Kellogg Company

FOUNDED: 1906 as Battle Creek Toasted Corn Flake Company

Contact Information:

HEADQUARTERS: 1 Kellogg Sq.
Battle Creek, MI 49016-3599
PHONE: (616)961-2000
FAX: (616)961-2871
TOLL FREE: (800)962-1413
URL: http://www.kelloggs.com

OVERVIEW

Kellogg Company is the world's largest producer of breakfast cereals and an industry leader in the production of grain-based convenience foods. Despite forays into non-cereal product types, the company has ultimately made its fortune through a commitment to the cereal and grain-based convenience food market. Kellogg's success in this mature and diversified market can be attributed to its aggressive advertising, product innovation, and constant expansion of its consumer base.

COMPANY FINANCES

Growth for the Kellogg Company was slow for the year-ending 1997. Net sales were $6.8 billion, up 2 percent from 1996 sales of $6.67 billion. However, even this modest increase represented improvement over the 1996 year-end loss of 5 percent from 1995 net sales of $7 billion. The company's stock price ranged from $32 to $50 per share through 1997, representing some improvement over its 1996 range of $31 to $40. Net earnings per share for 1997 were __BODY__.32, slightly higher than 1996 earnings per share of __BODY__.25 (however, this modest change also reflects the stock-split that took place on August 22, 1997). The company reported first quarter 1998 earnings per share of $.42, up 11 percent over $.38 reported in the first quarter of 1997.

Operating profits for the company as reported in 1997 were __BODY__ billion, up 5 percent from 1996's total $958.9 million. Of 1997 profits, $706.8 million was earned in the United States (vs. $611.2 million in 1996), $158.9 in Europe (vs. $204.4 million in 1996), and $143.4 million in all other markets (vs. $143.3 million in 1996).

ANALYSTS' OPINIONS

According to Zacks, current analyst opinion recommends a "hold" on Kellogg stock, meaning for solid investment performance investors should keep what they currently own. A few analysts recommended a "buy" or "strong buy" rating for the company, meaning they would recommend that investors pick up more shares (as of May 1998). Moody's Investors Service, however, was considering a downgrade of Kellogg's long-term debt rating. This was in part due to highly competitive conditions in the United States for the ready-to-eat cereal market, and in part to Kellogg's weaker market share in the United States.

HISTORY

Despite inventing the toasted grain flake in 1894, brothers Will Keith (W.K.) and Dr. John Harvey Kellogg were slow to capitalize on the discovery. W.K. worked for his brother in the Seventh-Day Adventist homeopathic sanitarium at Battle Creek, Michigan. In an effort to produce more digestible bread—one more product in Dr. Kellogg's long line of health foods—the brothers ran boiled wheat dough through rollers. Unfortunately, the mixture was too wet and sticky. One day, after an interruption resulted in dried-out dough, they again ran it through the rollers—this time, it came out in bite-sized flakes, which they then toasted. The grain flake cereal was born.

The brothers' partnership sold the Granose flakes by mail order, until W.K. left to start his own Battle Creek Toasted Corn Flake Company in 1906. At that time, Battle Creek was the undisputed cereal capital of the United States, with close to 40 separate companies. Dr. Kellogg himself continued to sell a similar product until W.K. successfully sued him for rights to the Kellogg name. One of the biggest competitors of the time was C.W. Post, who was once a patient at the Battle Creek Sanitarium.

STRATEGY

If there has been one successful strategy characterizing the history of the Kelloggs company, it is advertising. Upon its founding in 1906, W.K. Kellogg spent more than 30 percent of the company's working capital on an advertisement in Ladies Home Journal. The strategy paid off, with demand soon outstripping supply. One racy campaign told consumers to "wink at their grocer and see what you get;" consumers got a free taste test and Kellogg increased its sales. During the Great Depression, despite falling sales, the company followed the retired W.K. Kellogg's advice and added __BODY__ million to its advertising budget. As a result, sales continued to increase throughout the 1930s. In the 1950s, the company capitalized on the postwar baby boom and doubled sales and profits with the introduction of Tony the Tiger and other animated hucksters who pitched products on Saturday morning television. Stepped-up advertising was also the solution for sluggish sales in the 1970s. When the company returned to its roots, with renewed emphasis on high-fiber, health-oriented cereals in the 1980s, advertising was again key in capturing health-conscious consumers.

