Dr. John Kellogg and his brother, W.K., believed that more grains in the diet would lead to a long, healthy life. They both lived to 91.
Long before their deaths, the brothers had made their point. The company that W.K. founded in 1906 has grown to become the leading marketer of ready-to-eat cereals with a market share of more than 40 percent.
W.K. and Dr. John, who was superintendent of the Western Health Reform Institute, toiled before the turn of the century to develop foods that would be both nutritious and palatable for the institute`s patients.
But W.K. was more of a businessman than his brother was and sought to market their cereals. In 1906, W.K. split from his brother to found Battle Creek Toasted Corn Flake Co., later to become the present Kellogg Co.
When W.K. opened for business, there were 42 cereal companies in this town. Now the local entries have dwindled to Kellogg`s, Ralston Purina and Post.
Kellogg`s is an all-American success story. From the wholesomeness of its products to the philanthropy of the Kellogg Foundation to the Norman Rockwell drawings it has used on its cereal boxes, Kellogg is solid Middle America. And the numbers speak of an American financial success.
Last year sales increased 12.6 percent, to $2.9 billion from $2.6 billion the year before, while earnings rose 13 percent, to $281.1 million from $250.1 million.
Earnings per share jumped 36 percent, to $4.56, or $2.28 with a 2-for-1 stock split in January figured in. (The percentage is higher for earnings per share than in net earnings because the company bought about 20 percent of its outstanding shares in November, 1984).
Success has been a Kellogg tradition ever since the brothers began experimenting with cereals in a search for a palatable alternative to the heavy, meat-laden breakfasts that were popular in the Victorian era.
Dr. John was interested in cereal for his patients, but W.K. saw the commercial possibilities. Yet even before W.K. could launch his business, a competitor saw the commercial applications. A patient at Kellogg`s sanitarium named Charles W. Post left the institute in 1892 and three years later founded Post cereals. Others followed.
”By 1905 there were 40 little cereal companies making cereal in the city of Battle Creek. In 1906, W.K. began production of this first product, toasted corn flakes,” said William LaMothe, Kellogg chairman.
W.K. started on the run. He launched an aggressive advertising and promotional campaign and soon outdistanced the pack.
Through the `20s, the firm prospered to the point that by 1930, W.K. came up with $47 million to found the Kellogg Foundation, an autonomous philanthropic organization.
In 1933, the now-familiar Snap cartoon figure first appeared on a package of Rice Crispies. Shortly thereafter, he was joined by pals Crackle and Pop.
Nearly two decades later, another spokesman came roaring to the front to tout Sugar Frosted Flakes as Gr-r-reat. In his first year, 1952, Tony the Tiger shared package labels with Katy the Kangaroo, but she went down under after just a year.
Through the `60s, Kellogg`s continued to battle it out with General Mills Inc. and crosstown rival Post, a unit of General Foods Corp. But in 1972, the Federal Trade Commission sued to break the three companies up.
The FTC alleged that the firms` dominance of the market inhibited price competition and cost consumers $100 million a year. A decade-long battle ensued that cost Kellogg $10 million in legal fees and countless hundreds of hours in executive distraction, LaMothe said.
”We kept saying for 10 years we didn`t think it (the FTC action) had too much effect. We were trying to do our jobs. I just woke up in the end and said `this has had some effect` because I personally was involved almost every week on FTC issues,” LaMothe said.
Under the Reagan administration, the FTC dropped the suit.
John Bierbusse, an analyst with Duff & Phelps Inc. in Chicago, agreed that the fight hurt the industry and the resulting calm has helped.
”There were a range of costs beyond the legal fees. Since the FTC went away, it`s been a much more dynamic market. New product activity has accelerated, spending behind the brands has accelerated and the whole industry has adopted a more aggressive view,” he said.
But during the decade they were fighting the FTC, the cereal giants were given a helpful nudge by a number of scientific studies that were published recommending more fiber and less meat in the diet. The Kellogg brothers` ideas were validated.
”What (the studies) were recommending was what the Kellogg brothers were trying to do in their sanitarium: move away from meat and fat and have a diet that was more inclusive of grains, fruits and vegetables,” LaMothe said.
In 1984, Kellogg began advertising on its All-Bran packages that the National Cancer Institute reported that a high-fiber, low-fat diet may reduce the risk of some kinds of cancer.
But the California Cancer Advisory Council objected that the ads were
”misleading and objectionable.”
