This Cereal Maker Is Rebuilding Its Brand

Making branding mistakes can be costly, resulting in market share erosion and stagnant revenue growth. But once the mistakes are reversed, the company can get back on the road to profitability.

Jan 6, 2014 at 2:53PM

Post Holdings (NYSE:POST), the third-largest ready-to-eat (RTE) cereal manufacturer in the U.S., has seen its revenue stagnate in the past few years as part of private-label manufacturer Ralcorp. But since being spun off as an independent listed company in 2012, it has worked hard to reverse some of its past branding mistakes. Recent results show that Post is now better positioned to compete with its peers such as Kellogg (NYSE:K) and General Mills (NYSE:GIS).

Failure to invest
Post was a century-old brand that was simply outspent by its competitors. Furthermore, Post had to compete with Ralcorp's private-label cereal business for a share of the group budget.  

In fiscal 2010, Post spent 8.9% of its revenue on advertising and promotion (A&P), which amounted to $88.6 million. By fiscal 2013, A&P spending was increased to $118.4 million, representing 11.4% of its net sales. This compares favorably with the 7.9% of net revenue that Kellogg reinvested in advertising in fiscal 2012.

Apart from capturing the attention of consumers with flashy advertisements, new innovative products are needed to gain market share. Post has lacked groundbreaking product innovations since the launch of its flagship brand Honey Bunches of Oats in 1989. This is reflected in its relatively low research and development spending, which accounted for a mere 0.8% of Post's historical average net sales.

In comparison, General Mills invested 1.3% of its revenue in R&D in fiscal 2013. But Post has made plenty of changes, launching seven new products in 2013. This contrasts sharply with its lackluster product-development efforts in the past.

Post's recent trend of increased investments in both A&P and R&D expenses have showed initial success. Its market share of the RTE cereal market stabilized at 10.4% in 2013, effectively halting the gradual market share erosion in the past few years.

Detached from its customers
Under Ralcorp, Post faced two big problems in reaching out to its customers, given its reliance on a broker network. Firstly, Post couldn't draw sufficient insights about customer preferences working with intermediaries. Secondly, the brokers carried multiple brands and weren't solely committed to promoting Post products.

Realizing the deficiencies associated with its prior distribution system, Post has decided to gradually do away with brokers. By May 2012, all of its customers were served by its in-house direct sales force. Post also invested in customer analytics to ensure that it understood customer needs and had the ability to adapt its marketing strategies accordingly.

Investing in the wrong positioning
Unlike its peers, Post didn't position its brand to drive customer purchases even as customers became increasingly more concerned about health and nutrition.

General Mills has started producing the original version of its cereal brand Cheerios free of genetically modified organisms (GMOs), which should be on shelves early this year. Besides launching products targeted at health-conscious consumers, Kellogg went a step further in making sure that it understood how 'healthy' its products are. Kellogg put up a Facts Up Front label on the front of its products that simply presents the key nutritional facts in a manner that is more eye-catching for consumers, compared with the detailed nutrition panel at the back of the package.

But Post is slowly changing. Its September 2013 acquisition of Premier Nutrition, a marketer of ready-to-drink protein shakes and protein bars, is a strong sign that it is back in touch with customer needs and trends. Consumers are increasingly eating on the go and becoming more health conscious. Adding Premier Nutrition's products into its portfolio is a step in the right direction for Post.

Next steps
Post registered a decent 2.5% revenue increase in fiscal 2013, compared with negative sales growth in the past few years. This is a validation of its recent brand-rebuilding efforts. Going forward, Post should build on the positive momentum to gain market share at the expense of its larger competitors.

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Mark Lin has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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