Kellogg’s increasing advertising budget worries investors

BOCA RATON, Fla. The Kellogg Co.’s marketing budget has increased to over $1 billion, a 30 percent increase in the last five years, and the company is finding it hard to muster up excitement from its investors.

The $250 million increase in marketing spending is another example of the company’s strategy to heavily advertise the brand in response to increasing commodity costs that have forced it to raise prices on its brands. Other brands that have followed suit are Kraft, General Mills, Campbell Soup Co. and Sara Lee, which all increased marketing and advertising spending last year.

Chief executive officer David Mackay spoke of the importance of the decision to increase ad spending by trying to appeal to the Analyst Group of New York last week: “We believe this really helps us as we look at a more volatile environment,” he said. “We believe continued investment in our brands increases our dependability as a company.”

In order to get investors to understand and comply, Kellogg’s strategy was to explain that the increase in marketing spending will also involve the company taking a closer look at how everything is run to ensure that there will be a profitable return. Not only will the company be taking a “closer look,” but Mr. Mackay also states that it is looking to cut costs, and look at its media practices around the globe to increase its level of efficiency, among other things.

Mr. Mackay’s vow of efficiency and a plan of having advertising with the lowest rate of return and redirect them within the company's needs is drawing further concern from analysts.

“Mentioning that they’re looking more closely at effectiveness of ROI in advertising makes investors wonder if they are reaching frontiers of ROI,” said David Palmer, an analyst with UBS. “In other words, at some point, increases in advertising on the existing portfolio may not yield the best return.”