Cereal is not a growth business in the consumer staples sector. This is why Kellanova (K 0.35%) decided to spin off WK Kellogg (KLG 0.68%) as its own entity. There are likely to be big implications from this move in the cereal niche, which is exactly what cereal peer General Mills (GIS 0.32%) is hoping to see. Here's why.

Kellogg is a struggling industry stalwart

The backstory for Kellanova's spinoff of its North American cereal business into Kellogg has a number of nuances. First off, it was something of a good company/bad company spinoff, since Kellanova has been working to boost its growth profile. Cereal in North America is mature and, at best, is a slow-growth niche within the consumer staples space. It was, basically, an overhang on Kellanova's increasingly more growth-oriented business.

A person and a child looking at a food box in a grocery store.

Image source: Getty Images.

Add to that some company-specific problems. For example, Kellogg experienced a strike in its cereal business that reduced production. Then there was a fire at a plant that further reduced production. So Kellogg's market share had been falling for a bit and was largely sopped up by peer General Mills. All in all, Kellogg's North American cereal business was a bad business for Kellanova that required a lot of management time and effort.

But as the business worked back from the strike and fire, its results were improving dramatically. Sure, that was only because of the swift and deep downturn it was recovering from, but the timing was perfect for a spinoff of the slow-growth business. And that's exactly what Kellanova chose to do. The logic for the move, from Kellogg's perspective, was that it would allow the now stand-alone North American cereal business to concentrate all of its efforts on its cereal business without the need to compete for capital with other, higher-growth divisions.

More focus is better for General Mills

Kellogg spending more time and energy focusing on North American cereal won't change the big picture all that much. Even General Mills admits that cereal isn't a growth engine. In fact, Jon Nudi, group president of North America retail, noted during General Mills' fiscal first-quarter 2024 earnings conference call: "[W]e don't need to grow a lot. We can grow a little bit and really like the way that the business runs for us." Reading into that just a little, this is a foundational business on which General Mills can build more growth-oriented businesses in other food areas, like pet food.

But having a focused Kellogg will change some industry dynamics. For example, advertising is likely to increase, as will product innovation. Which is why Nudi added:

The other question we get a lot is what happens if one of our major competitors get more focused? And what we would tell you is that's actually a good thing. If you go back through history when the two major competitors in the category are supporting the category with marketing as well as innovation, the category does better. So, we hope that everyone comes to play, and we can continue to grow those categories as we move forward.

It isn't complicated to understand what General Mills is hoping for. More advertising will bring cereal to the attention of more customers. More innovation will do the same thing. And if Kellogg is upping its game, it is likely to get the competitive blood flowing at General Mills, too.

But there's a difference here that's important to remember. General Mills, currently the No. 1 player in North American cereal, doesn't rely on cereal alone. That means that Kellogg has more to lose if it fails, but that General Mills can afford to compete without any big risk to its business. And if the cereal market gets bigger, both companies might actually end up winners even if General Mills loses share (which is highly likely).

From a long-term perspective, General Mills likely wins more

Some investors might like the idea of Kellogg growing its share and see that as an investment opportunity. However, the larger cereal benefit that General Mills expects from increased competition will be a boon to both companies. Given the foundational nature of the cereal business within General Mills, meanwhile, it seems like the bigger winner will actually be General Mills since a stronger foundation will give it the ability to invest even more in the growth-oriented areas of its business. Kellogg's business may rebound, but it doesn't have any other way to drive growth after that.