In addition, the company has put a constant emphasis on market expansion and research and development (R&D). Kellogg's R&D expenditures were approximately $106.1 million in 1997, $84.3 million in 1996, and $72.2 million in 1995. Earnings are typically rein-vested to keep the company's facilities and technology up to date.

In 1996, after suffering a substantial decline in sales and earnings, the company placed emphasis on strengthening and repositioning itself for long-term growth. Kellogg's strategy featured the company's continued movement towards a goal of improved consumer value combined with pricing restraint and rigorous cost reduction. One major part of the repositioning process was the 1996 purchase of the Asian Ralston Purina Company. Also in 1996, the company repurchased $535.7 million in shares of Kellogg stock, with the Board of Directors authorizing up to $415.1 million in additional purchases for 1997. These purchases, the company asserts, will put long-term upward leverage on earnings per share and provide a "tax-efficient means of transferring cash to our shareholders."

To protect new advanced technology, Kellogg ended their popular plant tours in 1986, Kellogg saw the need for a new public relations resource and the community expressed the need for a new visitor attraction. The notfor-profit Heritage Center Foundation was created to develop, own, and operate the $18-million Cereal City USA complex in Battle Creek. The new complex was scheduled to open in Summer 1998. The 45,000-square-foot complex, a sort of homage to the history and process of cereal production, will include sets, a theater, and other recreational attractions. Backed with contributions from several local foundations, Heritage hired a veteran of the amusement park industry to manage the operation, which it hopes will bring in 400,000 ticket-buying visitors per year. The company lacks a strong merchandise or licensing presence so it will apply for a license to create souvenir merchandise using its cartoon hucksters, like Tony the Tiger and Snap, Crackle, and Pop for advertising and promotional purposes.

INFLUENCES

In 1996, competitive challenges in the U.S. market, and aggressive store brand competition in the United Kingdom dealt a serious blow to the company's historic performance level. This unprecedented turbulence in Kellogg's two largest cereal markets resulted in a decline in sales and earnings. Though earnings picked up slightly in 1998, the Kellogg Company continues to expand its global markets, partially to compensate for dropping domestic market share.

CURRENT TRENDS

The Kellogg Company's plans for the twenty-first century are to leverage what the company calls its "positive health image." Growing awareness of the benefits of fiber have led Kellogg's to redesign packaging and expand global marketing of bran products such as Kellogg's All-Bran and Kellogg's Complete wheat and oat bran cereals. The company is heavily promoting these products through its Age+5 campaign, designed to increase children's consumption of fiber.

PRODUCTS

Kellogg is, without a doubt, the cereal king—it is the number one seller of cereals. Its principal sales come from ready-to-eat cereals. The company generally markets its products with company-owned trademarks. Products are usually sold directly to the grocery trade for re-sale to consumers, though broker and distribution arrangements are made in less developed markets. Through its history, the company has acquired several convenience food companies, which account for nearly 20 percent of global sales. In addition to the Kellogg cereals the company also sells Kellogg's Pop-Tarts toaster pastries and Kellogg's Eggo frozen waffles. Most recently, Kellogg broadened its global potential with the purchase of the Lender's Bagel Bakery business from Kraft Foods, Inc.

CORPORATE CITIZENSHIP

Kellogg established the W.K. Kellogg Foundation in 1930 and gave it majority interest in his company (the company bought back about 20 percent in 1984). The private grant-making organization was established "to help people help themselves through the practical application of knowledge and resources to improve their quality of life and that of future generations." It provides seed money to organizations and institutions with solution-based programs in the areas of volunteerism, philanthropy, youth, leadership, community-based health services, rural development, and higher education. Grants go mostly to Latin America, the Caribbean, southern Africa, and the United States (particularly Michigan and the Great Lakes region). Early in 1997 the company commenced operations at the new W.K. Kellogg Institute for Food and Nutrition Research in Battle Creek.

