by Greg Thain
What Is Its DNA?
Cereals
Notwithstanding the new news of the Pringles deal, Kellogg is first and foremost a breakfast cereal company. It would be unimaginable for the company to divest its cereals business; it was the first thing it sold and pretty much the only thing it sold until the company began to diversify in the 1970s. The concern is that cereal DNA may be a part of the corporate chromosome that doesn’t deliver growth in the 21st century. However, it is management’s job to make its strengths relevant to changing circumstances.
Global-Local
As discussed above, Kellogg is more of a multi-regional than global company. It has proven itself better than most at sharing ideas across markets, and not just in a ‘head office to everywhere else’ direction. The relatively high level of autonomy still enjoyed today in the overseas companies has proven to be a significant strength. Perhaps not in the area of meeting local tastes - given the success of CPW in gaining a global market share north of 20% with a range of not very local brands - but certainly in the area of developing and sharing new products and new promotional or advertising campaigns. While this sounds an obvious and easy thing to do, the fact is that most large companies are not very good at it. It requires the right combination of local autonomy to develop new ideas in different environments, and a not-invented-here management culture that makes managers receptive and willing to proudly copy.
Summary
It could be argued that, while cereals run through Kellogg’s veins, either the company is not as good at it as it used to be or it was in the right time at the right place. The fact is that, even today, the vast bulk of its cereals business comes from markets it developed before and soon after the Second World War. Then it had first-mover advantage, sometimes for decades before serious competition turned up. Kellogg has not been particularly adept at either fending off competition, either from CPW or private label, or opening up new markets beyond its core.
Equally, its snacks business (excluding Pringles), while an impressive achievement, has been built largely through happenstance (eg. stealing a march on General Foods with Pop-Tarts) and in morphing its cereal brand equities into snack bars. Pop-Tarts has not been followed up by anything remotely as successful, and there are only a finite number of strong cereal brand equities that can transition into snacks. Pringles will dwarf its existing snack business, which will provide challenges as well as opportunities. Will Pringles make Kellogg a better snack company or will Kellogg make Pringle a better snack brand? The answer to that question in the next few years could well determine the company’s fate.
Kimberly-Clark
Where Did They Come From?
On March 26th, 1872, five Wisconsin businessmen pooled $30,000 to buy a paper mill. The initiator of the scheme, Charles Clark, who part-owned a hardware store, had heard a paper mill-owning neighbour boasting of his profits. So he corralled John A. Kimberly, Havilah Babcock, Frank Shattuck and George Whiting to come up with the necessary funds to get in on the act. The neighbour’s boasts were seemingly well grounded. In mid-to-late nineteenth-century America, both population and literacy levels were rising fast. These trends fuelled a steep rise in newspaper and magazine circulations, and consequently increased demand for newsprint and finer grades of printing paper. So when the partners opened their first paper mill on the Fox River in Neenah, Wisconsin, a few months later, their prospects seemed promising.
This was a Gilded Age, when virtually all consumer markets were mushrooming. The partners, like many businessmen, knew that success went mostly to the biggest and boldest thinkers. Their mill, at 210 by 88 feet, was large compared too more established set-ups. Only eight years later, having already opened a second mill and substantially upgraded both, the firm was incorporated as Kimberly, Clark & Co. It had a capitalisation of $400,000, a thirteen-fold increase. Clark’s neighbour hadn’t been exaggerating. By 1892, Kimberley, Clark & Co. had expanded into bond and ledger paper production through a new subsidiary. They were now by far the largest paper company on the Fox River. Their success had come, not from breakthrough innovation or some compelling new feature to their product, but from having a bolder and better-financed expansion strategy than their peers.
In 1893 they were making 55 tons of newsprint a week from one centralised large mill. They converted their other mills to the production of a wide spectrum of products, from cheap rag-based wrapping papers to the best manila grades and bond papers. Further expansion plans were put on hold as the good times in America came to a shuddering halt. During a three-year depression; paper prices dropped by 40%, and radical action was needed just to stay afloat. Wages were cut by 10% and John A. Kimberley organised his competitors into a Paper Makers Association. This cut back production through a coordinated mill shutdown programme across all manufacturers in the region.
By 1895, fifty paper companies had gone bankrupt. Profits at Kimberly, Clark & Co. had plummeted by over 70%, but they survived the crisis due to their aggressive response. As soon as a recovery was half-glimpsed, expansion plans were dusted off and mills were snapped up at rock-bottom prices. The company was now poised to resume its growth strategy, but success in the new century had to be based on more than buying up failed mills. The key differentiator for Kimberly, Clark & Co was to be innovation, driven by a state-of-the-art technical department.
How Did They Evolve?
In 1912, the company set out on a deliberate path of recruiting professional engineers and scientists to set up a properly organised technical department. Its role was primarily to codify the company’s quality-testing procedures, which was a common enough practice amongst their competitors. But Kimberly, Clark & Co was to take the concept much further. In 1914 they recruited an Austrian chemistry graduate from the Darmstadt Institute of Pulp and Paper Technology, Ernst Mahler. The need for Kimberly, Clark & Co to innovate was clear. They were one of the country’s biggest producers of newsprint, but newsprint prices had never recovered from the low point of 1895, and pulpwood costs were continuing to rise. The killer blow to the newsprint business, which was the mainstay of the company, was the passage of the Underwood Tariff Act in 1913. This opened the country to cheap Canadian imports of newsprint.
