A Century of Innovation
Inside the box at Kellogg's: How the cereal giant keeps its product pipeline fresh
The company was also forced to innovate. Were Kellogg still offering only same-old, same-old cornflake or bran flake cereals, it's pretty unlikely the company would have generated $10.2 billion in revenue last year. "Innovation has been one of the key things underneath as to why the company has been so successful," says James Jenness, CEO of Kellogg, while sitting in the corporate boardroom at company headquarters. "In the world of marketing, you hear a lot about product life cycles, where you introduce a product or brand, it goes for a while, lives, and then dies off. But in our business, life cycles do not exist."
Or, more precisely, constant innovation helps ensure that life cycles don't exist. That's why in addition to classic Special K cereal, Kellogg offers Special K Vanilla Almond, Fruit & Yogurt, Red Berries, Purple Berries, and Bars among other iterations in over 180 countries. As another example, Jenness points to All-Bran, which was introduced in 1916 and was Kellogg's fastest-growing global brand last year. Sure, you have more and more baby boomers chowing down on the stuff as they search for what Jenness euphemistically terms "digestive health."(The original All-Bran box promoted itself as a "natural laxative.") But the boomers also demand great taste. So Kellogg now offers All-Bran Yogurt Bites, which mixes wheat bran with yogurt-coated toasted oats. "We've taken a brand that has been around for 90 years and made it sing for today's consumers," Jenness says. "That is the essence of what we are doing for all products."
And apparently doing a bang-up job of it. "I think what you are seeing here is a company that is really innovating very well," says Citigroup Investment Research analyst David Driscoll. He notes, for instance, an increase in product launches. In the first quarter, the company launched 18 new products, compared with 15 in 2005 and seven in 2003. (Also in the first quarter, the company earned a better-than-expected $274 million on sales of $2.7 billion.) And that constant stream of high-quality offerings has made an impact. In 2005, the company captured 50 percent of new cereal product sales in the United States versus its total market share of 34 percent. Even more telling, the new products sell at 15 percent more per pound than the base products.
Adding higher-margin offerings is a key element of the company's growth strategy. "If the economics [of a new product] aren't better, it doesn't go out the door," says Jeffrey Montie, president of Kellogg North America. That attitude is a necessity since extensions of an existing product tend to cannibalize a portion of the old product's sales.
Crackle and pop. Innovation's effects haven't gone unnoticed by investors. "Kellogg is an excellent innovator, and that is why they have been clearly outperforming the sector they compete in," says analyst Timothy Ramey of D.A. Davidson in Lake Oswego, Ore. During the past five years, shares of Kellogg are up 107 percent versus 39 percent for General Mills and 3 percent for Kraft.
advertisement
