The Man Who Fixed Kellogg Stale offerings. Soggy profits. Carlos Gutierrez inherited both when he got the top job at the cereal giant. But look at it now.
By Matthew Boyle

(FORTUNE Magazine) – When you ask business consultants and analysts for examples of CEOs who have shown a knack for recharging tired brands, a few names tend to come up: A.G. Lafley at Procter & Gamble. Jim Kilts at Gillette. And, increasingly, Carlos Gutierrez at Kellogg. Since 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 has done all that by taking the slick salesmanship, financial discipline, and marketing savvy that he learned in his youth and blending it with disarming charisma, steely resolve, and an utter lack of pretension that you wouldn't expect in one so nattily dressed. (He even makes golf shirts look debonair.) That winning combination not only made him a folk hero in Kellogg's Mexican operations, where he began his career, but also has vaulted him onto the shortlist of CEO headhunters, who earlier this year considered him for the top spot at Coca-Cola. Save for Alcoa CEO Alain Belda, Gutierrez--who is also on the board of Colgate-Palmolive--is arguably the most powerful Hispanic American in business today. Not bad for a boy from Havana who learned English from the bellhops of a Miami Beach hotel and never graduated from college.

Gutierrez's circuitous path from Havana to the corner office at Kellogg's headquarters in Battle Creek, Mich., began in 1960, just shy of his seventh birthday, with an ominous knock at the door. Fidel Castro's regime had deemed Carlos's father, a successful pineapple merchant, an enemy of the state. He was held for a day or so and then released. "We were on a plane right after that," Gutierrez recalls. The family of four landed in Miami Beach, then New York City, eventually settling in Mexico City.

At 20, Carlos took a job driving a Kellogg cereal truck around the seedier parts of Mexico City, selling Zucaritas (Frosted Flakes) to small mom-and-pop stores. By 30 he had worked his way up to general manager of Kellogg's troubled Mexican operations. His first move was to shut down the plant for three months. He established clear performance metrics and made sure that everyone--from illiterate plant workers to accounts-payable managers--knew how his job contributed to meeting those targets. "This is his genius," says Clive Sirkin, who runs Kellogg's advertising account at Leo Burnett. "He has incredible depth of understanding, yet his articulation is so basic that everyone in an organization can [do what he asks]." Within three years he'd transformed the Mexican plant from the company's least to most productive.

Gutierrez moved to Battle Creek for a product-development job in 1990--shortly before the company began a downward slide. The cereal industry was changing, but Kellogg was slow to recognize the shifting currents. Once it did, it was too stubborn to chart a new course. In the 1980s cereal makers successfully raised prices by as much as 6% a year, but by the early '90s shoppers had had enough. Some migrated to cheaper private-label cereals, which were getting tastier, while others eschewed cereal entirely for bagels and other portable food. Wal-Mart and other discounters, meanwhile, had gotten into the food business and were using their clout to resist price increases.

Kellogg initially responded the only way it knew how: by couponing, which cut into profits and did nothing to engender consumer loyalty. But Kellogg cared little about either, according to analysts who followed the company then, concerning itself primarily with keeping sales volumes up. To meet unrealistic earnings-per-share targets, it skimped on marketing and R&D and bought back stock by the truckload, creating a vicious cycle. "We were setting ourselves up to fail, which was demoralizing," recalls Gutierrez, who ran Kellogg's U.S. cereal business in 1993. Others are blunter: "The company sucked," says Jeff Montie, now head of Kellogg North America.

In 1994, Gutierrez left to run Kellogg Asia-Pacific. He watched with dismay as Kellogg's beloved Tony morphed into a paper tiger while rival General Mills aggressively expanded its flagship Cheerios brand with frosted and multigrain varieties. In 1996, Post slashed prices 20%, forcing Kellogg to follow. By August 1998, Kellogg's stock had fallen to the same price it had commanded seven years earlier. A year later General Mills took the lead in the U.S. cereal market.

