Kellogg Cranks Up Its Idea Machine To grow, the company needs new products. But will fiber-enriched potato chips be a hit?
By Alex Taylor III

(FORTUNE Magazine) – Kellogg's new CEO, Carlos Gutierrez, took office with a pledge to boost profits of the Battle Creek, Mich., cereal company by at least 10% a year. Pie in the sky? Gutierrez could use some. For that matter, he could use any tasty new snack food. Sales of cold cereal, which accounted for nearly 80% of Kellogg's $6.8 billion in revenues last year, are flat at best. More people are skipping breakfast, margins are slipping because price cutting is rampant, and those consumers who do buy are looking to cheap store-brand corn flakes, not Kellogg's. In fact, years of weak sales and soggy profits hastened the retirement of former CEO Arnold Langbo in April. Enter Gutierrez with a bold new promise.

The 45-year-old CEO says he'll deliver by cranking up Kellogg's new-product machinery. "We have to drive earnings through innovation," he declares. That will be mighty tough at a company whose new-product machinery is rusty. Really rusty. Headquartered in rural western Michigan--where talk radio means ag reports, not Howard Stern--Kellogg has tended to be lethargic and insular. Frosted Flakes, its top seller, is 47 years old. Even when the company created a hit, it was slow to follow up. Kellogg launched Pop-Tarts in 1964, and then let 27 years elapse before coming out with another snack-food success, NutriGrain cereal bars.

For years, product development was the exclusive territory of marketers, who dreamed up ideas and tossed them over the wall to production specialists for manufacture. "We had a lot of failures in the '80s," admits Donna Banks, 42, a Ph.D. in animal science who heads R&D. Sometimes the company didn't do enough research up-front. Take Heartwise, for instance. Kellogg introduced the cereal in 1989 with an implied claim that it would reduce cholesterol, only to run into complaints by state and federal officials. Kellogg changed the name to Fiberwise, but the bad publicity followed the product, and it was taken off the market in 1993.

Now Kellogg is trying a new approach: fostering freewheeling creativity in the kitchen. Two years ago the company erected a giant idea factory, called the W.K. Kellogg Institute for Food and Nutrition Research, on several acres of vacant land in downtown Battle Creek. Employees spend their days cooking, munching, and comparing notes. No office is more than a few feet away from one of five restaurant-quality kitchens. In a spacious food laboratory nearby, hairnet-wearing nutritionists and food scientists brew new concoctions, while in an adjacent building a pilot plant one-tenth the scale of an actual manufacturing facility runs test batches of cereals and snacks.

Banks believes that "creativity comes with diversity," so she recruits researchers with exotic backgrounds, like the chemical engineer who studied music in college. In all, the institute employs people of some 22 nationalities. Researchers are encouraged to spend 15% of their time on their own ideas, and they get a budget to work independently with outside suppliers. The results have been spectacular. In one month this year researchers generated 65 new product concepts and 94 new packaging ideas. For instance, after employees noticed the popularity of products like bath oils with botanical and aromatic properties, Kellogg began researching the role of sensory appeal in foods.

Finally, Kellogg has thrown away its outmoded marketer-driven new-product model. Its employees work in cross-functional teams, with market researchers alongside food technologists and engineers. One recent brainstorm: selling Special K Plus, which has extra calcium and iron, in a half-gallon milk carton to remind consumers about the nutritional value. Says Dr. William J. Mayer, 43, who heads new-business development: "To win, we have to make foods that are tastier, healthier, and easier." This year Kellogg will introduce more than twice as many products as the dozen or so it did last year.

Creating is one thing--selling is another; and not everything coming out of Kellogg's idea oven has been eaten up by the public. Shoppers have been slow to sample Country Inn Specialties, a line of premium cereals sold in bags, though repeat business has been encouraging. And they seem confused by Breakfast Mates, a single-serving cereal packaged with a container of milk and a spoon for those who like to eat on the run. Kellogg has sold the product in the supermarket dairy case since mid-1998 but is now considering moving it to the cereal aisle (the milk is shelf-stable, so it won't spoil).

Still, the profusion of new ideas has produced some hits. Raisin Bran Crunch, which has thicker, coated flakes that don't get soggy in milk, has grabbed nearly 1% of the cereal market since late last year without chomping into the market for traditional Raisin Bran. Equally popular has been Rice Krispies Treats, a snack-food version of the marshmallow squares that Mom used to make at home. Kellogg is currently rolling out varieties in cocoa and peanut-butter chocolate for those with a truly incurable sweet tooth.

The biggest bet Kellogg is making is with a line of seven new foods called Ensemble. Besides cereal, it includes frozen entrees, dry pasta, potato chips, and cookies--products that Kellogg hasn't sold before and, in fact, doesn't even make: Production has been farmed out to suppliers. All the foods are laced with naturally soluble fiber from psyllium husk or oats that reduces cholesterol. To reinforce the health pitch, Ensemble customers can call an 800 number to devise a diet plan with a personal health coach. And this time around Kellogg has made sure to get approval for its health claim from the Food and Drug Administration before the new products hit the stores.

Because of distribution problems, Kellogg has scaled back Ensemble's test market from five Midwestern states to the Grand Rapids area. But Gutierrez is pushing ahead. "This isn't the old arrogant Kellogg," he says. "We are hungry for business, and the board of directors wants results." As Gutierrez would be the first to admit, if Kellogg cannot be more successful at innovating in the future than it has been in the past, those results will be very difficult to achieve.