Number
39
Kellogg Company
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In more than 160 countries around the world, people of all ages reach enthusiastically for a box of Kellogg’s ready-to-eat breakfast cereal as soon as they awaken each morning. Products like Corn Flakes, Special K, and Rice Krispies—not to mention the advertising icons with which they are associated, including Tony the Tiger and Snap!, Crackle!, and Pop!—have become more prevalent on kitchen tables than those of any other company in the business. In fact, in the mid-1980s, Kellogg commanded a larger share of the cereal market than both of its two closest competitors combined. Since first developing the toasted grain flake in Battle Creek, Mich., almost a century ago, the company has indeed carved a formidable niche for itself through these popular items and others with familiar brand names like Eggo, Pop Tarts, and Morningstar Farms.
However, despite decades of uninterrupted sales growth and its impressive place in food history, Kellogg found itself seriously floundering by the end of the 20th century. As competition intensified and taste in breakfast foods shifted, its one-time 42 percent share of the United States’ $7.3 billion cereal market fell to 32 percent. Even more depressing to folks in the “cereal bowl of the world,” arch rival General Mills actually overtook it as the number-one cereal seller.
Three months after the June 1998 opening of Cereal City U.S.A. (the combined corporate monument and tourist attraction where visitors can follow a corn kernel through a simulated production line to see it cooked, dried, pressed, toasted and sprayed with vitamins before emerging as a corn flake) the grit began to hit the fan. The president of Kellogg North America and the head of European operations stepped down. A new CEO was named. And shortly thereafter, the company’s 92year-old South Plant was shuttered and 550 jobs in Battle Creek were eliminated.
Considering how much they valued employees and their contributions, founders J.H. and W.K. Kellogg might not have approved. But stockholders and financial analysts certainly did, for the moves finally allowed the Kellogg Company to begin the process of regaining its place at the head of the world’s breakfast table.
In the mid-19th century, America’s breakfast cereal of choice was a cooked blend of salt, water, and grain (usually oats). John Harvey “J.H.” Kellogg, a physician from Tyrone, Mich., decided to try something different when he became superintendent of the Western Health Reform Institute in 1876 (later renamed Battle Creek Sanitarium). A Seventh-day Adventist who avoided consumption of animal-based products, J.H. developed numerous nut and vegetable foods to vary the diet of his patients. One began as a corn meal biscuit about half-an-inch thick; this was toasted until it was almost dry and slightly brown, then ground and rebaked. Flakes of this kind were not new, but J.H. was arguably the first to present them as a breakfast food.
Patients were instantly drawn to the concoction. (One, C.W. Post, saw business opportunities in the new item and ultimately started a company that thrives today as a unit of Philip Morris’ Kraft Foods.) Will Keith “W.K.” Kellogg, who assisted his older brother J.H. at the Sanitarium, also saw commercial possibilities. Together, the two siblings founded the Sanitas Food Company in 1900 to produce these flakes made of corn. W.K. soon bought out J.H., and in 1906 he established the Battle Creek Toasted Corn Flake Company. By heavily advertising his new product and improving its quality, W.K. increased sales from 33 to 2,900 cases a day by the end of the first year. His business continued to prosper, and its current name was adopted in 1922 when the company began producing cereals other than corn flakes. Its new granular, shredded, and puffed varieties soon proved equally popular, as did those featuring added sugar and those roasted rather than flaked.
Kellogg’s personal relationships did not always fare as well. He appointed his son company president but fired him upon learning that he abandoned his wife in favor of an employee. He then prepared a grandson for the job, but eventually drove him from the company and even sued him for copying one of its patented processes. The business continued to soar, however, and Kellogg cereal boxes carrying the founder’s bright red signature were increasingly seen on grocery store shelves and kitchen tables across the land.
But the cereal tycoon was not content to be just a wildly successful entrepreneur. With an endowment of $47 million, he established the philanthropic W.K. Kellogg Foundation in 1930. He also became one of two major business leaders during that decade (the other was Paul Litchfield of Goodyear Tire) to adopt a six-hour workday for employees in the belief that it would decrease inefficiency and increase productivity. Kellogg felt the plan, when fully implemented among his 1,500 workers, would permit him to hire an additional 300 and thereby boost the economy of Battle Creek.
