Wednesday, April 07, 2004

Focusing the company on its core competences, reducing debt and inventories work? Could it really be that simple? :-)

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Cereal thriller: How Kellogg's chief rebuilt the brand
Carlos Gutierrez has breathed new life into Tony the Tiger and Special K, James Prichard writes. But his success could present the breakfast food giant with a problem.

James Prichard
The Associated Press

Wednesday, April 07, 2004

Kellogg Company chairman and chief executive Carlos Gutierrez, with Frosted Flakes mascot Tony the Tiger, has led a major restructuring of the company over the past five years. He has narrowed its primary focus to cereal and wholesome snacks, rebuilt brands and increased cash flow.
CREDIT: Shawano Cleary, The Associated Press

BATTLE CREEK, Michigan - Five years ago, with North Americans eating more bagels and muffins instead of cereal for breakfast, Kellogg Co. was starting to look a little shaky.

Earnings had fallen 22 per cent in 1998, and some Wall Street analysts, believing that the maker of Rice Krispies and Frosted Flakes would continue to lose ground, told investors to sell Kellogg stock.

Baked goods are still the breakfast choice of many consumers, but Kellogg, having undergone a corporate and marketing overhaul under chairman and chief executive Carlos Gutierrez, is again flourishing. It announced this week that first-quarter earnings will be up 30 per cent on stronger-than-expected sales, and analysts are again giving Kellogg a "buy" recommendation.

Mr. Gutierrez, chief executive since April 1999, has narrowed Kellogg's primary focus to cereal and wholesome snacks, given new life to brands including Special K, and reduced the company's debt.

"I think we've come a long way," said Mr. Gutierrez, 50, who became chairman in April 2000. "We've made a lot of progress." A charismatic and approachable executive, Mr. Gutierrez has won admiration in business circles for reviving a flagging company.

"His success at Kellogg shows he's a good leader for a large company and he understands the American consumer," said Ron Larson, a former Kellogg marketing researcher now on the food-marketing faculty at Western Michigan University in Kalamazoo.

That understanding has led to a new image for some of Kellogg's older brands. Special K now comes in varieties, including Vanilla Almond and Peaches & Berries. And Kellogg is also catering to the diet-conscious with coming products that include a low-carbohydrate version of Special K cereal and reduced-sugar Frosted Flakes and Froot Loops.

Other healthy snack foods are planned, but Mr. Gutierrez expects the low-carb trend, which advocates eating meats and cheeses instead of high-carbohydrate foods such as pasta and most breads and cereals, to wane.

"I've been in the industry for almost 29 years," he said. "You learn to see these trends coming through and they always appear like they're going to stay. That isn't to say that low carbs isn't real, but I think that it's probably peaked."

Mr. Gutierrez acted quickly to create an ambitious, three-year turnaround plan that he now breaks down in simple terms: 2001 was the year of transition, with the acquisition of Keebler Foods Co. coinciding with the restructuring of Kellogg's business units, 2002 was the year of acceleration in sales and earnings, and 2003 was the year of momentum, in which the company surpassed sales and earnings growth targets.

Kellogg has sold units that were bad fits, such as Lender's Bagels, and bought good fits, such as Keebler, which was acquired in March 2001. While its cookies have not sold as well as expected, Keebler's store-delivery system is a valuable asset to Kellogg.

Kellogg's net sales rose from $6.2 billion U.S. in 1999 to $8.8 billion last year, a 43-per-cent increase. Earnings per share increased 131 per cent, from 83 cents to $1.92, and cash flow went up 82 per cent, from $529 million to $961 million.

Mr. Gutierrez said he plans to keep concentrating the company's resources on increasing cereal sales through promoting its many well-known brands. Kellogg will pursue more acquisitions of complementary companies.

The company's balance sheet has also undergone a restructuring. Mr. Gutierrez believes in managing for cash, a principle that emphasizes reducing the amount of money tied up in inventory, accounts receivable and accounts payable. Whenever possible, existing assets will be used for capital expenditures.

Since Mr. Gutierrez became chairman and chief executive, Kellogg has freed enough cash to pay down $1.6 billion in debt, said John Renwick, vice-president of investor relations and corporate planning.

Before Mr. Gutierrez took over leadership of the company, Kellogg was in trouble. While earnings fell in 1998, sales were flat and its stock price was hovering in the middle $30 range after trading in the high $40 range a year earlier. Kellogg cut 525 salaried jobs and 240 contract positions throughout its Battle Creek headquarters and North American operations in November 1998.

The company's stock is now back to the $40 range, its highest level in more than four years.

Mr. Larson said the company's troubles grew out of its inability to meet the competition.

"If other competitors are kind of 'on' and your products aren't quite clicking, that causes some problems," he said. "But if you've got some good products in the pipeline, which Kellogg's had and now has gotten out, I think that helped them a lot, too."
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