Winning The War Of Battle Creek

Just last year, Kellogg Co. seemed to have all the crackle of a day-old bowl of cornflakes and milk. The cereal giant was playing catch-up with rival General Mills Inc. to cash in on the oat bran craze. Its venerable, and premium-priced, Corn Flakes and Rice Krispies were losing share to lower-priced rivals. And Kellogg's wholesalers and grocery-store retailers were in high dudgeon over lackluster promotional support. While it's still No. 1, Kellogg saw its share of the U. S. cereal market fall to a low of 34.6% by last September, from 41% in 1988.

Well, the folks who brought you Tony the Tiger may finally be changing their stripes. Longtime Chairman William E. LaMothe, 64, considered delaying his retirement and took charge of a campaign to turn the $5.2 billion company around after his heir apparent and president, Horst W. Schroeder, was shown the door in late 1989. LaMothe has used a mixture of price promotions and couponing to win back the breakfast table for such core Kellogg brands as Corn Flakes, Raisin Bran, and Special K.

It's working: Kellogg's market share bounced back to 38.5% during the first quarter and could hit 39% by yearend (chart). At the same time, corporate cost-cutting and foreign expansion have brought some snap back to Kellogg's earnings. It posted a surprising 69% jump in profits, to $163 million on $1.4 billion in sales, during the first quarter. "They have been very smart," says one executive at a competing company. Investors apparently see brighter mornings ahead for Kellogg, as well: Its stock is now trading at around 90, up 50% since last year. Now that the company is on stronger footing, LaMothe plans to retire by yearend, turning over control to Arnold G. Langbo, Kellogg's president.

CEREAL KILLER. Kellogg's reawakening didn't come without considerable pain, though. Since the start of 1990, LaMothe has reduced Kellogg's white-collar work force some 10%, to 2,600. He has also scaled back on Kellogg's once-frantic pace of product development. During the late 1980s, Kellogg rolled out four orso new cereals a year, yet often with iffy market research, says LaMothe. Now, cereal products that don't make their numbers are getting the heave-ho. Kellogg pulled S. W. Graham off the shelves last year. Its belated and struggling oat bran cereals such as Cracklin' Oat Bran and Oat Bake may also be yanked.

In their stead, LaMothe has turned to his mainstay products. Until recently, their market share was being nibbled away by Ralston Purina Co.'s lower-priced private-label products. After years of 7% annual price increases, a box of Corn Flakes now runs as high as $2 or more per 18-ounce box--about double the price of many rival brands. LaMothe has called a halt to the price hikes. At the same time, Kellogg's cereal advertising has struck a more nostalgic tone, beckoning baby boomers to come back to Corn Flakes.

Kellogg has also patched up relations with disgruntled wholesalers and retailers. It is now encouraging grocery-store chains to include special two-for-onecereal coupons in their regular advertising circulars in newspapers. Result: Sales of Kellogg's Sugar Frosted Flakes and Fruit Loops are up 10% so farthis year.

Kellogg is also enjoying something of an earnings kick from its European sales, which increased 8% during the first quarter. LaMothe has boosted spending on advertising in Europe to persuade breakfast eaters there to forgo such delights as croissants or schwartzbrot, a black bread, for a bowl of Rice Krispies. Kellogg is the biggest U. S. cereal producer overseas. But the competition is heating up: In late 1989, General Mills reached a joint-venture agreement with Nestle that will bring its popular Cheerios and other cereals to Europe.

Back at home, LaMothe can't let down his guard much. Kellogg's aggressive promotions could kick off a price war in the U. S. If so, count on Kellogg to tough it out. When it comes to the battle of the bowls, Kellogg seems destined to remain the top banana.

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