If only we spent more on advertising we could have seen cereal sales rise. That was the assessment General Mills (NYSE:GIS) CEO Ken Powell delivered to an analyst conference the other day, saying it wasn't the consumer's fault the category was stagnant, but rather the cereal makers in general who failed to introduce new products and advertise what they had.
While cereal is the top food consumed for breakfast, there was insufficient innovation in the space, with only 28 new items introduced last year (down from 31 the year before), which, according to Nielsen numbers, was supported by 4% less spending on advertising than was seen in 2009.
That would certainly mesh with at least the latest results from industry peers like Post Holdings, which showed a $6 million decrease in advertising and promotion last quarter. For its part, General Mills says its own spending has increased by 3% over the same time period, but that isn't exactly a cure-all for what ails the industry.
Kellogg has been investing more in advertising and promotion, yet it's failed to gain any traction and has had to resort to cost-cutting to maintain profitability. Moreover, it seems General Mills is relying upon some pretty rosy economic assumptions to justify future growth.
The cereal maker points to falling unemployment, job levels staying steady, and consumer spending growing, yet as the underlying economic data shows, unemployment rates have fallen mainly because so many people have dropped out of the labor market. The Bureau of Labor Statistics says the nonparticipation rate, or the number of people simply no longer looking for a job, is at 37% of the workforce, its highest level in 35 years. And the retail landscape this past Christmas would argue against the fact that consumers are opening their wallets any wider. More to the point, unemployment and economic uncertainty make them more cautious and lead to their spending less, regardless of ad spend levels.
Yet last year cereal makers were complaining about the promotional environment that ate into sales. Post saw its earnings cut after its trade spending budget jumped because it meant it was paying more in slotting fees to stores to ensure its new products got shelf placement. Margins can expand or contract depending on how much trade spending is done.
And as I noted last fall, the $9 billion ready-to-eat breakfast cereal business is also coming under pressure from the changing tastes of consumers, who are looking at convenience and foods they can eat on the go as a replacement. Yogurt, particularly Greek style, has grown in popularity, as have breakfast bars. Kellogg says it's necessary to look "beyond the bowl" to realize growth and it's seeking to transform itself into a cereal and snack business, hence its acquisition of the Pringles business from Procter & Gamble, which catapulted it to the No. 2 position in snacks behind PepsiCo's Frito-Lay.
So the worldview that General Mills is espousing might not be the reason for slack sales. The industry's been facing higher input costs that can't be easily passed along to consumers, it's had to balance how much advertising and promotion it's undertaking with the need to maintain margins, and different food categories are catching the eye of consumers beyond just new product introductions. Add in a healthy dollop of economic malaise and you've got a prescription for slowgoing.
However, you can't entirely rule out General Mills' own advertising efforts as a cause, either. Although it's commendable that it's tackling social issues with its ads, there's no denying that doesn't resonate with everyone, and wearing its heart on its sleeve to push an agenda may cause a backlash, whatever plaudits it wins from industry critics.
The cereal maker still has a strong portfolio of brands, more than a fifth of the market share, and anticipates steady growth going forward. But if General Mills is banking on these numbers based on faulty assumptions, that may see its growth prospects be as firm as a bowl of soggy cereal.
Rich Duprey has no position in any stocks mentioned. The Motley Fool recommends Procter & Gamble. It recommends and owns shares of PepsiCo. 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.