General Mills disappoints as cereal sales stagnate

Higher commodity costs are only part of the problem.

By Jonathan Berr Dec 20, 2011 1:27PM
 (© David Arky/Corbis)Shares of General Mills (GIS) slid 2.5% in midday trading Tuesday after the maker of Cheerios reported disappointing quarterly earnings with costs rising faster than sales.

Though higher commodity prices are being blamed, there is another less well-known reason: People are eating less cereal.

Though nutritionists have said for years that breakfast is the most important meal of the day, it is also the most rushed. Research from the NPD Group shows that the average American spends about 13 minutes each day preparing and consuming breakfast.

People are increasingly buying their first meal outside the home, as evidenced by the surging popularity of the McDonald's (MCD) Egg McMuffin and similar breakfast sandwiches, which may be eroding sales of ready-to-eat cereals. There also is the perception -- perhaps unjustified -- that cereal is unhealthy, as well as competition from breakfast bars and other quick meals.

However, not all GM brands are suffering. Several, such as Multi-Grain Cheerios and Cinnamon Toast Crunch, posted gains of 11.62% and 7.5%, respectively, during a recent 52-week period, according to IRI/Symphony data from June, which excluded sales to Wal-Mart (WMT).  

The battle for America's breakfast palate has high stakes for Minneapolis-based General Mills. Big G, the company's cereal unit (excluding the smaller organic lines), accounted for about 23% of its US retail sales in the last fiscal year. Overall, U.S. retail sales rose 3% in the most recent quarter to $2.94 billion. Operating profit fell 4% to $661 million. Net sales for Big G eked out a 1% gain.

General Mills' second-quarter results were a disappointment. Net income fell 28% to $444.8 million, or 67 cents per share, as rising costs were not off-set by price increases. The results also included gains from its $1.2 billion acquisition of a 51% stake in Yoplait SAS, which was completed in July. Sales rose 14% to  $4.62 billion, buoyed by Yoplait. Wall Street analysts had expected earnings of 79 cents per share on revenue of $4.6 billion.

Kellogg (K), maker of Froot Loops and other well-known cereal brands, is in a tougher spot than General Mills. The Battle Creek, Mich., company gets about 50% of its net sales from ready-to-eat cereals. Last month, Kellogg reported disappointing quarterly profit, slashed its 2011 forecast for earnings per share and gave a disappointing view for 2012.

Jonathan Berr owns shares of McDonald's.
Dec 20, 2011 3:11PM
When I walk through the cereal aisles at my local supermarket, I see dozens of different kinds and flavors of cereals especially intended for kids.  We didn't have all of those choices when I was a kid, and we got along quite well with what we had available.  Manufacturing all of those different kinds must cost quite a sum, plus the cost of the various boxes..  Why don't all of the cereal manufacturers cut back on all of that variety?  They should be able to save plenty! 
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