Crunch time for Kellogg

The departure of two of Kellogg’s most senior executives over the past week underlined the catalogue of problems facing the US cereal colossus.

Donald Fritz, president of Kellogg Europe and executive vice president of Kellogg Company, resigned last week after 19 years (MW September 17). This week, it was the turn of Thomas Knowlton, president of Kellogg North America, to go after 18 years. In that time, the company has seen a dramatic fall in its share of the declining US cereal market, and its products have been under pressure in the UK as well.

Kellogg refuses to give any reasons for their departures, leaving the industry to speculate on whether they jumped or were pushed. Clearly, Fritz and Knowlton cannot be personally blamed for all the company’s problems.

But a top-level source, who has worked with Kellogg in the past, says: “Kellogg has a reputation for firing the top person when things go wrong. They are very much reaction people rather than strategists.”

Fritz was instantly replaced by Jean-Louis Gourbin, the president of Kellogg Asia-Pacific, and the announcement was made to Wall Street last Tuesday. No successor has been named for Knowlton.

It is understood that Fritz was once seen as a successor to chairman Arnold Langbo. But Langbo split the Kellogg empire between himself and the 44-year-old Carlos Gutierrez under the new position of president.

Gutierrez is in line for the job when 60-year-old Langbo resigns. William Leach, vice-president of investment bank Donaldson Lufkin USA in New York, says: “Gutierrez will be managing the whole company in a couple of years if he doesn’t mess up before then. But he needs to shake things up before Kellogg’s past problems get labelled as his own.”

Job losses are expected in North America where Langbo announced plans to review the roles of more than 2,000 employees earlier this month. Langbo also inherited a promise to shareholders to cut overheads by $100m (62.5m) over the next two years.

Meanwhile, in the UK – Kellogg’s biggest market outside the US – a TV campaign for Honey Rice Krispies launches this week. This latest brand extension is one of many developed by the company.

Some new products been successful. Others have not. Whether Honey Rice Krispies will be a hit remains to be seen. Either way, Kellogg is caught in a downward spiral of declining market share as its rivals Nestlé, Cereal Partners, Quaker, Weetabix and retailers’ own labels eat into its long-established position.

True, Kellogg owns five of the UK’s top ten cereal brands. It has dominated the market for many years. The company has launched successful confectionery-type brand extensions Nutrigrain and Rice Krispies Squares. But most of its products are losing market share in the UK cereal market, and some of its new lines are facing the axe.

Kellogg is sticking to its policy of new product development in an attempt to regain dominance of the cereals market it helped to create 100 years ago.

Pop Tarts have not been advertised on TV this year and many of Kellogg’s cereal launches have died a death – Banana Bubbles and Golden Crisp to name but two. Nut Feast could be on its way out (sales dropped almost 90 per cent according to the leaked figures).

The company faces decline across its markets. The US cereal sector is fading as consumers switch to other breakfast products such as bagels, and Kellogg is losing its share there. The company recently issued a profits warning in the US that earnings for 1998 are likely to be 15 per cent below last year’s. Kellogg held more than 40 per cent of the US cereals market at one time and this has plummeted to 30 per cent in the first quarter of 1998.

Besides Fritz and Knowlton, Jeffrey Merrihue, the market development manager for Europe is leaving to become chief executive of Initiative Media London and regional director for Europe (MW, last week). But Kellogg spokesman Anthony Hebron insists Merrihue’s departure is coincidental.

Product innovation has always been central to Kellogg. WK Kellogg created the first flaked cereal in 1894 at Battle Creek, a homeopathic hospital in Michigan. His brother John sold the flakes through mail order and William started his own cornflake firm in 1906.

Innovative marketing ideas gave Kellogg the edge over rival cereal companies. It was the first to use full-colour magazine ads and widespread consumer sampling. One “risqué” ad for The Battle Creek Toasted Corn Flake Company, as it was called then, offered a free box of cereal to every woman who winked at her grocer.

Kellogg continued to innovate. Bran Flakes were launched in 1915, Rice Krispies in 1928. International expansion began with Canada in 1914, Australia in 1924 and Kellogg moved into England in 1938.

