Thinking Out Of The Cereal Box

CEO Carlos Gutierrez is taking Kellogg in new directions

In many ways, 47-year-old Carlos M. Gutierrez is the ultimate company man. Respectful of authority and intensely loyal, the Cuban-born chairman and CEO of cereal giant Kellogg Co. spent 25 years working his way up the corporate ladder. For a boy uprooted from his home during Fidel Castro's Communist revolution and moved around the U.S. for years afterward, Kellogg, based in Battle Creek, Mich., has offered Gutierrez the stability that was missing from his youth. Indeed, when people ask Gutierrez if he's more comfortable in Latino or American cultures, he says neither--he identifies most with Kellogg. "I've spent more years at Kellogg than anywhere else," he explains.

But now, nearly two years after taking over the corner office, this loyal soldier is grappling with the notion that Kellogg's old battle plan is failing. The unappetizing truth is that Kellogg sells something that doesn't easily fit into America's eat-on-the-run style. Who has time to sit down for breakfast at home anymore? And those who do are often choosing cheaper, bagged cereal instead.

COST CUTS. Meanwhile, rival General Mills Inc. has bucked the trend by introducing new versions of familiar brands such as Cheerios and by introducing innovative snack foods--for example, Go-Gurt, yogurt in a tube. Kellogg has been slower to come up with new ideas. It also lost market share in recent years when it slashed advertising in an attempt to meet what Gutierrez now sees as unrealistic double-digit earnings projections.

You can be sure that Gutierrez didn't work for 25 years to see Kellogg go soggy under his watch. He has done what any company man would do: cut costs, shuffled management, offered customers more discount coupons, and pushed Kellogg's scientists to come up with new products. And he has done what none of his predecessors dared: closed the original 93-year-old Corn Flakes plant, putting more than 500 people out of work. Many in Cereal City, the nickname for Kellogg's hometown, felt betrayed. "It's difficult to do something like that in a small community," says Gutierrez. "My kids go to school here." But shutting down the factory was good for the company, he says.

Still, none of these steps was enough. So Gutierrez did something even more radical. He spent $4.4 billion to buy Keebler Foods Co., maker of Cheez-Its and other crackers and cookies. In a single stroke, the cereal veteran has transformed Kellogg into a $10 billion snack-foods company. When the deal is completed in February, Kellogg will derive just 40% of its sales from breakfast cereals, down from 75% today. For analysts who have made a career of criticizing Kellogg for its lackluster performance and extreme risk aversion, Gutierrez is just the kind of CEO the company needed. "It's looking a lot brighter at Kellogg than it has in years," says Credit Suisse First Boston analyst David C. Nelson.

But much turns on making the deal work. "He's bet his career on it," says Prudential Securities analyst John McMillin. Gutierrez says he had little choice. With the food industry undergoing a major shakeout and new competitors such as PepsiCo in a strong position, Kellogg risked being left behind. Gobbling up Keebler gives Kellogg two crucial advantages: faster-growing food categories and a more efficient delivery system. It used to take Kellogg six to eight weeks to roll out new products from warehouses to retailers. Now it can use Keebler's in-house distribution system to get new items on store shelves faster. That will allow Kellogg to take more chances with new products. "Failure is a lot less expensive," he says.

Gutierrez is proud of forcing change at Kellogg. "I think there were doubts that Kellogg would ever make a move that size," Gutierrez says. But for him, change is a way of life. Born in Havana in 1953 to a successful pineapple exporter and his wife, Gutierrez enjoyed a comfortable childhood until Castro came to power in 1960. The image of uniformed soldiers barging into his home to arrest his politically active father, Pedro, is still plenty vivid. After his release, Pedro Gutierrez took his wife and two sons to Miami, where they expected to vacation until the nastiness in Cuba subsided. But after nine months, Pedro realized Castro wouldn't be toppled anytime soon. Devastated, he abandoned his business and tried to start a new life in the U.S. The family moved around frequently, from Florida to New York to Mexico and back to Florida, as Pedro sought to regain his stature.

It was a wrenching experience, but it prepared Gutierrez to run a company in transition. "Given that my life changed so quickly, and so often, I have a certain tolerance for ambiguity," he says. But as he tries to reshape a hidebound Kellogg, he knows that not everyone handles change as readily. "I have to be sure I don't go out ahead of the organization," he says. "Sometimes I don't understand it. It's so obvious to me," he says. "Change is a constant, but I'm finding myself very often explaining that to people."

BIG BREAK. Gutierrez began his Kellogg career as a sales and marketing trainee in Mexico City in 1975, after working briefly for his father's struggling produce export company. It was during this period that he met and married Edilia Cabrera and began studying business administration at a local university. He never had time to finish his degree, however. After handling several sales and marketing assignments in Mexico, he was promoted to corporate headquarters in Michigan, where he headed up marketing for all of Latin America. In 1984, Gutierrez got his break. Former CEO William E. LaMothe took a chance by assigning him to run Kellogg's struggling Mexico division. The country was in economic turmoil, and Kellogg's operations were a disaster. Costs were spiraling, sanitation was a perennial problem. Proving his ability to make tough decisions, Gutierrez shuttered the plant for three months to focus on productivity and cleanliness. After it reopened, the factory became one of Kellogg's best, winning several company awards.

Today, Gutierrez is known for his ability to spot new ideas. He stays in tune with pop culture by poring over such magazines as People and Time and attending Spice Girls and Matchbox 20 concerts with his teenage kids. He's fanatical about baseball and a voracious reader. He likes nothing more than to talk with friends about big trends, say, the effect of the Internet on daily life or how the democratization of the stock market will change wealth distribution in America.

As CEO, Gutierrez has encouraged communication. Before, new product ideas were presented only at monthly meetings and only by the head of research and development. But Gutierrez is "someone who opens himself up to advice from people," says Tim O'Day, a senior vice-president at the Leo Burnett Co. advertising agency who has known him for 15 years. So now, technicians from the company's three-year-old, $75 million W.K. Kellogg Institute for Food & Nutritional Research are free to bring their ideas directly to Gutierrez.

Wall Street likes his candor. In an unusually frank meeting with investors in late November, Gutierrez vowed that Kellogg wouldn't promise what it couldn't deliver. Instead of "overly ambitious" double-digit sales growth targets, he said, Kellogg would now aim lower--about 6% at the most. That sobering message drove Kellogg stock down 5% that day, but it was necessary, Gutierrez says. In an era when corporations think nothing of tossing out CEOs after a disappointing quarter or two, Gutierrez is taking a chance. "Once you get insecure, you start doing the wrong things for the company to ensure your survival," he says. Spoken like a true company man.

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