Case: New Product Strategy at Kellogg

The Kellogg Company of Battle Creek, Michigan, has been producing cereals since 1906. With
reported annual sales in the $9 billion range, it is a leading manufacturer of cereals and other
convenience foods (cookies, crackers, toaster pastries, frozen waffles, etc.). Aside from the
familiar Kellogg’s cereals, company brands include Keebler (acquired by Kellogg in 2001), Kashi
(acquired in 2000), Pop- Tarts, Eggo, Famous Amos, and Morningstar Farms. Kellogg advertising
has long featured cartoon spokespersons such as Tony the Tiger, Toucan Sam, and Snap, Crackle,
and Pop, the Rice Krispies elves. Kellogg manufactures in 19 countries and has a presence on store
shelves in over 150 countries. Many Kellogg’s brands are particularly popular in Europe, where
peanut and chocolate flavoured corn flakes coexist on store shelves with the original recipe.

Kellogg, long the number-one cereal maker, was bypassed by General Mills in 1999. Many factors
seemed to contribute to Kellogg’s loss in cereal market share (from over 40 percent to about 31
percent): few successful new product introductions, high prices, and slashed advertising budgets.
Meanwhile, its many competitors were thinking up new ways to compete: General Mills
successfully launched line extensions such as Honey Nut Cheerios; Post focused on the adult
market; and Quaker slashed prices by switching to bag packaging.

Kellogg CEO Carlos Gutierrez, who took over in 1999 (and who later became U.S. Secretary of
Commerce), planned to respond to the competitive challenges by getting Kellogg to rethink its
corporate strategy. Under his leadership, Kellogg has turned to a greater emphasis on snack
products while not ignoring its core cereal products. It is building its traditional cereal business
through heavy advertising and promotions (such as a Special K sweepstakes offering a chance to
meet model Cindy Crawford). At the same time, however, it is leveraging its well-known ce- real
and snack products to increase its presence in the snack food business. New snack products are
being spun off familiar cereal brand names (Snack ‘Ums are large-size Froot Loops that come in
small cans), and new flavours of familiar snacks are constantly being tried out (such as butterscotch
Rice Krispies Treats and S’Mores Nutri-Grain Bars). The 2001 acquisition of Keebler also quickly
increased Kellogg’s snack portfolio. Gutierrez predicted that cereal would soon make up less than
half of Kellogg’s business, as the company increasingly pursues the convenience foods market
with products such as Nutri-Grain Bars. As Gutierrez said, “People snack—that’s the way the
world is moving.”

By year-end 1999, Kellogg’s snack food lines were already showing substantial sales and profit
increases. New product development efforts at Kellogg have focused on new snack items, many
being line extensions of familiar Kellogg snacks. Among the items tested were kimchi- and
seaweed-flavoured Rice Krispies Treats (both aimed at overseas markets, neither ultimately
launched). Another was Krave, a refueling snack bar intended as a midday snack. Krave was to be
supported with a $2–3 million advertising budget; on the packaging, the “K” in Krave was written
as the familiar red-script Kellogg’s K. Snack ‘Ums (see above) made the cut. At the same time,
major cereal brands such as Special K are being supported with significant advertising and sales
promotion budgets: At one time, Beanie Babies were stuffed inside Kellogg cereal boxes.

By 2002, Kellogg had regained the leadership position, largely due to its successful new products
and shrewd marketing investments. In 2003, more new cookies were launched: E. L. Fudge in
Butterfingers and S’Mores varieties. In keeping with the line extension strategy, new cereals
included Special K Red Berries and Special K Vanilla Almond, as well as Maple Brown Sugar
Frosted Mini Wheats, Smart Start, and Tony’s Cinnamon Crunchers. In 2004, low-sugar Frosted
Flakes and Froot Loops were launched, as well as Fruit Twistables (a snack). Kellogg has also got
into licensing in a big way recently with SpongeBob SquarePants items such as Pop-Tarts, Eggo
waffles, and Cheez-Its. By 2006, Kellogg was focusing on Special K as a “mega brand” under
which it launched several new snack products (Snack Bites, K2O Protein Water, and Protein Bars)
as well as fruit- and yogurt-flavoured Special K cereals. These launches have been tied to
aggressive promotions aimed at the calorie-counting crowd. During 2006 it sponsored a “Drop a
Jeans Size” ad campaign, ran a joint promotion with David Lloyd health clubs in Britain, supported
a special “get-fit” Web site, and offered Special K Personal Trainer watches. Noting the obsession
with healthy eating in North America and elsewhere, Kellogg also tied its promotion of All-Bran
to better digestion.

Question:
Given what you know about the cereal industry and the information provided above, choose one
of the products or product lines marketed by Kellogg (it can be an older brand or a new release)
and try to write out its PIC for 1999, around the time of Gutierrez’s assumption of the CEO
position. Be sure to flesh out all components of the PIC and include in the background section of
your PIC what higher level strategic plans may have been in place.

*As a further challenge, try to think of future products and/or product lines that would be consistent
with your PIC and might be appealing directions for new product development at Kellogg.

===================