FMCG

by Greg Thain

  Winning Shelf Space

  Owing to WK’s years of experience selling brooms to shopkeepers, he understood this environment very well, better than his competitors. He had a winning combination. WK built consumer demand by aggressive advertising: then, he sent his salesmen into every shop they could find, with an array of incentives to stock his product. As WK’s product had a much longer shelf life than his competitors, it was a brave shopkeeper who would refuse to find room for Kellogg’s on his shelves.

  Barriers to Entry

  WK spent a fortune selling the concept of the breakfast cereal category to consumers and shopkeepers alike. However, he was acutely aware that his advertising was in danger of floating all boats in the category. He was already coming under pressure to maintain his trademark on ‘Toasted Corn Flakes’ (a claim he would ultimately lose in 1922, forcing the Kellogg Company into another company renaming), and too much advertising on one product risked becoming street wallpaper. Early on WK realised a category truth that would continue to this day: breakfast cereals are very responsive to new news. So developing a stream of new products became a company priority. Kellogg’s Toasted Rice Flakes had appeared in 1909, soon to be followed by Kellogg’s Toasted Wheat Biscuit (demonstrating forcefully to Henry Perky, the inventor of Shredded Wheat, just how low the technical competitive barriers were), Kellogg’s Krumbles, Kellogg’s 40% Bran Flakes and, in 1916, Kellogg’s All-Bran. The dominating use of the Kellogg’s name on the box, featuring WK’s own signature, was an essential component of building differentiation among cereal brands. In 1910, WK also invented the idea of putting collectibles inside the boxes to increase the pester-power component of brand loyalty, including a set of moving pictures booklets.

  While WK was building a cereal empire, John Harvey stopped speaking to his brother. No doubt he saw WK’s commercial compromises as a betrayal of family and church principles. John Harvey continued to run the sanatorium along with the Sanitas Food Company. In 1910, he launched the first in a decade-long series of legal battles to prevent WK selling items such as Rice Flakes and Flake Biscuits under the Kellogg name. He claimed prior usage. WK counter-sued on the basis that John Harvey sold under the Sanitas name, not Kellogg. In 1916, the United States Patent Office awarded WK a partial victory by ruling that he had won the right to use the Kellogg name in script form. The matter was finally closed in 1920, when a judge observed that WK had spent millions promoting the Kellogg name; while John Harvey had spent precisely nothing until WK had already popularised the name. Game, set and match to WK.

  The same year, the Kellogg Company recorded its first ever-annual loss in the economic slump following the end of the First World War. WK was undeterred. His factory, with fifteen acres of floor space, was capable of producing 30,000 cases of cereal a day, fed by orders from 400 salesmen working out of twenty regional offices nationwide. He just needed to keep converting Americans to the cereal habit. If sales were slow then salesmen did more door-to-door sampling. In 1921, the company launched single servings of its brands: selling them to hospitals, hotels, rail companies and the like. So captive audiences could sample this new kind of breakfast. The same small packets formed the basis of a massive sampling campaign the year after. WK was intent on growing his way out of the slump.

  In 1923, John Leonard, much more scientifically minded than his ex-broom-salesman father, came up with the idea of hiring a dietician. It wasn’t enough, he reasoned, that Kellogg’s cereals were tasty and convenient. They had been invented in the first place for reasons of nutrition and that message was being lost. His first recruit was a dietician at Columbia University, Mary Barber, who established the Home Economics department. In 1924 she issued a leaflet entitled, Food Selection Chart, which was soon approved in Washington to be mailed to home economics teachers across the nation.

  Meanwhile, the new product development machine trundled ever onwards. The new brands so generated, where all widely promoted by the company’s huge advertising budgets, and filled the expanding shelf space in the emerging supermarkets. In 1925 came the company’s first brand targeted at a particular segment, Kellogg’s Pep, which was aimed at athletes. Two years later, a blockbuster followed: Kellogg’s Rice Krispies. Its famous Snap! Crackle! Pop! slogan soon appeared in the soon-to-be-famous ditty:

  Listen to the fairy song of health,

  the merry chorus sung by Kellogg’s Rice Krispies

  as they merrily snap, crackle and pop in a bowl of milk.

