http://www.fortune.com/fortune/subs/print/0,15935,685433,00.htmlSince becoming CEO of the cereal giant five years ago, the 50-year-old Cuba native has transformed a lumbering, insular, volume-obsessed company into an innovative, profit-focused powerhouse admired by Wall Street and Wal-Mart alike. He has breathed new life into brands like Frosted Flakes and Special K, regaining the top spot in the $9 billion U.S. cereal market; snatched up cookie- and snack-maker Keebler to expand the company's portfolio and distribution capability; and put some snap, crackle, and pop into Kellogg's stock, which is up 26% over the past year and has dramatically outperformed its peers for three years running....Gutierrez's strategy, dubbed Volume to Value, was to grow sales by shifting resources to higher-margin products. Those include Special K, which appeals to weight-conscious women; Kashi (purchased in 2000), targeted at the health-food set; and Nutri-Grain bars, which let you have breakfast on the go. (Cereals such as Kellogg's Corn Flakes have lower margins because they have been so widely copied that they are essentially commodities.) The extra dollars would go to fund advertising, promotions, and R&D, which would beget further high-margin sales growth—a virtuous cycle, rather than the death spiral of the '90s. The idea was not revolutionary; in fact, it borrowed liberally from what General Mills had been doing and what Procter & Gamble has done successfully under Lafley. Wall Street was pleased with the plan—"Finally this company is behaving like a true category leader," wrote one analyst—but selling it internally was a different matter. Just as he had done in Mexico, Gutierrez tirelessly explained how each employee's actions could make a big difference. Montie recalls sitting in meetings where Gutierrez would interrupt anyone who dared to give results in pounds of product sold, not in dollars. "Volume is a means to an end—not an end," he would say. "What counts is dollars." To bring that point home, he altered the daily tracking systems to record dollar sales, not pounds, and overhauled bonus plans to reward profits and cash flow, not volume. "Once he did that, everyone got the picture," says Merrill Lynch managing director Leonard Teitelbaum. The plan also called for cutting excess capacity—namely, shutting down the 93-year-old South Plant in Battle Creek, a mile from Kellogg's headquarters, which employed more than 500 people. Though Battle Creek's town fathers were incensed, the CEO stood his ground, stating quietly but forcefully that the shutdown was necessary for Kellogg's long-term health. The next step was mending fences with Wal-Mart, whose buyers didn't take kindly to the inflexible policies on pricing and promotion used by Kellogg's arrogant sales reps. After only a few months on the job, Gutierrez personally attended the retailer's big annual vendor meeting in Kansas City—the first Kellogg CEO to do so—and pledged to improve Kellogg's relationship with Bentonville. Since then he has shifted top talent to the Wal-Mart account team (which he oversees), put more Kellogg products on Wal-Mart's shelves, and tapped longstanding Kellogg market knowledge overseas that has helped the retailer expand into new regions. Those moves helped Kellogg win Wal-Mart's Supplier of the Year award in 1999, which Gutierrez displayed proudly on his office wall. "Gutierrez wrote the blueprint for other CEOs on how to handle Wal-Mart," says Ken Harris of consumer products consultancy Cannondale Associates. (Wal-Mart declined to comment.) Wal-Mart accounted for 13% of Kellogg's sales last year—that's $1.1 billion—up from 11% in 2001. ...But perhaps nowhere is the Kellogg turnaround more evident than in new-product development. Other than the launch of Nutri-Grain bars in 1991 and Raisin Bran Crunch in 1998, Kellogg's new product successes in the '90s were few and far between. "R&D was not a member of the team before [Gutierrez]," says Donna Banks, SVP of worldwide product innovation and operations. Today about 100 food scientists swarm through a seven-year-old R&D center in Battle Creek, complete with a 9,000-square-foot test kitchen and a scaled-down production plant. Kellogg has introduced 102 new products through July of this year, up from 68 in all of 1999, according to Productscan Online—and the percentage of its cereal sales coming from products launched in the past three years has increased substantially (see chart).
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