A look at what now constitutes a power breakfast in Washington says a lot about the challenges facing Kellogg Co., which last week sold Lender's Bagels for $275 million and acquired the maker of Morningstar Farms meat "alternatives" for $307 million.
Sen. Barbara A. Mikulski of Maryland describes herself as a "diner Democrat" who loves eggs and home fries from Jimmy's in Baltimore, but nowadays she eats a veggie-burger breakfast patty with low-fat cottage cheese.
D.C. Mayor Anthony A. Williams starts his day (after exercising) reading newspapers over a breakfast of coffee, fruit and a bagel, while Washington Capitals owner Ted Leonsis settles for just coffee and fruit.
Lawyer Victoria Toensing's usual fare is half a grapefruit with salt and a hard-boiled egg, although one morning last week she had leftover creamed spinach.
And AFL-CIO President John Sweeney eats raisin bran, unless he is on the road, where he opts for a plain bagel (not toasted) with light cream cheese.
America's breakfast habits are changing. Although cereal still has slightly more than a third of the market for breakfast foods, according to the consumer marketing research firm NPD Group, more and more consumers are in a hurry and are opting to break their overnight fast by grabbing something that requires no preparation whatsoever.
Kellogg, based in Battle Creek, Mich., and other cereal manufacturers have struggled to keep up with changing tastes in breakfast (the company experienced a 2 percent decline in cereal sales worldwide last year).
But Kellogg's biggest gamble so far on a product developed outside the company was a bust. Three years ago Kellogg paid $466 million for Lender's Bagels. Bagels were a fast-growing category back then. From 1.8 percent of the breakfast foods consumed in 1990, bagels grew to 4.9 percent in 1998. But the growth wasn't across the board, and Lender's wasn't among the leaders.
First of all, most Lender's sales were in frozen bagels, a category increasingly disdained with the availability of fresh bagels almost everywhere. And even though Lender's also sold fresh bagels--supermarket sales of which were up 4.4 percent last year, according to Information Resources Inc., a Chicago-based marketing research firm--it was the number four brand in the category and saw its sales slip 9 percent last year.
Within five days last week, Kellogg got rid of Lender's--at a loss--and announced an even bolder departure from its core cereal business, acquiring a major manufacturer of meat alternatives such as meatless breakfast sausages.
Kellogg also has diversified with products developed in-house in recognition of the trend toward foods that can be eaten on the run. Convenience foods, which in Kellogg's case include such items as Rice Krispies Treats, Nutri-Grain bars and Pop-Tarts, account for 22 percent of sales, up from 17 percent in 1996. While Pop-Tarts are meant to be toasted, many consumers eat them cold and untoasted--even at Kellogg headquarters.
Notwithstanding the bagel debacle, Kellogg has seen growth in its convenience foods business, according to PaineWebber analyst John M. O'Neil. Cereal sales have begun to stabilize as a result of spending on marketing over the past year, he said, "but the company has focused more of its growth on products that are convenient."
While Kellogg is pursuing diversification, it also faces the task of fine-tuning its cereal offerings to maintain its place as the market leader in that category.
U.S. consumers spend $7 billion in supermarkets for cold cereal, according to IRI, and the biggest share--$2.23 billion--goes to Kellogg. But General Mills has $2.22 billion in sales, and the category itself has been slowly declining, falling by 0.9 percent in just the past year, according to IRI.
Kellogg has eight of the 10 top brands globally and four of the top six brands in the United States. Worldwide, Kellogg's Corn Flakes are at the top of the breakfast-food chain, but in the United States, General Mills' Cheerios are on top, followed by Kellogg's Frosted Flakes.
Kellogg has also taken steps to make cereal more convenient--selling it in individual boxes into which the milk can be poured and, as of last year, in snack-size bags, a la potato and corn chips, to be eaten dry and on the run and eaten as a snack as well as for breakfast.
The company is also redesigning some of its classic brands in an effort to find a new market. One such effort is Raisin Bran Crunch--a version of the ever-popular Raisin Bran with a different flavor and consistency--which the company hopes will appeal to a younger market. One of the commercials shows what Kellogg spokeswoman Christine Ervin described as "20-something guys tumbling out of bed."
"They lumber in and eat some cereal, and lumber back to bed," she said.
Still another product, designed to attract women, is Special K Plus, packaged in what appears to be a milk carton. Each serving provides the equivalent of the calcium in two glasses of milk (even without milk added), 90 percent of the daily requirement for iron, and 100 percent of the daily requirement of B12 and folic acid, which is important for pregnant women.
So far Kellogg has stayed away from two small--but very fast-growing--categories of breakfast foods. According to NPD Group, consumption of pizza and burritos for breakfast each grew from 0.1 percent in 1990 to 0.2 percent in 1999.
But on Friday, Kellogg announced its purchase of Worthington Foods Inc., a major manufacturer and marketer of vegetarian and health foods. Kellogg paid approximately $307 million ($24 a share) for the Ohio company, and Kellogg's new chief executive officer, Carlos M. Gutierrez, declared the company to be "committed to expanding this business and building the consumer base." Gutierrez took over in April.
Erika Gritman Long, a food industry analyst for J.P. Morgan Securities, said that the price Kellogg paid assumes that the company will succeed in doing so and could be too high if it doesn't. "This is going to be a big litmus test for Gutierrez," she said, noting that most of the company's successful diversification has been with products developed internally.
"If this works, then people are going to feel comfortable with his ability to use shareholder money to make acquisitions and get into new, higher-growth earning streams."
Little Snap, Crackle or Pop; A sampling of what a few Washingtonians eat for breakfast shows the variety of competition facing cereal maker Kellogg Co.
Washington Capitals owner
Coffee and fruit
U.S. senator (D-Md.)
Veggie-burger breakfast patty and low-fat cottage cheese
Usually raisin bran; bagel (not toasted) with light cream cheese when on the road
Half a grapefruit with salt and a hard-boiled egg
Coffee, fruit and a bagel
Tony the Tiger
Kellogg's products include cereals such as Frosted Flakes and Rice Krispies; Pop-Tarts; Eggo waffles and pancakes; and Nutri-Grain bars