A FOCUS ON VALUE

Name The Cliche About Battle Creek, Mich: Soggy" business; "No snap, crackle or pop"; "Snap, crackle, bust?" -- and it's been heard or seen lately at Kellogg Co.'s headquarters here in media coverage of the company's woes.Kellogg marketers aren't deterred. They believe they've already seen the worst of the company's several-year slump. And it has gotten pretty bad: Long the undisputed holder of the

Name The Cliche About Battle Creek, Mich: Soggy" business; "No snap, crackle or pop"; "Snap, crackle, bust?" -- and it's been heard or seen lately at Kellogg Co.'s headquarters here in media coverage of the company's woes.

Kellogg marketers aren't deterred. They believe they've already seen the worst of the company's several-year slump. And it has gotten pretty bad: Long the undisputed holder of the No. 1 market share in the U.S. dry-cereal business, even Kellogg admitted that it was toppled by General Mills. The company's aggressive forays into "functional" foods have failed. And it has had to turn to buying companies in niches like veggie burgers and in vast new categories such as cookies, where it recently bought Keebler Corp., to put together a formula for renewing growth.

Further, citing higher spending to integrate the Keebler operations, Kellogg reported that second-quarter earnings fell 24% from a year ago. The company reported net earnings of $114.6 million, or 28 cents a share, in the quarter ended June 30, compared with earnings of $150.9 million, or 37 cents a share, for the same period in 2000.

Kellogg said the integration reduced sales by $18 million and operating profits by $22 million. The results from a year ago include restructuring charges. Excluding those charges, the company earned $165.6 million, or 41 cents a share, in the quarter ended June 30.

But nowadays, top executives ranging from Chief Executive Officer Carlos Gutierrez to Michael Allen, the vice president of ready-to-eat cereals marketing, are convinced that the company is deeply into the process of restoring -- well, all right -- some crackle to the overall enterprise and even to its struggling cereal business.

"We're already a very different company than we were a year and a half ago," said the 39-year-old Allen, who took over the job in late 1999. "This is not your grandma's Kellogg anymore. The people in brand management here and at Kellogg USA are an assertive and tenacious group of people who are working extremely hard now. Culturally, as a business, when you talk about brand management, that's very different for this company. But now we're very focused on what we need to do, and the opportunity for us is that we know what we're going to do over the next three years."

What Kellogg is going to do, said Kellogg USA President David Mackay, is change its focus "away from volume and toward value." Lately, he said, Kellogg's "mix has been a casualty of looking at volume instead of value. The move from a volume focus to a value focus should help us drive profitable growth in cereal -- even if that means giving up volume."

Among other things, Mackay and Allen say, the new value focus means more marketing and advertising and more product innovation, as illustrated by a new cereal entry tied to Walt Disney Co.'s big animated summer movie release, "Atlantis: The Lost Empire."

A most recent low point for Kellogg was early this year, when Gutierrez admitted at a conference of food analysts in Florida that Kellogg had lost the top spot in the U.S. cereal market to General Mills.

Most recently, however, two major moves have signaled to Kellogg executives, securities analysts and other followers of the company that things may be looking up.

First, the company finally became serious about diversifying in a major way out of the sluggish cereal business. Over the last few years, it had made half-hearted forays into functional foods with the establishment of an entire separate division devoted to the pursuit, one of whose first initiatives was the introduction of an entire lineup of products called Essentials. Based on a highly healthful grain called psyllium, they bombed badly. But last summer, Kellogg purchased Worthington Foods, the market-leading producer of Morningstar Farms soy-based burgers.

And then last fall, Gutierrez took the radical step of spending $4.4 billion to purchase Keebler Foods Co., maker of Cheez-It and other crackers and cookies. The move has been transformational for Kellogg, making it a $10 billion snack foods company that now derives just 40% of its sales from breakfast foods, down from 75% previously. Among other things, the purchase gives Kellogg two important new attributes: a significant stake in the fast-growing snack category and a delivery system that is more efficient than Kellogg's.

In fact, Kellogg already is taking heart in new IRI figures that show it has recaptured the market-share lead from General Mills, at least for now, 32.3% to 31.6% for the 52 weeks ended July 8.

For the Gutierrez lieutenants who have attacked the challenge over much of the last couple of years, the process started with gaining a more thorough understanding of just what kind of a brand Kellogg cereals were.

"We've done a lot of work strategically on getting a better understanding of the segments and how they relate to each other: adult demand vs. kid demand," Allen said. "For instance, we spent a lot of time with kids and understanding the power of our equities, and really valuing them. We realized a lot more than before what kind of power our brands have."