WSJ891030-0089 WSJ891030-0089 = 891030

= 891030

891030-0089 . 891030-0089 . Kellogg Pours Water on Plans to Build Big Cereal Plant @ ---- @ By Richard Gibson @ Staff Reporter of The Wall Street Journal Kellogg Pours Water on Plans to Build Big Cereal Plant @ ---- @ By Richard Gibson @ Staff Reporter of The Wall Street Journal 10/30/89 10/30/89

10/30/89

WALL STREET JOURNAL ( J ) WALL STREET JOURNAL ( J ) K K FOOD PRODUCTS ( FOD ) FOOD PRODUCTS ( FOD ) This has n't been Kellogg Co. 's year . The oat-bran craze has cost the world 's largest cereal maker market share . The company 's president quit suddenly . And now Kellogg is indefinitely suspending work on what was to be a $ 1 billion cereal plant . The company said it was delaying construction because of current market conditions . But the Memphis , Tenn. , facility was n't to begin turning out product until 1993 , so the decision may reveal a more pessimistic long-term outlook as well . Kellogg , which has n't been as successful in capitalizing on the public 's health-oriented desire for oat bran as rival General Mills Inc. , has been losing share in the $ 6 billion ready-to-eat cereal market . Kellogg 's current share is believed to be slightly under 40 % while General Mills ' share is about 27 % . Led by its oat-based Cheerios line , General Mills has gained an estimated 2 % share so far this year , mostly at the expense of Kellogg . Each share point is worth about $ 60 million in sales . Analysts say much of Kellogg 's erosion has been in such core brands as Corn Flakes , Rice Krispies and Frosted Flakes , which represent nearly one-third of its sales volume . Kellogg is so anxious to turn around Corn Flakes sales that it soon will begin selling boxes for as little as 99 cents , trade sources say . `` Cheerios and Honey Nut Cheerios have eaten away sales normally going to Kellogg 's corn-based lines simply because they are made of oats , '' says Merrill Lynch food analyst William Maguire . `` They are not a happy group of people at Battle Creek right now . '' Kellogg is based in Battle Creek , Mich. , a city that calls itself the breakfast capital of the world . Another analyst , John C. Maxwell Jr. of Wheat , First Securities in Richmond , Va. , recently went to a `` sell '' recommendation on Kellogg stock , which closed Friday at $ 71.75 , down 75 cents , in New York Stock Exchange composite trading . `` I do n't think Kellogg can get back to 40 % this year , '' he said . `` Kellogg 's main problem is life style . People are reading the boxes and deciding they want something that 's ` healthy ' for you -- oats , bran . '' Mr. Maxwell said he would n't be surprised if , over the next two years or so , General Mills ' share increased to 30 % or more . In announcing the plant delay , Kellogg Chairman William E. LaMothe said , `` Cereal volume growth in the U.S. has not met our expectations for 1989 . '' He said construction would n't resume until market conditions warrant it . Kellogg indicated that it has room to grow without adding facilities . The company has five other U.S. plants , including a modern facility at its Battle Creek headquarters known as Building 100 , which is to add bran-processing and rice-processing capacity next year . General Mills , meanwhile , finds itself constrained from boosting sales further because its plants are operating at capacity . A large plant in Covington , Ga. , is to come on line next year . A Kellogg officer , who asked not to be named , said the Memphis project was `` pulled in for a reconsideration of costs , '' an indication that the ambitious plans might be scaled back in any future construction . Initial cost estimates for the plant , which was to have been built in phases , ranged from $ 1 billion to $ 1.2 billion . A company spokesman said it was `` possible , but highly unlikely , '' that the plant might never be built . `` As we regain our leadership level where we have been , and as we continue to put new products into the marketplace and need additional capacity , we will look at resuming our involvement with our plan , '' he said . The new facility was to have been the world 's most advanced cereal manufacturing plant , and Kellogg 's largest construction project . The company had retained the Fluor Daniel unit of Fluor Corp. as general contractor . But in recent weeks , construction-industry sources reported that early preparation work was slowing at the 185-acre site . Subcontractors said they were told that equipment orders would be delayed . Fluor Daniel already has reassigned most of its work crew , the sources said . Last Friday 's announcement was the first official word that the project was in trouble and that the company 's plans for a surge in market share may have been overly optimistic . Until recently , Kellogg had been telling its sales force and Wall Street that by 1992 it intended to achieve a 50 % share of market , measured in dollar volume . Although he called current market conditions `` highly competitive , '' Mr. LaMothe , Kellogg 's chairman and chief executive officer , forecast an earnings increase for the full year . Last year , the company earned $ 480.4 million , or $ 3.90 a share , on sales of $ 4.3 billion . As expected , Kellogg reported lower third-quarter earnings . Net fell 16 % to $ 123.1 million , or $ 1.02 a share , from $ 145.7 million , or $ 1.18 a share . Sales rose 4.8 % to $ 1.20 billion from $ 1.14 billion . The company had a one-time charge of $ 14.8 million in the latest quarter covering the disposition of certain assets . The company would n't elaborate , citing competitive reasons .