Despite the company's charitable activities, its role as the leading cereal maker has not been bereft of criticism. In 1972, the Federal Trade Commission accused Kellogg and other major cereal producers of monopoly business practices, overcharging consumers by more than __BODY__ billion between 1957-72. The American Dental Association blasted the industry for downplaying the sugar content of its presweetened cereals. Kellogg's, to its credit, made no secret of its sugar use, with bold product names like Sugar Smacks , Sugar Corn Pops, and Sugar Frosted Flakes. By the 1990s Kellogg's had changed the names to those lines, calling them Kellogg's Smacks, Kellogg's Corn Pops, and Kellogg's Frosted Flakes. Again, in 1995, U.S. Representative Charles Schumer accused Kellogg and others of price collusion.

GLOBAL PRESENCE

Kellogg is truly a global company, with 29 manufacturing plants in 20 countries and distribution of 120 countries. It currently holds an estimated 39 percent of worldwide volume in the ready-to-eat cereal market. The company's cereal business shows formidable growth both in developing markets of Asia, Latin America, and southern Europe, and in established markets like Canada, Australia, and Mexico. Faced with widespread competition at home, the company aggressively courted European consumers, who in 1995 accounted for 26 percent of total sales. An additional 16 percent of sales came from Asia, Australia, Africa, and Latin America. Kellogg's 1996 decision to reduce prices domestically may increase sales at home, but this may be hampered somewhat by a competitive U.S. market. Overall growth in sales may ultimately depend on success in the global marketplace.

Kellogg is building from a strong global base. Of the top 15 cereal brands in the world, 12 are Kellogg products. In early 1997, the company bought cereal plants in Ecuador and Brazil and finished building a new plant in Thailand. In the eyes of Kellogg's CEO Arnold Langbo, ready-to-eat cereal will be a global growth business for the twenty-first century. In the grain-based food industry, Kellogg Company's global infrastructure goes unmatched. The company's position became even stronger with the 1996 addition of the three Lender's plants, plus the purchase of a Kentucky convenience foods plant. Roll-outs of convenience foods such as its Kellogg's Nutri-Grain cereal bars and Kellogg's Rice Krispie Treats Squares in the United Kingdom and Austrlia, with plans to move into Latin America during 1998, also helped to accelerate global growth.

EMPLOYMENT

On its web site, the Kellogg's company states, "We are committed to helping Kellogg people reach their full potential and to recognizing their achievements." Toward that end the company provides training and development opportunities, tries to promote from within the company, and works to provide an environment where equal opportunity is awarded and diversity is respected.

SOURCES OF INFORMATION

Bibliography

"Kellogg Company." International Directory of Company Histories. Detroit: St. James Press, 1988.

"Kellogg Company Completes Lender's(R) Bagels Purchase." Kellogg Company Press Release, 16 December 1997. Available at http://www.prnewswire.com/K.

"Kellogg Corporate Headquarters." Available at http://www.kelloggs.com/corp_hq/.

"Kellogg EPS Increases by 11 Percent in First Quarter." PR Newswire, 24 April 1998.

Kellogg's 1997 Annual Report. Kellogg Company, 1998. Available at http://www.prnewswire.com/cnoc/AREPORTS/483375.6.

"Letter to Shareholders." Kellogg's 1997 Annual Report. Kellogg Company, 1998.

Moody's Industrial Manual. New York: Moody's Investors Service, Inc., 1996.

"Moody's May Cut Kellogg Co Long-Term Debt." Moody's Investors Service Press Release, 28 April 1998.

O'Brien, Tim. "Construction Under Way for Kellogg's $18 million Cereal City USA Center." Amusement Business, 13 January 1997.

For an annual report:

on the Internet at: http://www.prnewswire.com/cnoc/ARE-PORTS/483375.6 or telephone: (800)962-1413 or write: Kellogg Company, PO Box CAMB, Battle Creek, MI 49016-1986

For additional industry research:

Investigate companies by their Standard Industrial Classification Codes, also known as SICs. Kellogg's primary SICs are:

2041 Flour & Other Grain Mill Products

2043 Cereal Breakfast Foods

2051 Bread, Cake & Related Products