Processor of the Year: Kellogg — The original health food company

As a result of changes in both the business and the marketplace, the company in 2000 began instituting a two-prong philosophy that remains in place today: Volume to Value and Manage for Cash. “ ‘Volume to Value’ has our entire organization focused on profitable net sales growth, rather than on simply increasing tonnage,” then-Chairman Carlos Gutierrez wrote in the 2003 annual report. “This means adding value to our products through brand-building and innovation instead of relying on price discounts. It also means concentrating our marketing and sales resources on our most profitable brands, as well as launching new products that have more favorable profit margins than our portfolio average.”

In the corollary “Manage for Cash” philosophy, “Cash flow is the ultimate measure of a company’s value,” explains Jenness. “Manage for Cash ensures the organization maximizes cash flow and always makes the best decisions for our stake holders.”

As a result, the company’s approach to capital investment has been conservative. “In 2005, capital spending was 3.7 percent of sales, the lowest in the industry,” acknowledges the chairman. It had been below 3 percent the prior two years. “While we expect this to increase somewhat [it appears headed above 4 percent for 2006, partly due to hearty volume growth] we remain focused on keeping this expenditure to a minimum.”

Kellogg's sales by year, region and category. (Click to enlarge.)

About the same time Gutierrez was announcing the Volume to Value and Manage for Cash philosophies, the company adopted a simple three-point strategy, which also remains intact today:

• Grow the cereal business
• Expand snacks
• Pursue select growth opportunities

Addressing those points:

• Despite its migration into other, perhaps similar, categories, Kellogg remains a cereal company first and foremost. It is, in fact, the world’s biggest cereal maker, with a 37 percent market share. The company has gained market share in the U.S. RTE cereal business, as already mentioned, and done likewise in other parts of the world.
• In addition to the Keebler acquisition, snacks have been expanded by two 2005 fruit leather acquisitions. Kellogg bought a Chicago manufacturing plant from Kraft that made fruit-flavored snacks. At the end of that year, Kellogg acquired Stretch Island Fruit Co., an Allyn, Wash., manufacturer of natural and organic fruit snacks. The company continues to operate both of these facilities. The Stretch Island business is managed by the company’s Kashi brand.
• Besides those two fruit snacks acquisitions, which came at a combined cost of less than $50 million, Kellogg has not “pursued select growth opportunities,” and company officials are mum are what they may be shopping for.

Kellogg around the world

Kellogg was one of the first American food companies to build plants in other countries. It opened a manufacturing facility in Canada in 1912, and then one in Sydney, Australia, in 1924. Kellogg also was a pioneer in teaching the rest of the world, which was steeped in centuries of either cooked breakfasts or baked goods, the virtues of cold cereal.