  If you’ve never heard food talking,

  now is your chance.

  The eponymous Leo Burnett-designed cartoon characters appeared in the early 1930s.

  The problem of succession loomed large in WK’s mind in the mid-1920s. He had booted John Leonard out of the company for the twin crimes of divorcing his wife to marry an employee, and buying an oat-milling factory on the side. WK appointed a succession of non-family members to the President’s role but gave them no room to manage. During the Great Depression, he heard that the company was scaling back both on advertising and sampling. So WK intervened to restore the cuts and double the advertising budget. The result was that the company continued to grow through even the hardest of economic times. By the end of the depression, the Kellogg Company was making nearly $6 million a year profit.

  The Kellogg Company realised that success came from desire for its products amongst children plus parental approval. Marketing efforts targeted at kids reached new heights when commercial radio became available nationally. Kellogg’s sponsored the first network radio programme aimed directly at children, followed by a series of others. The other part of the strategy, parental approval, focused on the nutrition angle. This led to the development of a technique to spray vitamins and minerals onto the cereal during production. The first brand to benefit was Kellogg’s Pep, a move reinforced by the company becoming a pioneer regarding the labelling of ingredients on the boxes. The company also sponsored such activities as Admiral Richard E. Byrd’s South Pole expedition. Their thinking was: if the cereals were good enough to sustain a group of hardy explorers willing to drag two years’ supply across Antarctica, then they would be perceived as good enough for the kids.

  The Second World War saw several changes to the Kellogg’s business. The company was an enthusiastic contributor to the war effort, not least in allowing its famous home economist, Isabel I. Barber, to take up the post of Food Consultant to the Quartermaster General. There she created all the menus for the army, including rations for combat troops. Kellogg’s produced K-rations throughout the war. Regular business did not stand still during the war years. Individual packs of cereals that could be used as the cereal’s bowl were developed initially for the army, and have benefited Boy Scout camps ever since. In 1940, the Home Economics department came up with the recipe for Kellogg’s Rice Krispies Marshmallow Treats – an invention that would keep on giving half a century later, when the company decided to make and sell the product for itself. Kellogg’s Raisin Bran was launched as the company underwent a major modernisation of its factories, updating its Battle Creek facilities and building several factories across the country. The company even diversified into dog food in 1941 with the launch of Gro-Pup, a dog food so replete with added vitamins and minerals that no meat was required: well worth wagging for, as the ads proclaimed.

  After the war, the company embarked on the most expansive era in its history. By 1948, sales had reached $100 million a year. Its factories were modern and highly automated for the time, giving Kellogg a profit margin double that of the typical food company. They enjoyed a dominant share of the market and were well set to benefit from the two factors that would power its business for the next twenty years: the post-war baby boom and the arrival of television advertising. Sadly, WK Kellogg would not live to see much of the new era, passing away in Battle Creek at the age of 91.

  In 1951, some twelve million US homes had a television set. Four years later half the homes in the country were tuning in. Kellogg could not have been
better positioned: with 85% of its sales coming from ten cereal brands. Its concentrated brand portfolio was fully exploited by the most effective advertising medium the world had ever seen, to produce high profit margins. With its target market, children, getting more numerous by the year, the company launched a raft of new products unashamedly aimed at the young, and backed with prodigious amounts of advertising dollars. The Leo Burnett advertising agency did them proud, developing characters such as Tony the Tiger for the new brand Kellogg’s Frosted Flakes, a brand soon joined by Kellogg’s Honey Smacks, Kellogg’s Sugar Corn Pops, Kellogg’s Sugar All-Stars and Kellogg’s Cocoa Crispies. Grocery stores, which were in an arms race of their own to build bigger and better stores, fell over themselves to stock anything and everything turned out by the Battle Creek selling machine.