However, the company has not kept up the innovation success rate of its famous founder.

In recognition that its advertising in the US needs shaking up, Kellogg – which has a reputation as a tough and sometimes unreasonably demanding client – is seeing presentations from six agencies. They are Young & Rubicam, which handles Quaker in the UK; BBDO Worldwide; Grey Advertising; Ammirati Puris Lintas; Lowe & Partners; and the Martin Agency in Virginia. Kellogg is expected to add at least one more agency to its US roster – Leo Burnett, J Walter Thompson and Burrell Communications – to handle the $400m (250m) advertising business.

The review is restricted to the US but agency sources say that if a new global network is appointed it is likely to affect the UK and other markets eventually. Certainly UK agencies are worried.

The UK business is split between Burnett and JWT. One agency source says: “Kellogg won’t hire a new global network and only give it one brand in the US.”

Spreading the Kellogg’s brand too thinly in an attempt to cover every single product sector is a long-term problem for the company. John Crowther, planning director on Weetabix at Banks Hoggins O’Shea, says: “Kellogg has tried to cover all bases, thinking like a classic US company which believes it must dominate the market by covering every possible opportunity.”

Kellogg, the original brand, is challenged by supermarket own labels with copycat packaging placed next to it on shelves. The brand’s sales are down more than five per cent on the year. Kellogg’s Crunchy Nut Cornflakes cost 2.59 for 750g in Tesco, where the equivalent own-label product, Honey Nut Cornflakes, costs just 1.99. And Leach of Donaldson Lufkin says one of Kellogg’s big problems in the US is indeed pricing: “The fundamental problem is that its products are overpriced – the company has been skirting round this issue for a number of years.”

In an attempt to reclaim the generic brands it created and differentiate them from own labels – like Bran Flakes and Fruit N Fibre – Kellogg has renamed them Healthwise and Optima. The company says: “Kellogg has renamed the brands to create greater differentiation between its competitors. The names reflect the brand equities of both cereals and enhance competitor positioning.”

But industry sources say Kellogg has failed to put enough marketing support behind the rebranding and has failed to defend core brands from the own label onslaught. “The name changes are confusing and there has not been enough marketing support. Kellogg needs to emphasise the “Kelloggness” of its products – at the moment people see bran flakes as bran flakes and don’t care which brand they buy. The company needs to make Kellogg’s stand for more,” says one source.

Pop Tarts are thought to be one of the biggest profit earners in the US but have not fared so well in the UK, where they failed to appeal to British taste. Sources say launches like Pop Tarts into the UK are the result of the company being dominated by too much US management.

But that’s not the only problem. Kellogg’s product advertising in the UK is seen as too old-fashioned and formulaic to combat rival brands and own labels. One agency source says: “The company has a particular view of how advertising works and agencies have to conform to that. Whereas Procter & Gamble has a rule book and sticks to it consistently, Kellogg is very unpredictable in its interpretation. Its view is based on an old-fashioned view of persuasion – Kellogg will try to persuade you to buy its products by convincing you that they taste great. All product ads show someone doing something extra-ordinary or embarrassing or forgetful because eating the product is almost an addiction.”

In the UK, Kellogg has been trying to give the brand a healthy proposition, and focused on the benefits of eating a nutritious breakfast. Under the “Serving the Nation’s Health” banner it launched a corporate advertising campaign, though the ads are on hold while Kellogg reviews its marketing strategy in Europe and the US.

This advertising was supposed to represent a break from the traditional family round the breakfast table used in cereal advertising. Kellogg had already ditched its Mrs K advertising, which failed to make much impact on the British public.

A common criticism levelled at Kellogg is that it has been too slow to react to the changing market. Kellogg seems to have lost its innovative edge.

It seems unlikely that the departure of long-serving top executives will do much to rejuvenate the brand. On the contrary, it contributes to the impression of a company adrift. A concerted effort is needed to put the snap, crackle and pop back into Kellogg. There are few signs that this is happening.

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