All American paper companies were in the same boat and all paddled the same way. They changed over their mills to tariff-protected products, such as paper for books, magazines, wrapping and toilet paper. However, the sudden massive rise in production capacity for those products simply depressed their prices. No one was any better off. Kimberly, Clark & Co managers had seen this coming as early as 1908, but it needed their Austrian paper genius to explore completely different possible products that could be made on their machines. He had to come up with something quickly as the company was already planning to exit newsprint altogether. The answer to their prayers came from a combination of a fact-finding trip to Germany by Mahler and Kimberly in 1914; and the devastation of the American cotton crop by the Boll Weevil. Mahler explored German scientists’ latest ideas on bleached groundwood pulp, and also enquired about the possibility of making a cotton wool-type product out of cellulose. This could be an alternative for sanitary-wound dressings. The consensus of opinion was that it was possible, although complicated, to turn tree trunks into ersatz cotton wool. Within a few months of his return, Mahler had mastered the process and had a product: Cellucotton.
The outbreak of war in Europe clearly indicated there might be a demand for such a product. The first samples of Cellucotton wound dressings were ready for testing in hospitals in 1915. The tests were a developer’s dream: not only did the product more than meet the required sanitary standards, it proved to be several times more absorbent than cotton. The dressings required changing less frequently, which was a big plus in busy hospitals. Meanwhile, the Boll weevil had decimated the American crop and driven up raw cotton prices. So Cellucotton cost 60% less than raw cotton. This looked to be a winner. Kimberly-Clark contacted the Surgeon-General of the War Department, and gave him a hard
sell on the many benefits of Cellucotton wound dressings. The deal was swung when the company patriotically agreed to forgo all profits on supplies sold to the War Department and the Red Cross. By the end of 1917, the company was shipping wound dressings as fast as they could make them.
The end of the war in November 1918 brought matters to a shuddering halt and almost saw the end of Cellucotton. Huge orders were cancelled, forcing the company to immediately shutter one of its two mills devoted to the product. A second was kept going to supply hospitals who had latched onto the product. However, even this outlet disappeared. The Red Cross donated their stocks of wound dressings to hospitals free of charge; and the War Department dumped theirs to jobbers at rock bottom prices.
Cellucotton now seemed a commercial dead duck. Kimberly-Clark’s rivals, Scott Paper, had had a similar wartime experience. They had also developed a cellulose derivative, called Zorbik surgical dressings, which, after the war, they dropped completely. They could see no peacetime application for it. Thinking along the same lines, most of the senior management at Kimberly-Clark were keen to get back to the day job of making and selling paper. However, Mahler and Kimberly wanted to give Cellucotton one last go. They met with Walter Luecke, the Chicago representative of Sears Roebuck (to whom the company sold paper for the catalogue) and discussed possible alternative markets. The outcome was that Kimberly-Clark, made Luecke an offer he couldn’t refuse: to accept the specific brief of finding markets for Cellucotton.
Luecke reviewed all the correspondence the company had received about Cellucotton from France during the war. He noted letters from nurses who mentioned that the wound dressings also served as very serviceable sanitary napkins. Luecke saw immediately that here was a market of sufficient potential size to make it worthwhile starting up the factory again. But he failed to convince jobbers to buy his Cellucotton and make the napkins. They declared the project hopeless: such a product could never be advertised. Nevertheless, Luecke convinced Mahler and Kimberley to start production again to make a newly-designed sanitary napkin, while he went out to drum up some sales.
This was a classic example of a production-led strategy: ‘Here’s something we can make, now go and find a market for it’. This should of course have doomed it to failure, especially as the market experts who were consulted wouldn’t go anywhere near the idea. But Luecke’s background in Sears-Roebuck had given him a good grounding in the art of selling to the American housewife. His first priority was to hire an advertising agency, to come up with a good name and ads that would not offend the delicate sensibilities of the time. In a September 1919 meeting with the agency, they were playing around with the product descriptors. They latched onto its cotton-like texture, and out popped the name, Cotex. This was soon changed to Kotex to make sure it would be pronounced correctly. Later that month a few dozen boxes were shipped to a branch of Woolworth’s as a test market.
The problem from the start was how to sell the product. Most women used homemade towelling pads. This involved no embarrassment for buyer or vendor in a sales transaction. The difficulty with Kotex was how to avoid the inherent embarrassment of a transaction for a product that had only one possible use, for an unmentionable topic. The problem was not unlike that faced by condom manufacturers in less enlightened times. Indeed, so big an issue was the embarrassment factor that Walter Luecke got an edict from on high that in no way could the Kimberly-Clark name be associated with such a product. So he set up a subsidiary, the Cellucotton Products Company (CPC), to be the name on the box. Needless to say, nowhere on the box appeared the dreaded term, ‘sanitary napkins’.