  Helped by other additions to the range, such as Kellogg’s Special K in 1955 (the first cereal to be fortified with seven vitamins and iron), the company managed to double its sales within a decade. They reached the magic $200 million mark in 1957, the same year another Leo Burnett creation, Cornelius the Rooster, made his debut on the Kellogg’s Cornflakes box (it was still the company’s best-seller). As the television medium matured, and in an inspired move, Kellogg bought The Huckleberry Hound show and made full use of the likes of Yogi Bear and Boo Boo on their packet. It was a golden era for the company. More new lines, such as Kellogg’s Concentrate and Kellogg’s OKs, were added to the mix in 1959. OKs’ failure turned out to be a blessing in disguise. The equipment installed to make OKs would be utilised during the 1960s to make the more enduring Kellogg’s Froot Loops, Kellogg’s Apple Jacks and Kellogg’s Puffa Puffa Rice. Kellogg’s Bran Buds and Kellogg’s Frosted Mini Wheats also joined the line-up.

  What would turn out to be one of the more significant moves in the company’s history came in 1963, when Post, struggling to compete head-on with Kellogg and General Mills, developed a new breakfast food. It could be warmed in a toaster (which was now a ubiquitous kitchen appliance) and came enclosed in foil to keep it fresh. The product, Country Squares, received a press fanfare but spent many months in test market. This gave Kellogg the chance to head off this threat to its heartland. It developing their version, launched in 1964 under the name Kellogg’s Pop-Tarts. Although seen as a reactionary, tactical move at the time, this would turn out to be a major development. Kellogg’s Pop-Tarts eventually become the company’s single largest brand, growing in volume for every year of its existence. It signalled a shift in direction. Kellogg was no longer a cereal company; it was a breakfast/snack company. This move was accentuated in 1969 when the Kellogg bought Salada Foods, a tea and coffee company.

  The International Dimension

  Kellogg went international very early for a US-based food company. It opened its first factory in Canada as early as 1914: not least because the main population centres in Ontario were less than half way from its Battle Creek headquarters than the cities on the US eastern seaboard. However, a rival Canadian firm won a legal battle preventing Kellogg from using the Corn Flakes name in Ontario. Kellogg retaliated by purchasing the company for $400,000. Having merged the two businesses, Kellogg based itself in the rival’s headquarters.

  In the 1920s, Kellogg expanded further afield, using its enlarged Canadian manufacturing base to supply products for export to the United Kingdom and Ireland, the products being proudly advertised as being made in Canada. Building export businesses to other economically well-developed countries was very difficult at that time. Many countries erected trade barriers, as protectionism became the default economic policy of governments. One of the most protective markets was Australia, which imposed a 100% tariff on imported food products in order to protect its fledgling indigenous packaged goods industry. The only realistic avoidance was to build a factory there. This would have the twin benefit of producing tariff-free goods locally and being protected from the competition of foreign imports. So in 1924, Kellogg opened a factory in Sydney. From here, it had a free run to develop the Australian breakfast cereal habit using all the techniques forged in its American business.

  In both Australia and the UK, Kellogg would be free from serious competition for decades. This would enable the company to build extremely successful businesses that would also be seen by consumers as being indigenous. As business in the UK continued to grow, the decision was taken to build the company’s largest factory to date in Manchester, England. It opened in 1938, to supply not just the UK market but also Continental Europe. Unfortunately however, the outbreak of war put a prolonged hold on the European strategy.

  After the war, the company opened its sixth factory just outside Johannesburg in South Africa. Like its UK counterpart, the factory was of sufficient size to export products to nearby countries. The next such regional production hub was built in Mexico in 1951 to supply Central and South America. By this time approximately one-third of total company sales were being generated outside the US. During the late 1950s and throughout the ’60s, funded by the booming US business, the company ramped up its international expansion. It aimed at first-mover status in as many developed markets as possible: opening up in Ireland, Sweden, the Netherlands, Denmark, New Zealand, Norway, Venezuela, Columbia, Brazil, Switzerland, Japan, Finland, Spain and Italy.

  Each of the overseas businesses was given a high degree of autonomy to develop the breakfast cereal habit as they saw fit given the local breakfast customs. Air travel was then in its infancy, so a trip from Battle Creek to kick the tyres of the Australian operation entailed weeks out of the office. In 1963, the company opened an international technical centre in Europe, which lessened the already slim dependence of the European businesses on Head Office.

