When Kellogg announced late last month that its board had tapped an outside director to become the cereal giant's next chairman and chief executive officer, some financial analysts...
BATTLE CREEK, Mich. — When Kellogg announced late last month that its board had tapped an outside director to become the cereal giant’s next chairman and chief executive officer, some financial analysts questioned the move.
They wondered whether Jim Jenness, a 58-year-old former advertising executive from Chicago, was chosen merely to keep the seat warm until the board was ready to turn over control of the company to David Mackay, a 49-year-old Australian who is Kellogg’s highly regarded president and chief operating officer.
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Analysts at Deutsche Bank Securities downgraded Kellogg from “buy” to “hold” on Nov. 29, the day of Jenness’ appointment. The next day, John McMillin, an analyst with Prudential Equity Group, released a report acknowledging Jenness’ marketing acumen but saying his appointment “brings uncertainty.”
Part of that is because Jenness has such a difficult act to follow.
Under the charismatic and approachable Carlos Gutierrez, 51, who left after President Bush picked him to succeed Donald Evans as the U.S. secretary of commerce, a struggling Kellogg made a remarkable turnaround.
After Gutierrez took over as CEO in 1999, Kellogg’s net sales rose from $6.2 billion that year to $8.8 billion last year, a 43 percent increase, and the company surpassed General Mills to be the nation’s largest cereal maker. Kellogg’s stock has doubled in value since early 2000 and now trades around $45 a share.
Gutierrez crafted an ambitious, three-year turnaround plan that in 2001 featured Kellogg’s acquisition of cookie and cracker maker Keebler Foods and a complete restructuring of its global business units. Revenues and profits started climbing the following year and the company surpassed sales and earnings goals in 2003.
Keeping current strategies
Suggesting he plans no major changes to Gutierrez’s game plan, Jenness told The Associated Press in an interview that the company will pursue the “terrific, smart, intelligent concepts and strategies” now in place.
“We have momentum, and when a company with great people, with great strategy and culture has momentum, you certainly anticipate trying to keep that going,” he said.
Jenness also dismisses speculative talk about his tenure, saying he plans to be around for a while. He also said he and Mackay work well together, as do the rest of Kellogg’s senior managers.
“The team is fantastic, and that’s one of the things, I’m sure, underlying why the board decided to have me come in at this particular time — it’s really to keep that team going, keep them moving along,” he said.
But while Jenness has never been a Kellogg employee, he’s no outsider. His association with the company dates to 1974, when he started working on the company’s account for Leo Burnett Co., Kellogg’s major advertising agency.
Jenness ascended to vice chairman and COO at Burnett, which created Kellogg’s icon, Tony the Tiger, more than half a century ago. For years, he traveled the world with Kellogg’s leaders to visit the company’s various international units and in 2000 he was named to the board.
At the same time the board selected him to succeed the Cuban-born Gutierrez, it also appointed Mackay as a director, to give him more exposure to the company’s governance.
Mackay said in an interview that being elected to the board is a tremendous honor and he views it as a learning opportunity. He also said he’s not upset about being passed over for the job of CEO and looks forward to working with Jenness.
“This is a fantastic company and I feel fortunate to be part of what is a great global team,” Mackay says.
Not a caretaker
Jenness is “a long-term appointment” who possesses great creativity and vision, says William Richardson, a Kellogg director who also is president and CEO of the W.K. Kellogg Foundation. “In this business, you cannot caretake for even a week,” he says. “This is about as competitive a business as there is.”
As chairman of the board’s marketing committee, Jenness was deeply involved in choreographing Kellogg’s recent turnaround, Richardson said. Jenness helped the company focus on managing cash flow, developing innovative new products and selling goods with the highest margins.
Mackay also has been key to Kellogg’s success, Richardson said.
“The people that work for David Mackay have enormous respect for his capabilities,” Richardson said. “He’s very quick, he’s decisive, energetic — and a wonderful mentor to people who are coming up through the company.”
As Kellogg competes for cereal-market share against General Mills, Kraft Foods’ Post and PepsiCo’s Quaker, wholesale prices have been steady or somewhat down during the past five years after several years of price increases, said Richard Galanti, chief financial officer of Issaquah-based Costco Wholesale Corp.
Costco, whose total annual sales now approach $50 billion, sells “well in excess of $200 million” worth of cereal every year, Galanti said. Unlike major supermarkets that may stock 70 or 80 different cereals in two or three box sizes each, Costco stocks about 15 cereals in just one size each.
Costco often carries such Kellogg cereals as Special K, Froot Loops and Frosted Mini-Wheats, but the warehouse club can go weeks without stocking certain brands. The varieties carried at any given time depend upon where the company can get the best deals to pass along to its customers, Galanti said.
While store brands of cereal have grown in popularity — Costco’s brand is called Kirkland Signature — they don’t threaten to overtake innovative major producers such as Kellogg, according to Tierney Remick, global managing director of the consumer market for Los Angeles-based executive recruiter Korn/Ferry International.
“I think they will be a constant presence — they won’t go away — but I believe when you look at the price-value ratio of in terms of a box of cereal, people are more willing to go with a brand that they trust,” she says.
Mackay says there’s little concern at Kellogg, even in today’s competitive consumer marketplace, that store brands and major competitors will push its products off retail shelves. He attributes that to the company’s proven business strategy.
“We compete in some relatively large and very intense segments — cereals, cookies and crackers, healthy snacks, etc. — but we don’t envision any issues maintaining and hopefully increasing our presence with our trading partners,” he said.