Strategy Of Kellogg

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Not long ago it looked as if Kellogg, a name synonymous with ready-to-eat cereal, might be tempted to skip breakfast altogether. In October 2000, with its profits and market share falling, Kellogg struck an uncharacteristic deal to buy Keebler, the maker of Cheez-Its and other crackers and cookies, for $4.6 billion. Breakfast cereals, predicted Chief Executive Carlos Gutierrez, would account for just 40% of Kellogg's sales in the future, down from 75% before the deal. Since then Kellogg has indeed been transformed, but not in the way even Gutierrez expected. Cookie sales have been crumbling--down 5% this year after falling 2% in 2002--but cereal has taken off. Shedding its decades-long obsession with volume, Kellogg decided to put its marketing muscle behind the brands that bring in the most money. It got consumers to pay more for higher-profit cereals by adding a feature or two, much as razormakers did by adding a third blade, or toilet paper companies by adding a scent. Instead of pushing heavily discounted boxes of Raisin Bran, for instance, Kellogg introduced Special K Red Berries cereal containing freeze-dried berries. The retail price averages $4.36 per pound for Special K Red Berries, nearly double the price of Kellogg's Raisin Bran. Kellogg has also licensed the Walt Disney name to hook kids with cereals like Mickey's Magix and Mud & Bugs, getting parents to pay an average $3.77 per pound. The average Kellogg cereal sells for $3.11. Kellogg's focus on expensive frills inched its gross margin up to 45% last year from 44.2% in 2001. That small gain, along with cost savings from the merger, translated into a handsome 52% gain in net income, to $721 million last year on sales of $8.3 billion. The momentum continues. In the first half Kellogg's net rose 13% to $368 million. "More than anything else, they've put fun back in the cereal aisle," says Prudential

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