  One effect of this autonomy was that product ranges differed quite markedly between countries. Each had the R&D capability to develop its own new products, and this proved a benefit in the 1980s when the US business needed a lot of new products, and quickly. While the core brands appeared in all markets, recipes differed slightly to suit local tastes. Advertising slogans such as Snap! Crackle! Pop! Also developed local versions: Piff! Paff! Puff! in Sweden, Knisper! Knasper! Knusper! in Germany, Pim! Pam! Pum! in Mexico, Riks! Raks! Roks! in Finland, Cric! Crac! Croc! in French Canada, Pif! Paf! Pof! in the Netherlands, and Knap! Knaetter! Knak! in South Africa. Kellogg was an early devotee of the principle of acting locally.

  All this while, Kellogg’s main US competitors had stayed resolutely local, with the exception of small forays into Canada and Mexico. The result was that not only did Kellogg build overwhelming market shares in most of these countries but also international business was proportionately a much larger share of its business than it was for its competitors. This in turn lessened the impact on Kellogg of difficulties in the US market. So successful was the UK business that the company opened a second factory there in 1973. The rate of international expansion slowed down somewhat in the 1980s as the US cereal business, which had been funding all the start-ups, ran into choppy waters for the first time. This limited the most significant international development to a move into South Korea, a market previously supplied by the booming Australian company.

  Unfortunately for Kellogg, its free run without serious competition in many of these markets started coming to an end in 1989. General Mills, long jealous of Kellogg’s many overseas gold mines, hit on the rather good idea of developing a joint venture with Nestlé, called Cereal Partners Worldwide (CPW). This combined General Mills brands such as Cheerios with the reassurance of Nestlé branding, and the strength of Nestlé’s route-to-market capabilities, into many of the markets currently dominated by Kellogg. It turned out that quite a few of the Kellogg overseas subsidiaries had got used to the good life free of a competitive dogfight. CPW began to make significant inroads in Nestlé’s stronger markets. This would become a major headache as, by that time, Kellogg held 50% of non-US cereal sales and was generating a third of total company profits overseas.

  The CPW threat to Kellogg’s affiliates m
ade the company realise it had to reactivate its strategy of being first into up-and-coming markets. So, in 1993, it gained a first Eastern Europe foothold, in Latvia. A year later, a small factory was opened in India, followed by one in Guangzhou, China and then in Thailand. Kellogg now had 29 factories operating in nineteen countries, and supplying nearly 160 countries. However, for all Kellogg’s international expansion, its core markets of UK/Ireland, Mexico (where it had implemented a Keebler-style direct store delivery, DSD, system), Canada and Australia/New Zealand accounted for over 80% of its non-US sales; Kellogg had a global footprint but a regional sales base. Following the imposition of the ‘Volume to Value’ focus on profitable growth, in 2001 most overseas investment was focused on these core markets. At least for a while.

  How Did It Build Its Modern Business?

  It could be argued the modern company took shape the day the first box of cereal rolled off WK’s production line in 1906. Kellogg started as a cereal company and by the late 1960s was the largest one in the world by some considerable margin. While it had aggressive competitors such as General Mills, Post and Quaker, Kellogg was the market leader. It had also expanded overseas while the others had stayed local. But while the company would obviously remain a cereal company to this day, we prefer to date the building of the modern company to the time when it realised the breakfast cereal bonanza of the 1950s and ’60s would not continue forever.

  The job of building the category had been achieved. Virtually every child in the land ate its products. The cereal market had matured to become a highly expensive dogfight between entrenched competitors. The next challenge was to find other ways to grow. The company had diversified in the past, on an ingredient-processing basis, into dog and other animal feeds, without much success. But its very success in building the packaged goods breakfast market was attracting new competitors who offered something different from the ubiquitous cereals. Pop-Tarts had shown that the company could compete outside of the cereal aisle. So in 1970 it ventured into the freezer section, and bought Fearn International, Inc., specifically so it could acquire an up-and-coming line in Fearn’s portfolio, Eggo waffles.