LaMothe defended the ads.
”The language went through with the approval of the National Cancer Institute. They thought this was great, that this was the type of cooperation between industry and government that we all should have because here was an important message for the American consumer,” he said.
In this controversy the FTC was more kind. The federal agency had no problem with the ad, LaMothe said, although the U.S. Food and Drug
Administration expressed qualms.
”The FDA had problems with the ad and were concerned that it might bring in a whole bunch of people who, as they put it, might not be as responsible. In a way that was kind of an accolade to the way we handled it,” LaMothe said. ”Now it`s been pretty well accepted. And we`re still using it.”
Through the mid-`70s, Kellogg increased its share of the ready-to-eat cereal market until it reached its peak in 1976 at 43 percent. In 1979 and 1980, the share dropped a bit before picking up again in 1981.
”We were losing some share because the private labels and generics were focused on our big four. And they were getting new distribution. Many chains up to that time had not carried either. But because of the economy, they felt they wanted to put in a cheaper line,” LaMothe said.
Last year, giant Philip Morris Inc. acquired General Foods and along with it Post cereals. So far, Kellogg is watching, warily.
”We`ve always had great respect for General Foods as a great big food company. And now they`re a tremendous company. We`ve got to stay focused and, for our organization, we think that is good. It`s not too unhealthy a thing to say, `Let`s show the big guys we know how to do this job better than anyone else,` ” LaMothe said.
That Kellogg focus has helped it dominate the market, Duff & Phelps`
Bierbusse feels.
”Scale has its value and there`s a lot to be said for the narrow focus of the company. That it`s just about the only thing that they spend their time on is important, and they spend very heavily on the business from a capital spending standpoint–well above their competitors,” he said.
Part of the company`s capital spending has gone to bolster its international business. In 1983, Kellogg built a plant in South Korea and in 1984 it finished building a ”state of the art” addition to its plant in London, Ontario. LaMothe sees tremendous opportunities overseas, citing a projected world population of 6 billion by 2000.
”There are 4 billion pounds of ready-to-eat cereals sold worldwide annually. With our background and tradition of being able to turn grains into palatable foods, we think the opportunity today is great,” LaMothe said.
It`s not just the consumers who like Kellogg`s. Wall Street has crackled with enthusiasm with the pop the stock has shown and has advised customers to snap up shares.
”Last year, the stock was up 74 percent versus the Standard & Poor`s average of 26 percent. This year it is up a shade over 10 percent, compared to the 8 percent average of the S&P,” Bierbusse noted.
”Their return on equity last year was 48 percent. You can`t find that too many other places. Quite remarkable.”
While taking care of business has been its historic concern, the giant firm has a dominant position in this community of about 55,000. The relationship with its home town has mostly been good, but when one firm has such clout, some conflict becomes inevitable.
In 1982, Kellogg told the city and township that if they wanted to keep Kellogg`s corporate headquarters and its 600 employees here, the governmental units should merge. In all the firm, employs 3,700 in the city. LaMothe said they made the request because it was difficult to attract people to work in Battle Creek.
”The six (area) political units had been fighting for 40 years and, in the meantime, the city was going downhill and losing population. As the city lost population, it upped the tax and drove out more people to the surrounding five governmental areas,” LaMothe said.
In the end, the city voters approved Kellogg`s idea nearly 12 to 1, while the township was less enthusiastic at 2 to 1.
Gordon Jaeger, Battle Creek city manager, would not characterize Kellogg`s position as a threat.
”They explained what their position was and how they were having a hard time recruiting young engineering people. They told us what they would do and they have more than fulfilled that promise,” Jaeger said.
That promise included building a $70 million headquarters in Battle Creek and pumping into community development the $1.6 million in tax savings Kellogg will realize over five years from the merger. The new building is still under construction.
This year a few local noses got out of joint when Kellogg announced it was going to stop its plant tour, which attracted about 160,000 people annually to Battle Creek.
Kellogg wanted to guard the unique technology being installed in a retrofitting of its plant. So rather than open the plant to possible industrial spying, it dropped the tour.
”We debated long and hard on how we could handle a tour that would get them through that operation and see only the old-style equipment. We decided we couldn`t do it,” LaMothe said.
Kellogg and the city officials are still trying to find an alternative to the tour. Jaeger estimated the tour`s demise will cost area businesses about $1 million a year in lost revenues.
