Kraft and Kellogg pursue increase in ad spending despite fall in income

CHICAGO Kraft and Kellogg Co. have decided to increase ad spending despite decreases in net income, according to published reports.

According to Kellogg chief executive officer David Mackay, the company’s loss, which was 3 percent in the fourth quarter, was mainly due to an increase in ad spending. The company is said to have spent 12 percent of its $11.8 billion in sales on advertising. The Kraft Co. decided also to increase its marketing spending to about 8 percent of its total sales by 2009, despite a 6 percent fall in net income.

The decision to increase marketing spending comes in response to its desire to increase prices, which the company feels will not be possible unless it devotes adequate spending in advertising. The increase in marketing sales are put in place in the hope that consumers will feel that the product will be worth the new price increases Kraft hopes to establish.

“Our pricing realization was not as strong as we would like it to be, because we don’t yet have suitable brand equity,” stated Kraft chief executive officer Irene Rosenfeld. “But the key to our future in cheese, as it is in so many of our businesses, is continuing to ensure that we have invested appropriately in quality, in marketing support and in innovation to be able to realize those price opportunities.”

According to published reports, analysts are not convinced that this will work as quickly as the chief executive officers of Kellogg and Kraft would hope. As Jonathon Feeny, a Wachovia analyst explains, “The problem in the cheese business isn’t so much costs; it is that brand equity and product differentiation are well below average, not something that can be fixed overnight.”