Perhaps unsurprisingly, Luecke test marketing was not an immediate success. Here was a brand no-one had heard of, that did not mention its function on the package, and was for a use people found too embarrassing to ask for. Shopkeepers were equally embarrassed and kept the product out of sight. When people did find out what it was all about, the company was bombarded with letters strongly objecting to them selling the product at all. However, consumer pressure groups did not have the pulling power they do in today’s social media world. Luecke binned the letters and pressed on. He was going to solve the manifold problems of selling Kotex.
Luecke experimented with direct marketing: he sent free samples to women whose addresses he had found in the phone book. That failed - not one contacted the company to take up the offer of regular supplies by mail. Luecke reluctantly concluded that the only viable means of selling Kotex would be through jobbers and wholesalers, backed by a two-pronged advertising campaign. Trade advertising would come first, to establish the wartime and medical credentials for the brand with the retailer. The consumer campaign would follow, again full of medical terms and imagery, with the primary aim of building name recognition. The idea was to reach a point when the customer would simply ask for a box of Kotex, rather than mutter sanitary napkins under her breath. But it was an uphill struggle. Luecke was battling deeply ingrained social taboo.
The turning point is legendary. The president of the company’s advertising agency arranged a face-to-face with the editor of the widely read and highly influential Ladies Home Journal. The editor flatly refused to run the Kotex ad. In desperation, the agency president pleaded to show it to the editor’s secretary, a white-haired lady in her sixties. If she didn’t like the ad, he would accept the editor’s judgement. But if she did, then the editor ought to run it. A coin-toss. The editor took the bait. He presumably thought his secretary to be the epitome either of upright, or uptight, American womanhood, and support his editorial policy. Her pronouncement could not have been more emphatic. Not only was Kotex a good thing, and something that women deserved to be told about, but also the Journal had to run the ad. The editor meekly complied.
Was Kotex now off to the races? In 1921, $172,000 was spent on advertising across a range of women’s magazines. Few sales resulted, so Luecke’s request for a further $200,000 for 1922 occasioned a good degree of boardroom nervousness. Nevertheless, the board bravely bore down on their investment, as the only hope of getting back a penny of what they had put in so far. The missing piece of the sales puzzle fell into place during 1922. The company hit on the idea of making the product a self-service item. This way the embarrassment factor could be avoided. While it may seem an obvious answer today, in 1922 self-service was almost unheard of. Shops were staffed by clerks who went and got what the customer asked for. A few pioneers, such as Clarence Saunders’ Piggly Wiggly chain, had been experimenting with self-service stores with just a cashier at the exit. Otherwise, the concept was seen as being very raw, if not downright odd. Not least because it required a host of other, as yet unrealised inventions - such as the shopping cart and pricing guns - to make it function well.
Retailers were now bombarded by trade advertisements encouraging them to place Kotex’s box on the counter by the till. The box was now shorn of everything but a large Kotex logo and a medicinal-looking white cross. This was now an integral part of the design. A coin box next to the Kotex would avoid the need for any interaction with store clerks at all. With consumer advertising going full steam ahead, and creating awareness and demand, sales turned the corner. By 1924 the company was converting more mills over to Cellucotton and Kotex production. Sales were further improved by Luecke’s brainwave: sell the product via vending machines in ladies rest rooms. There he decided to sell singles rather than full boxes. He was not going to upset the retail trade that he had worked so hard to win over.
The corner had been turned but it had been close run. It was based on two remarkable insights. First, that a wound dressing could be adapted to a completely different use. Then, that a handful of throwaway comments from consumers could be a compelling basis for a new product. At the time no one was knocking down the doors of paper companies demanding disposable sanitary towels. Equally, manufacturing-led strategies are not always a bad idea when you have a breakthrough technology, and the ideal application isn’t immediately obvious. Scott gave up and lost out on a g
oldmine. Kimberly-Clark could very easily have given up on the whole idea at several points, but went on to reap enormous benefits from their perseverance. Within five years of Luecke begging for a $200,000 spend on advertising; he was lavishing $3 million on the brand. Kotex was well on the way, not only to creating but owning a new and fast-growing category. Although paper was to be the mainstay of company sales for many years to come, the future of the business was now in the arena of branded packaged goods. This put them into a new realm of direct competition. The success of Kotex attracted a host of competitors, manufacturers and retailers alike. They piled into the market with cheaper versions. CPC responded by reinforcing their high ground position: improving the base product and beginning to segment the market with different pads for different needs. This maintained the value of their price premium. Their advertising featured men in white coats warning darkly of the dangers of; unsafe and unsanitary makeshift methods’.
The game changed in 1926 when Johnson & Johnson entered the fray. They launched Modess and Nupak pads, which, by being thinner, claimed to be less visible under clothing. Kotex responded with a thinner version of their own, rounded and tapered at the ends for even greater invisibility. They hired a fashion model, Lee Miller, who was the first real human used in their ads, to demonstrate the point - wearing a series of swish evening gowns and apparently little else. By 1929, CPC was delivering nearly $2 million profits a year into the parent company.