the total marketing at $1.4 billion.

Insufficient brand equity
While some products, such as cheese singles and Maxwell House coffee, have benefited from increased advertising, Ms. Rosenfeld noted that ad spending was not enough: The products' insufficient brand equity has prevented the company from increasing its prices commensurate with commodity costs.

"Our pricing realization was not as strong as we would like it to be, because we don't yet have suitable brand equity," Ms. Rosenfeld said during the call. "But the key to our future in cheese as it is in so many of our businesses is continuing to ensure that we have invested appropriately in quality, in marketing support and in innovation to be able to realize those price opportunities."

So while Kraft would like to increase prices to an optimal level in categories like cheese -- Ms. Rosenfeld noted during the call that the company misjudged how much dairy costs would rise -- it can't do so until it can persuade consumers to pay more for its products via brand-building advertising.

And so analysts don't expect a quick fix. "Irene & Co. are confronting long-term problems that will take some time to solve," Wachovia analyst Jonathan Feeney said in a report. "For example, the problem in the cheese business isn't so much costs, it is that brand equity and product differentiation are well below average -- not something that can be fixed overnight."
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