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The Nervous Faces Around Kellogg's Breakfast Table

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For the usually staid Kellogg Co., the management shuffle announced on July 1 amounted to pre-Fourth of July fireworks. Yet the cereal powerhouse seemed to hope that the news would draw less notice than the snap, crackle, and pop from a bowl of its Rice Krispies. Why? Perhaps Kellogg did not want to draw attention to the reason for the shakeup: All is not well in the land of Tony the Tiger.

As announced at 4 p.m. on the Friday before a four-day company holiday, Kellogg Chief Executive Arnold G. Langbo brought Thomas A. Knowlton back from his position as head of Kellogg's European operations to become president of Kellogg North America. The man he replaced, Gary E. Costley, left Kellogg. Costley declined comment, but a Kellogg spokesman said he had resigned after being offered another assignment. Kellogg did not make any executives available for interviews.

Knowlton, like Langbo, is a Canadian who came up through Kellogg's foreign operations. He did well in Europe. John M. McMillin, food analyst for Prudential Securities Inc., says Knowlton helped Kellogg keep both its prices and market share in Britain, where private-label cereals claim 20% of the market--far more than the single-digit levels they hold in the U.S.

MISSED FAD. Kellogg remains formidable. It still leads the U.S. cold-cereal market and controls half of the foreign market. In the first quarter of 1994, net earnings rose 6%, to $183.7 million, before such one-time events as the sale of the Mrs. Smith's frozen-pie business and the funding of a charitable trust. Sales rose 6%, to $1.6 billion. And the sales gain came while volumes rose only 2%.

But the results mask a worrisome slide in the U.S. While virtually every other division reported better first-quarter results, U.S. cereal sales fell. And Kellogg's dimming fortunes started showing up in its stock price. On the strength of the company's overseas prospects, the stock rose briefly to 75 in October, 1992. Last year, it fell more than $5, even though Kellogg repurchased $547 million of stock during the year. So far this year, the stock has dropped another $2.50 or so, to around $54, leaving it below the level when Langbo became chairman in January, 1992 (chart).

Why the falloff? Kellogg's rivals have been more innovative, for one thing. When its cereals claimed 42% of the market in 1986, the company started talking openly about scarfing up 50% of the U.S. cereal market by the early '90s. Instead, competitors ate Kellogg's breakfast. Ralston-Purina Co., for instance, quickly cashed in on the Batman and Ninja turtles crazes with fad cereals. Kellogg's share, meanwhile, slipped to 35.8% in the 52 weeks ended June 11, according to A.C. Nielsen Co. And the slide continues, with Kellogg's share slipping to 33.8% in the four weeks prior to June 11. It's a costly slide: Each point of market share represents $64 million in revenues.

Kellogg missed the oat-bran craze and never regained its strength after that fizzled. Analyst McMillin figures Kellogg has just 30% of the market among cereals introduced in the past four years. In addition, private-label versions of such standbys as cornflakes have undercut Kellogg while it hiked prices for its cereals. Meanwhile, coupons and other promotions have added substantially to costs.

For a while, that didn't seem to matter. Kellogg simply kept raising prices-- six times in the past three years. As a result, a 19-ounce box of Rice Krispies now goes for about $4.20. Trouble is, Langbo has cut back on coupons at the same time Kellogg has raised prices. Last year, 9 of the top 10 coupon-issuing companies in the U.S., including Kellogg, cut back, according to NCH Promotional Services in Lincolnshire, Ill. Then last November, Langbo signaled to analysts that Kellogg would cut back further on promotions and instead spend on ads to build its brand names. In the first quarter, he boosted national advertising 29%, to $119.1 million, against an industry gain of 26.5%, according to 1994 Competitive Media Reporting.

Kellogg's market-share slide, however, only worsened after rival General Mills Inc. decided this spring to drop its prices. Kellogg's painful choice, then: Keep prices high and give up market share, or match rivals' prices at the expense of profits. For now, says Goldman, Sachs & Co. food analyst Nomi Ghez: "The focus is back on profitability."

The question of balancing market share and profits will be topmost on Knowlton's agenda. If he can succeed, he may go far. Back in 1983, the head of the then-underperforming U.S. operations was given what was, at best, a lateral transfer to head up Mrs. Smith's Frozen Foods Co., where he turned in a solid performance. His name: Arnold Langbo.James B. Treece in Detroit, with Greg Burns in Chicago

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