What Makes Kellogg Grrreat

While other companies fade away or get broken up and sold for scrap these companies seem to thrive, no matter what the economic climate or which raiding parties ride into town.

This is the first in a series that will reveal how some of the bluest of America’s blue chip companies stay consistently successful over many decades. While other companies fade away or get broken up and sold for scrap these companies seem to thrive, no matter what the economic climate or which raiding parties ride into town. In the first article in this series, written by Barry Rehfeld, a veteran business writer for Time and The New York Times, we focus on the Kellogg Company.

It was a business that caught fire – literally. In the process of developing a substitute for bread, two brothers -Dr. John Harvey and Will Keith Kellogg – found their creation cooked to crispy flakes after a fire damaged their kitchen. That was the start over a century ago of what was to become the world’s largest cereal maker and a business synonymous with breakfast – the Kellogg Company. Remarkable though that achievement has been, it’s only part of the story. The Kellogg Company has not just grown, it has grown highly profitable.

Just take a look at the record: Kellogg’s posted increased annual earnings during 43 of the past 44 years, with earnings growth of nearly 15 percent annually in the last 10 years. (And that 10-year time span includes the one year when earnings were down!) This kind of sustained growth is a major accomplishment for any business, but it’s even more impressive in today’s market. Global competition is widening and intensifying almost daily and the slightest slip can trip up even the strongest company.

In his 1986 book Corporate Staying Power, James B. Hobbs, a professor of business administration at Lehigh University, identified Kellogg as one of the top companies in the Fortune 500. His criterion for success: a return on investment and a return on sales in the top 20 percent of the Fortune 500 for at least 10 straight years. That put Kellogg in a group of only 14 companies, including such giants as Eli Lilly, Merck and Dow Jones.

From its worldly experience, Kellogg would be the last to say that growing earnings is a Snap! Crackle! or Pop! “If this business was ever easy, it isn’t anymore,” declares Arnold Langbo, chairman and chief executive of Kellogg, which has had to face some of its greatest challenges in the past year.

As difficult as sustained growth may be, however, and as rare as Kellogg’s sterling record is, Professor Hobbs determined that there are no secrets to building the kind of company that produces consistently dazzling results. Each of the companies he studied is unique, but he found they have much in common with each other, with a clearly identifiable set of traits that are the keys to their success.

First, a company must have a clear vision of what kind of company it is. Second, it needs strong leadership. Third, it needs to have extensive plans, the means to carry them out and the ability to monitor performance carefully. Fourth, the company must treat the customer as king, giving quality and service their due. Finally, the successful company must have a distinct culture that breeds a “give-a-damn” attitude.

From the beginning, the Kellogg Company epitomized all these qualities. That Kellogg knew what kind of company it was – that is, a cereal maker – may seem easy enough now that its success is so well established, but even some very well-known, otherwise successful companies today have trouble defining themselves so clearly.

Following a recent retreat for the management of The New York Times Company, one executive there said: “It was apparent the company lacked a strategy for anything. Is it a newspaper company? An information services company? Where’s it going?” Being able to answer such questions is where any company must start.

A Sense of Purpose Knowing where it’s going has never been a problem for Kellogg. Executives talk of their sense of purpose with religious or military zeal. Available to all is a statement of the Kellogg philosophy: a 12-page pamphlet that has the look of a tablet brought down from the mountaintop. Laid out inside is the gospel of long-term volume and earnings growth and the selling of quality and nutritious foods.

“We are almost like missionaries,” William LaMothe, Langbo’s predecessor, said upon his retirement five years ago. “All of the people we can convert to eating our products, we can lower their risk of certain heart diseases and certain types of cancers.”

His words are like received wisdom, having virtually echoed down through the years. Kellogg grew out of the nutritional theories that were part of a way of life called “biologic living” developed by Dr. John Harvey Kellogg, a brilliant and colorful character, at the Battle Creek (Michigan) Sanitarium in the 1870s. Kellogg was absolutely dedicated to a program of health foods, exercise, baths and massages. Meat, tea, coffee, smoking and alcohol were the enemies of good health.