On the bright side, things had gotten so bad that Gutierrez, who was named CEO in April 1999, could make just about any change he wanted. "Doing the opposite of what we had been doing was a good idea," says John Bryant, an Aussie financial whiz who heads Kellogg International.

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. (Today the company produces only about 20% of its U.S. cereal in Battle Creek.)

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.

Distribution was another area in which the company was weak. In 2000, Gutierrez hired more than 200 direct-sales reps for the U.S. cereal business, replacing inefficient middlemen and accelerating distribution of new products in supermarkets like Kroger. He then went a step further: In March 2001, Kellogg bought Keebler (maker of such brands as E.L. Fudge cookies and Cheez-It crackers) for $4.6 billion. That made Kellogg the No. 2 player in cookies and crackers overnight--but "Kellogg didn't buy Keebler for cookies," says Bain & Co. senior partner David Harding. Rather, Kellogg bought Keebler to get its direct store delivery (DSD) distribution system, one of the largest of its kind in the packaged-food industry. A DSD system bypasses the warehouses and third-party distributors entirely, sending company reps directly to grocery stores and mass merchants like Wal-Mart and Target. The reps fight to ensure that Kellogg and Keebler products get prime shelf space.

But shelf space alone won't get consumers excited about your product. Gutierrez took a cue from company founder W.K. Kellogg, who, shortly after the stock market crashed in 1929, calmly responded by doubling his advertising budget. Gutierrez beefed up his ad spending during the economic slowdown--from $282 million in 2001 to $441 million in 2003, according to Nielsen Media Research--as many others pulled back. What's more, the company plunged into movie tie-ins. When marketing services chief Kevin Smith told Gutierrez back in 2001 that he had a good feeling about the upcoming Spider-Man movie, Gutierrez told him to go with his gut. Today Kellogg's Spider-Man 2 promotional campaign involves slapping the web slinger's image on 200 million packages of 40 different cereals, snacks, and cookies across 42 countries. Though Kellogg won't say how much the promotion juiced sales, marketing experts say it was a great call: Spider-Man and its sequel were both blockbusters.

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).

One example: Special K with Red Berries. In 1999, Kellogg marketers in France decided to jazz up Special K by adding freeze-dried berries. Cereal makers had tried it before in the '70s, but freeze-drying was more primitive back then, and the process wreaked havoc with moisture levels in the cereal box, turning flakes into mush. Eventually food scientists perfected the technology, and R&D folks in Battle Creek and Europe tinkered with a mix of tart raspberries and sweet cherries until they found the perfect blend. An immediate hit in France and Britain, the cereal was introduced in the U.S. in 2001 and generated almost $100 million in sales in 2002, according to IRI figures that exclude Wal-Mart. That's an impressive 1.5% of the cereal market.

Then there are Cheez-It Twisterz, launched last April. Spicier, crunchier versions of Cheez-It crackers that come in twisty shapes, Twisterz are packaged in a new cube-shaped box that stands out on crowded snack shelves. They are made with a type of extrusion technology, which uses pressure and heat to turn water inside the dough into steam, making it expand and turning the dough into a light and airy snack. Keebler did not possess that particular technology before the merger; it got it from Kellogg, which uses it to make Froot Loops cereal.

Thanks in part to successes like those, the year has gotten off to a stellar start for Kellogg: net sales excluding foreign currency effects were up 6.5% in the first quarter, the company's best showing in five years. But Gutierrez is keenly aware of what the company still needs to do. The low-margin cookie business has been crumbling for three years, thanks to Atkins dieters and bad news about trans-fatty acids. So he wants to rely more heavily on "wholesome snacks," like the Nutri-Grain line, cereal bars, and Rice Krispies Treats. Such foods make up less than a fifth of Kellogg's snacks business but are growing at a double-digit clip. "If we're going to lose somewhere, it might as well be cookies," he says, offering a visitor who has skipped breakfast a Kashi meal-replacement bar. "Fills you up, right?" he asks. Indeed--and it's tasty too.