Fast Fall: Personal `Chemistry' Abruptly Ended Rise Of Kellogg President --- As Cereal Firm Lost Ground, Horst

Schroeder Overrode Tradition of Collegiality --Wrong Home and Wrong Car

Full Text:
BATTLE CREEK, Mich. -- Kellogg Co. President Horst W. Schroeder had looked forward to a relaxing weekend in Chicago with his wife after a visit to a Kellogg plant in Ontario last Sept. 15. Instead, the sleek Falcon 50 corporate jet in which he was riding was ordered to land at Kellogg Regional Airport near company headquarters here. Kellogg Chairman and Chief Executive Officer William E. LaMothe met the plane, ushered his 48-year-old heir apparent into a gray-wallpapered airport conference room, and told why he had diverted the plane: After only nine months as president, Mr. Schroeder was fired. The terse announcement of his departure issued three days later rocked the cereal industry and the Kellogg community here. Major executive upheavals are rare in Cereal City, where Kellogg is renowned for its paternalism and its predictability. Mr. Schroeder had been a Kellogg star when he took the presidency. "I really believed it would work," Mr. LaMothe reflects. Nearly everyone else at Kellogg had thought so, too. What went wrong? Until now, both Mr. LaMothe and Mr. Schroeder have kept mum about September's events. Even now, Mr. Schroeder will discuss them only in a general way, referring to "philosophical differences" that caused his departure, and he declines to respond to specific criticism by colleagues of his performance. Mr. LaMothe, in an interview, cites a failure of management "chemistry." He says he erred seriously in choosing an executive whose background and style so strikingly departed, he sees in retrospect, from the Kellogg norm. "Succession in organizations is the most difficult thing," says Mr. LaMothe, 63, who had planned on retiring in two years. "So many career paths that seem so clear somehow go wrong." In Mr. Schroeder's case,

Mr. LaMothe adds, "I wish I would have been smarter and had seen it more clearly." Others at Kellogg say that Mr. Schroeder was strong-willed, even imperious, causing friction with other top executives. But the problems at Kellogg seem to go well beyond "chemistry." Mr. Schroeder ascended to the Kellogg presidency at a time when a sudden reversal of the company's fortunes over the past few years had created rare difficulties. Kellogg's share of the cereal market has eroded to an estimated 39.8% from 42% in 1987. Each percentage point represents $63 million in sales. It was hardly a calamity for a company as big and strong as Kellogg, but it still was a shock. Before the setback, top management had talked of attaining more than 50% of the market by 1992. Alarmed executives began to question whether their idea of a nutritious breakfast was suddenly at odds with consumers' tastes. Kellogg clearly underestimated the strength of the nation's oat-bran binge. The company's efforts to promote its competing cereals have clogged food warehouses with unsold Corn Flakes and other products. Profits have declined, and a period of austerity has begun. Factory workers have been laid off, and plans for a $1 billion plant in Tennessee have been shelved. Prospects were brighter when, in mid-1986, Mr. Schroeder gave a threehour presentation on Kellogg's future to the company's directors. At the time, Mr. Schroeder was in charge of Kellogg North America. He had been a Kellogg man for 16 years. He joined the company as a controller in Bremen, West Germany, later managed operations in much of Europe, and by 1983 headed all of Kellogg's overseas business. The results were impressive. So was his 1986 presentation. Directors still remember it. With colorful slides and other graphics, Mr. Schroeder gave them a glimpse of his comprehensive grasp of the business. They gave him an ovation. Mr. Schroeder knew Kellogg so well, director Russell Mawby says, that he could even "remember some piece of equipment in Sydney, right down to the cost of it." Says another insider: "You came away from meeting Horst feeling, `This guy is going to take the company to new heights.'" But while he was head of North American operations, before he became president, another side of Mr. Schroeder was beginning to attract attention. He struck other Kellogg people as demanding and abrasive and often
2

unwilling to listen to subordinates. "He was very abrupt -- European," says Robert L. Nichols, Kellogg's recently retired vice chairman. "His personality is quite different from what we consider normal executive manner." Others say Mr. Schroeder ignored their input and seemed intolerant of dissent, in stark contrast to Mr. LaMothe, who they say favors teamwork by individuals strong enough to confront him. "He wanted to be challenged and questioned," while Mr. Schroeder "seemed more inclined to manage without being questioned," says John Melangton, the company's recently retired investor relations director. "That's not Kellogg's style." In one case, Mr. Schroeder became convinced that Pro-Grain, a he-man cereal popular with Australians, would make a big hit in the U.S. When company researchers armed with market data disagreed, he is said to have exploded in anger. Worse, he ordered them to keep their conclusion quiet. "We were told it should be kept confidential," says a former marketing official. "Schroeder wanted to keep the results to himself." When Pro-Grain was introduced in the U.S. in 1987, it did even worse than the researchers had warned. Within a few months, Kellogg took it off the market. Mr. Schroeder escaped blame; a product development official was demoted. The bespectacled West German seemed aloof in other ways. While most Kellogg executives live here or close by, he and his wife, Gisela, bought a house 20 miles away in Kalamazoo. Even his car -- a new Mercedes-Benz -- departed from Kellogg's less-conspicuous style. And the West German chose not to apply for U.S. citizenship, working instead, the Immigration and Naturalization Service says, by virtue of a government "green card." Mr. Schroeder enjoyed some successes, and there is speculation that these may have confirmed him in his autocratic style. Despite intense internal opposition, Mr. Schroeder persuaded Mr. LaMothe that Mueslix, a Kellogg fruit, flake and nut cereal popular in Europe, would score well with American yuppies. It became one of the company's 10 best sellers. But at Kellogg, success is normally shared, and others say Mr. Schroeder took all the credit. As for this and other criticism, Mr. Schroeder will say only, "It's one word against the other. This is not the time to talk." To some extent, Kellogg and Mr. Schroeder were victims of forces beyond their control. The sudden craze for oat bran favored competitors. Nearly 80% of Kellogg's cereals are corn- or wheat-based. Thanks to the enduring
3