In no small way though, the sanitarium was serious business. It was a spa for the wealthy, and in decades to come Kellogg hosted such noted celebrities as John D. Rockefeller, J. C. Penney, Billy Sunday, Eddie Cantor and Johnnie Weismuller. (It was recently spoofed in the film The Road To Wellville starring Anthony Hopkins.) Foods Kellogg developed that proved popular among visitors, from the original flakes, which were made of wheat, to granola to peanut butter, were spun off into businesses, which were run, as was the sanitarium, by the good doctor’s younger brother, Will Keith Kellogg.

The two became so good at developing foods that Battle Creek eventually resembled the California Gold Rush country with competitors flocking to town to copy the Kelloggs – some successfully. Among the invaders who thrived: C.W. Post, the creator of Postum and Grape-Nuts, which outflanked Kellogg’s granola. But when Will Keith went off on his own there was no looking back. He alone realized that of all the new products, corn flakes had the greatest potential, needing only time to be sold on the broadest scale possible.

In 1906, he started the Battle Creek Toasted Corn Flake Company – changed to the Kellogg Company 16 years later – to sell Kellogg Corn Flakes. And lest the competition get any ideas, he signed his boxes in red ink: “None genuine without this signature, W. K. Kellogg.”

That signature has, of course, become known around the world as an exemplar of global success, adorning 12 of the top 15 brands in the world – including Kellogg’s Corn Flakes, long the world’s largest-selling cereal.

Visionary Leadership None of the company’s success would have been possible without the visionary leadership of W. K. Kellogg. From the beginning, he planned to sell cereal by the railroad carload, not by mail order, as his brother was content to do. These and many other notions of his own helped sow the seeds of his independence.

Although a stern man of few words, there was no question about what he liked. Once, after trying a bowlful of a new product his executives brought him to sample, he said simply, “That will be a successful product.” His executives needed to hear no more to launch the product. The cereal? Rice Krispies.

It was the third hit cereal after Corn Flakes and All-Bran, and searching for ways to extend the product line was a Kellogg constant. Kellogg also blazed new trails by being an innovator in packaging, by being an aggressive salesperson pioneering selling overseas and by being a leader in mass advertising.

The popular advertising cliché that sex sells had a stellar example virtually from the beginning at Kellogg. After a picture of a comely, corn-fed “sweetheart” maiden appeared winking in a 1907 ad, corn flakes sales rose from a carload a month to one a day. Half a century later, the same plant, greatly expanded, that launched the first carload of flakes, shipped 65 carloads daily. Kellogg’s faith in advertising continues to this day. The company is one of the largest advertisers, spending over $700 million, or 12 percent of sales, on advertising.

That the vision remained so consistent no doubt owes much to the fact W.K. Kellogg created the mold for leadership that his successors had to fit. As Professor Hobbs notes, virtually all of Kellogg’s chief executives have come from within the company, have spent their careers at Kellogg and have emerged from sales. And, as at all of Hobbs’s successful companies, they have been strong leaders.

Indeed, the Kellogg style has carried down to the present day. LaMothe was commonly viewed as the go-getter, while Langbo, a Canadian, is the Mountie. Both were imbued with the strength and commitment to keep Kellogg moving on and up.

See It Through Keeping Kellogg on track has almost always meant spreading the name, spreading the brand, spreading the product to every outlet everywhere. Sales come first. Profits will follow. That is the plan. To carry it out, Kellogg has been quick with advertising, promotions and coupons in an effort to gain a foothold or to gain market share.

In the early days, W.K. Kellogg beat the drum himself – or rather monitored his drummers. He reviewed incoming and outgoing telegrams in the sales department, then scribbled notes like, “Why wasn’t this done?” He popped up in the most unlikely spots – including the proverbial “greasy spoon” diner – in search of his cereals. His obsession kept sales reps on their toes and brought Kellogg’s products to every corner of the U.S.

