A Return to Basics at Kellogg

During much of the 1990s, Kellogg Co., the Battle Creek, Michigan-based food manufacturer, was an iconic U.S. business whose best days seemed to be behind it. With net sales then of more than $6 billion, it had increasingly lost the confidence, and even the interest, of Wall Street. Plagued by the realities of a mature market, rising costs and intense competition, the company’s brands were languishing and its profit margins were weak. New product launches proved largely to be forgettable failures. Kellogg developed a reputation for failing to live up to its own rosy projections. The stock suffered as did employee morale.

Those conditions might have stagnated or worsened for some time were it not for two important events that took place in 1999: the appointment as CEO of Carlos Gutierrez, a longtime company insider, and Kellogg’s first ever loss of market leadership to the industry’s perennial No. 2, General Mills Inc., later that year.

Under Gutierrez’s leadership, Kellogg embarked upon a process of corporate reinvention driven by a comprehensive focus on profitability. Like many companies sobered by recession, Kellogg had pursued profitability goals many times in the past but seemed to lack the management model and discipline to achieve them in a meaningful and sustained way. With impressive results during each of the past few years, however, Kellogg’s recent strategic turnaround seems to have had traction and has been at the core of the food giant’s recent revival.

To fully understand the magnitude of the Kellogg revival, it’s important to step back to the late 1990s and evaluate just how bad conditions had gotten for this century-old company. Financial journalists were bandying about such adjectives as “lethargic” and “insular” to describe the company, while making irresistible puns about “soggy profits.” Many Wall Street analysts had stopped tracking the company entirely.

One might conclude that the problem was that the company had a stodgy image during an era in which investors were captivated by dot-coms and other high fliers. But Kellogg’s difficulties were multiple and were well-entrenched within a corporation that largely had earned its lack of respect on the Street. Management had failed to deliver on a wide range of promises, especially its growth-oriented financial projections. With sales basically flat, gross profit margins slipped from 53.2% in 1996 to 52.1% in 1997 and 51.5% in 1998. Earnings per share (EPS) dropped from $1.53 to $1.35 during the same period.

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