Americans’ hectic new morning routine is wreaking havoc on Kellogg Co. Killer commutes (nearly an hour round trip in many cities) leave no time to fix even the simplest breakfast. Getting out the door is equally challenging for the 64 percent of families in which both parents work. More Americans than ever simply skip breakfast, according to new data from NPD Group, an eating-habits researcher. “People wish they could just get breakfast injected into them on the run,” says Gerald Celente, editor of the Trends Journal, a marketing-industry newsletter.
That means overall cereal sales are in trouble, slipping by nearly $1 billion in the last five years to $7.7 billion in 1999. At the same time, Kellogg’s more nimble competitors have been eating its breakfast. For the first time ever, Kellogg is no longer America’s No. 1 cereal seller. Archrival General Mills, maker of Cheerios, took that title last year. The shift sent Kellogg’s stock plunging to its lowest level in seven years and has stoked persistent speculation that the cereal giant is a possible takeover target.
Tony the Tiger’s proud parent is not accustomed to second place. Brothers John Harvey and W. K. Kellogg pioneered the dry-cereal business a century ago by selling Americans on the curative powers of Corn Flakes and luring the rich and eccentric to their health-spa sanitarium in rural Battle Creek, Mich. Today the smell of cereal still wafts from Kellogg factories in Battle Creek, but it is not coming from the original Corn Flakes plant–that was closed in October, and its 525 workers were laid off.
America’s bad breakfast habits aside, once innovative Kellogg has made a series of blunders. It went 27 years between the successful introduction of Pop-Tarts in 1964 and its next hot new product, Nutri-Grain Cereal Bars. In the ’90s, as $2-a-bag grocery-store brands imitated Frosted Flakes and Froot Loops, Kellogg was slow to cut prices that reached more than $5 a box in some markets. When Kellogg finally started offering dollar-off coupons, it unwisely slashed advertising, depriving its cereals of attention. Kellogg’s share of the U.S. cereal business dropped to 31 percent, from more than 40 percent a dozen years ago. “It was very easy to get stuck on ways that worked in the past,” Kellogg’s chief executive, Carlos Gutierrez, told NEWSWEEK.
With Kellogg stuck in the past, its rivals were busy coming up with new recipes. General Mills introduced popular-line extensions of Cheerios, such as Honey Nut Cheerios. With tasty new offerings like Banana Nut Crunch, Post got high marks for attracting more adult customers. Taking the low road, Quaker Oats took its market share to record levels by getting into the bargain-bag cereal business. And Kellogg’s competitors scored with snacks like General Mills’ Chex Mix and Quaker’s Chewy Granola Bars.
Now Kellogg is trying to reformulate itself as a snack-food company. The 46-year-old Gutierrez, who became CEO last year, predicts cereal could be less than half of Kellogg’s business within five years, down from 75 percent. Instead, Kellogg will emphasize portable “convenience foods” like Nutri-Grain Bars. Already, Rice Krispies Treats outsell their namesake cereal. The early results are promising: Kellogg’s snack-food sales climbed 14 percent last year, which, along with cost cutting, pushed profits up 10 percent, to $606 million.
To launch its new snack attack, Kellogg has assigned 200 researchers to its “idea lab,” a new $75 million research center a few blocks from company headquarters. Behind smoked-glass windows, researchers in white coats scurry around preparing platters of new treats in industrial test kitchens. Last summer they invited top executives to test 75 new flavors of Rice Krispies Treats. The seaweed flavor (intended for the Japanese market) didn’t make the cut, but a new butterscotch version will hit U.S. store shelves this summer. Kimchi-flavored Rice Krispies Treats aimed at Korean snackers also failed to make the grade. But the researchers did get the green light on chocolate and marshmallow “S’mores” Nutri-Grain Bars. Kellogg introduced nearly 70 new products last year, more than triple the rate of five years ago. One promising new entrant: Pop-Tarts Snak-Stix that break into sections designed to fit the tiny toddler hands that now clutch Cheerios.
Since Kellogg was slower than its rivals to crank up the new-product machine, it is trying to hedge its bets. Rather than spending the $40 million it can take to develop a new brand from scratch, Kellogg is spending a fraction of that by concocting versions of its household brand names. The latest spinoff: Snack ‘Ums, supersize versions of Froot Loops and Corn Pops in cans small enough to hold in your hand. The idea is to eat the cereal straight from the can. (Food technicians dusted it with a lighter sugar coating to eliminate sticky fingers.) “We’re taking cereal to new places,” explains Gutierrez, who in August pulled the plug on Kellogg’s Breakfast Mates, which combined a bowl, spoon, milk and cereal in one package. It failed to catch on because it was impossible to eat while driving.
Gutierrez is not about to abandon the traditional cereal business. That’s why he’s “substantially” increasing Kellogg’s cereal advertising with big-budget campaigns like supermodel Cindy Crawford’s new commercials and sweepstakes for Special K (first prize: breakfast with Cindy and a makeover in New York). And to win back kids, Kellogg is stuffing Beanie Babies inside boxes of its sugared cereals.
But ultimately, Gutierrez sees Kellogg’s salvation in snacks, not cereal bowls. It may have taken a while, but Kellogg is finally waking up to the fact that America is Junk Food Nation, not the land of healthy eaters. “People snack,” says Gutierrez. “That’s the way the world is moving.” Indeed, with so many commuters eating breakfast in their cars, it seems the only place that’s traffic-free for Kellogg these days is the cereal aisle.