popularity of Cheerios, 60% of General Mills Inc.'s cereal output is oatbased. But Kellogg and Mr. Schroeder didn't respond quickly to a surge in demand for oat bran. They seemed to treat it as a passing fancy. In his public debut as Kellogg's president, addressing the nation's food-industry securities analysts in Fort Lauderdale, Fla., last February, Mr. Schroeder declared, "Cheerios is sitting like a lame duck." Merely putting a blue streamer across the familiar yellow box, proclaiming that the little puffed Os contain oat bran, wouldn't help the General Mills product, he declared. Yet month after month, Cheerios continues to wrest market share from Kellogg standbys such as Corn Flakes, Rice Krispies and Frosted Flakes. Now Cheerios (which comes in three varieties) has replaced Frosted Flakes as the nation's top-selling brand. Analysts figure that General Mills's share of the total cereal market has grown by nearly three percentage points, mostly at Kellogg's expense, in the past year alone. Kellogg belatedly rolled out several oat-based cereals, of which Oatbake is the latest. But Mr. Schroeder placed his biggest wager on nostalgia. He was sure that S.W. Graham, a sweet cereal named after the founder of the popular cracker, would be Kellogg's next winner. He was wrong again. It peaked in late October with a tiny 0.66% share of the market. Such mis-calls brought out what some detractors see as a dictatorial bent in Mr. Schroeder. As Kellogg's target of a 50% market share receded, he intensified his demands on Kellogg people. He wanted a new product every quarter, subordinates say, and they were having to work 80-hour weeks. In the summer of 1988, grocers facing price increases had stockpiled cereal. Kellogg couldn't produce enough to meet the sudden increase in demand, and consequently lost market share. Mr. Schroeder wasn't about to let that happen on his presidential watch. At the Battle Creek plant this past summer, employees were "begging to get time off," says J.R. (Dick) Munoz, president of the American Federation of Grain Millers Local No. 3. The local represents 2,370 Kellogg workers at the Battle Creek plant, which makes 27 of Kellogg's 48 cereals. Kellogg's culture favors hard work; in 1985 a LaMothe-led task force developed Raisin Squares cereal in just 90 days, after a box of a rival's prototype found its way to the chairman's desk. But Kellogg's hard work had been part of a Midwestern tradition of consensus and collegiality that
4

may have been difficult for a foreigner to understand. "Not only do you come into a national culture, but a company culture that's nearly 100 years old," Mr. LaMothe says. "Oh boy, what a tall assignment when you're foreign." Kellogg, moreover, is a concern that one former manager describes as "a family company in small-town Midwest." Union employees bristled when Mr. Schroeder tried to impose drug and alcohol testing shortly after arriving in Battle Creek. "That's when he began his dictatorship," Mr. Munoz says. When he was dissatisfied, for example, Mr. Schroeder "didn't waste time taking people aside," says H.J. DuBrule, who left Kellogg after Pro-Grain's failure. At a meeting last year, Mr. Munoz says, "every time the vice presidents tried to say something, Horst would abruptly cut them off." He was known for deriding any unimpressive presentation as a "CE" -- career ending -- "performance." So when Mr. Schroeder himself needed the support of vice presidents and other managers, it wasn't there. Mr. LaMothe was concerned with morale, and loyal Kellogg people were jumping ship. Mr. LaMothe recalls telling Mr. Schroeder at the airport that "obviously it isn't working." Mr. Schroeder recognized that, Mr. LaMothe said, and knew "there was only one thing he could do." The corporate announcement on Monday cited only "personal reasons" for Mr. Schroeder's departure. Mr. Schroeder, who says he retains "the highest regard" for Kellogg's management, hasn't landed another job, but is considering "all kind of options. I'm at home in different parts of the world," he says. He has a more immediate concern. After selling his house in Kalamazoo, he bought one fronting the Harbor Town golf course on Hilton Head Island, S.C. He hired a contractor, by the name of Bright Side Inc., to renovate it. On Halloween, two days after Mr. Schroeder and his wife took possession, the house was destroyed by fire. The Schroeders plan to rebuild. Credit: Staff Reporter of The Wall Street Journal