The experiment proved unsatisfactory for a variety of reasons, so management began shifting back to the traditional eight-hour schedule during World War II. Undaunted, the ever-resourceful Kellogg adopted other broad-minded management principles to improve the living and working condition of his employees. He built an on-site gymnasium and recreation facility equipped with the latest in motion picture projection equipment. He offered employees plots for personal gardens on 40 acres he owned outside of town. He paid bonuses. He even opened a daycare facility for employees’ children. (Despite many changes in these programs, this philosophy continues and the company still receives high marks for its charitable giving, family benefits, community outreach, and programs for women and minorities.)
Before his death in 1943 at age 91, brother J.H. went on to write several medical texts, start Battle Creek College, and open Florida’s Miami-Battle Creek Sanitarium. Ironically, W.K. was exactly the same age when he died eight years later. To many, the pair’s longevity proved their somewhat radical beliefs about life and health were indeed sound. Few ever doubted W.K.’s often equally controversial business philosophies, though, and it was not until nearly two decades after his death that management even dared to look past the core product mix he initiated and nurtured. In fact, it took until the 1970s—when the U.S. Government began an effort to break up the country’s big cereal makers—before the company started diversifying. It introduced teas, desserts, soups, sauces and nondairy frozen foods through various acquisitions; other takeover attempts involving 7-Up, Tropicana, and crayon maker Binney & Smith fell through.
The government dropped its antitrust effort in 1982 with Kellogg still atop its burgeoning industry. CEO William E. LaMothe, who had come on board in 1979, claimed this was because the new product lines had little overall impact on the company’s traditional operations. “At Kellogg, the focus always has been the product,” he told Dun’s Business Month. Cereal production and sales remained primary despite the diversification, and in this vital area Kellogg continued to reign. Profits topped $286 million on revenues of $2.9 billion in 1985, prompting analysts to reconfirm that “Kellogg knows the cereal business better than anyone else.”
Launching an aggressive attempt to recapture the fading allegiance of children and those aged 20 to 49, the company introduced 10 new cereals including Apple Raisin Crisp and Nutri-Grain. It increased promotional budgets for existing products such as Bran Flakes to emphasize their potential health benefits. And it planned aggressive expansion outside the United States, where nearly one-third of sales were generated by the mid-1980s. Ultimately, it operated production and distribution facilities in 20 countries on six continents.
But the road to the future was not as smooth as LaMothe hoped, and in 1992 Arnold Langbo was tapped as his replacement. Disappointments continued on several fronts, though, as even the international market grew sluggish. In response, the company’s worldwide workforce was reduced by about 8 percent.
Annual earnings still dipped 21 percent in 1998, which was attributed to increased competition from cheaper store brands and America’s increasing rejection of breakfast cereals. Langbo was replaced by president and chief operating officer Carlos Gutierrez, who vowed to improve profits by spending more on advertising and new convenience foods. He also decided to cut even more employees and close the historic South Plant in Battle Creek. Rumors abounded that Nabisco, Unilever, Procter & Gamble, and PepsiCo were interested in acquiring the company, but the W.K. Kellogg Foundation’s 33 percent ownership stake complicated matters. No moves were formally initiated.
As the century wound down, Gutierrez made more cuts to fund new products. “We have to drive earnings through innovation,” he told Fortune magazine. In a company where new ideas had never been developed very quickly, Gutierrez charged the 2-year-old W.K. Kellogg Institute for Food and Nutrition Research with creating and pushing them rapidly through the pipeline. Initial results were promising: in one month alone researchers developed 94 packaging proposals and 65 product concepts, including novel ones related to a food’s aromatic appeal. More than two dozen of these new items were introduced in 1999 alone. In October 2000, Kellogg added cookie and cracker maker Keebler Foods Co. to their lineup for $3.6 billion. In doing this, they created a company with almost $10 billion in annual sales, which further extends Kellogg’s in a direction it needs to go: Beyond the breakfast table and into faster-growing areas of the food business.
Times are, admittedly, tougher today than they were when J.H. and W.K. began baking and flaking their corn meal. But the two Kelloggs overcame long odds then to develop the world’s largest cereal company, and most observers are not willing to count out their legacy just yet.