Cereal Business Gives Boost to General Mills

Sales Up for Fiscal Quarter as Company Says More Consumers Eating at Home

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CHICAGO (AdAge.com) -- General Mills reported better-than-expected first-quarter earnings this morning. The company cited particularly strong growth in its cereal business, and said increased marketing investment helped keep its brands top-of-mind.
Big G President Jeff Harmening cited particular focus on marketing spending behind Multigrain Cheerios, Fiber One and Lucky Charms cereal brands during a first-quarter earnings report this morning.
Big G President Jeff Harmening cited particular focus on marketing spending behind Multigrain Cheerios, Fiber One and Lucky Charms cereal brands during a first-quarter earnings report this morning.

"People are eating more meals at home, and cereal is a quick and healthy option," Big G President Jeff Harmening said during the call.

General Mills' net earnings were actually down 4% to $279 million, due to the declining value of some hedged commodity positions, the company said. Net earnings excluding the commodity positions were up 19%. Sales in the U.S., meanwhile, were up 13%.

Marketing pays off
The company continued to credit increased consumer marketing spending with much of this success. Ad spending was up 17% in its first fiscal quarter, which ended Aug. 24; that increase is on top of an 11% increase during the same period last year. Mr. Harmening cited particular focus on marketing spending behind Multigrain Cheerios, Fiber One and Lucky Charms cereal brands.

Competitors Kraft and Kellogg have dutifully hiked spending as well, but there has been wide speculation as to when the food industry will begin to show signs of share loss to private labels, or lower ad spending. But with General Mills reporting comparable quarterly earnings six weeks before its rivals, its strong returns would seem to bolster the prevailing trend.

"Today's performance is a positive indication that we should see similar results for both Kellogg's and Ralcorp in the third quarter," Wachovia analyst Jonathan Feeney said in a research note. "We believe food companies stand to benefit greatly over the next six months."

Instead of fighting what was expected to be a shift by consumers to lower-priced private-label brands, General Mills CEO Ken Powell said his company is benefiting from consumers seemingly eating out less often and taking more meals at home. (The move away from restaurants appears to have had a positive effect on grocery in general. Kroger reported a 3% increase in second-quarter profit yesterday, citing particular growth in its private-label business.) He said cereal is in a good spot for the current economy, because each serving only costs about 50ยข, including milk. Mr. Powell pointed to his company's recent spate of ads positioning Progresso soup as convenient and low calorie.

Winners in tough times
UBS analyst David Palmer expects the sour times to further sweeten the pot for General Mills and its best-positioned competitors.

"Across our coverage in food/restaurants, it appears that the top-tier 'must have' brands that also stand for value and at-home preparation are widening share gains versus peers," Mr. Palmer wrote in a research note. He cited McDonald's dollar menu, Kraft Mac N' Cheese, Heinz's Ore Ida and Campbell's soup as strongly positioned platforms. "Like Heinz, Mills' portfolio of brands/categories holds up well in this framework, since many of its best-margin categories enable easy preparation and low cost per serving."

Mr. Palmer added that he expects the trend to more dinners at home to increase over the next few quarters.

"As job losses deepen, we wonder if lunch and breakfast occasions could be next -- further bolstering breakfast businesses at General Mills and Kellogg," he said. "Already, breakfast away from home is slowing and restaurant breakfast traffic was flat in the June quarter for the first time since 2004."
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