Today, the word may be “Welcome to 1996, globally.” With the domestic market flat and prices at their ceiling, Kellogg must face up to the challenge that its principal engine of growth will be foreign markets – among them Russia, Eastern Europe, India and China – that have no familiarity with cold cereal, much less a habit of buying the Kellogg name.

Langbo, whose career was made in foreign markets, deploys his executives like invading armies, shipping them around the world to wherever they’re needed. In Latvia, Kellogg spent $22 million on a new Corn Flakes plant. It brought in machinery, expertise and even corn from outside the country. It trained local sales representatives, who knew nothing about selling, in a country that knew nothing about cold cereals. But with advertising on television and the building of a retail distribution system, Philip Stewart, head of Kellogg in Latvia, can now say, “You’d have a hard time finding a store in Latvia that doesn’t have Kellogg’s Corn Flakes.”

Robust sales, not to mention earnings, are still far away, but Kellogg is always in for the long haul, in Latvia and other untapped markets. It’s a patient company: For example it took Kellogg’s 40 years to succeed in Latin America.

Serve The King In its quest for global earnings growth, Kellogg has tended to focus more on winning over customers than on beating the competition. It could afford to. For one thing, Kellogg has long had a stranglehold on a majority – 52 percent – of the world market for breakfast foods.

No matter what its market share, Kellogg has never hesitated to throw extra money into advertising to promote itself in a new market, or even to invest in sideline products in order to get its name known. For example, Kellogg sold refried beans in Mexico before bringing in – and profiting from – Kellogg’s Corn Flakes.

It will also invest in new research. Kellogg recently committed $65 million for the building of the W. K. Kellogg Institute for Food and Nutrition Research.

As Professor Hobbs found, leader companies like Kellogg are motivated by inner forces to succeed simply because of the huge opportunity they see in the marketplace. For Kellogg, it’s the knowledge that per capita consumption of cold cereal in the United States is 10 pounds, while that of the rest of the world – with a population of 5.4 billion and growing – is only two.

By the same token, Kellogg and the other leaders set product standards that are invariably the highest in their industry, providing customers with superior quality, performance and service. That means listening to their customers, but the final arbiter is the company. One of the most dramatic examples at Kellogg took place a decade ago. When some metal filings were found in a few boxes of its Just Right cereal soon after its debut, Kellogg’s recalled and then destroyed the entire production lot. “It took guts to do that,” said one distributor at the time.

Caring Culture No less evident in Kellogg’s success as it stretches its reach around the world is the presence of a distinct culture that permeates the daily labors of the company’s 15,000 employees. Its operative word has always been “family.” The father was W. K. Kellogg, a harsh and demanding, yet egalitarian and generous patrician.

For example, there was an understanding at Kellogg that if an executive stayed on the payroll, he was doing an outstanding job. Among those who didn’t stay were Kellogg’s son and grandson, both of whom he trained to be his successor – before forcing them out.

There was also compassionate wisdom and a sense that Kellogg took care of its own if they did work hard. In the depths of the Depression, Kellogg instituted a six-hour day to give more people work. He was ahead of his time in granting unemployment compensation, he offered employees day care, and he built a landscaped 10-acre park at the Battle Creek plant.

Some of the “family” atmosphere is gone, but the company still offers its employees many benefits. Factory workers in Battle Creek, Michigan, may earn $50,000 and six weeks’ vacation, truly remarkable for work in a safe, clean environment and a community with a relatively low cost of living. The high standards expected of employees – and rewards given them – have created an esprit de corps – a can-do, give-a-damn attitude – and a concern for each other.

There are special community touches, including the bowling league joined by white- and blue-collar workers, the cereal festival with the longest breakfast table, the Christmas party for children and the philanthropy of the Kellogg Foundation, which controls one third of the company’s stock.

It’s a way of life and a frame of mind for success that may be threatened by the downsizing trend ripping through corporate America. Long a holdout, Kellogg laid off hundreds of employees this past year. But in timeless Kellogg fashion, the company has gotten through it and maintained their employees’ support. The key to the future though, may be living up to the example of staying power set by Kellogg for nearly a century.