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Although cereal sales are soggy, the future looks bright for General Mills.

According to analysts, Big G should start reaping some rewards from its cereal price-cutting strategy as well as rebound from last year's pesticide problem. More importantly, the spinning off of General Mill's restaurant business will help the company concentrate on its core $2.1 billion ready-to-eat cereal business.

"General Mills is showing somewhat of a declining market share in cereal," said Chris Jakubic, an analyst with Salomon Bros., New York.

But Mr. Jakubic maintained it's a short-term problem. "General Mills will be more aggressive with not only new products, but on the pricing side."

Cereal sales began to decline more than a year ago when General Mills lowered prices on big brand ready-to-eat cereals as well as cut back high-cost coupons and in-store promotions, hoping to put an end to the cereal marketing war.

According to Information Resources Inc., sales declined 8.1% for the year ended April 2, 1995, partly due to promotion reductions.

Analysts say it's too soon to tell whether the price-cutting program is working. One reason it's been hard to evaluate the effort is because of the pesticide scare last summer.

A General Mills licensed contractor used an unapproved pesticide on oats for cereals like Cheerios, Trix and Lucky Charms. As a result, the company voluntarily pulled all affected cereal from the shelves.

Despite these setbacks, the pricing strategy is sending a signal to rivals that General Mills is committed to delivering value to ready-to-eat cereal customers.

"Kellogg Co. has not raised shelf prices since April 1994," said Michael Mauboussin, an analyst for CS First Boston, New York.

However, No. 1 cereal maker Kellogg and others still continue to promote heavily.

While Big G's cereal business has floundered, competitors like Kraft General Foods' Post have excelled with strong new products.

"Post is on a roll right now in terms of rejuvenation of Nabisco and it has a couple good new products out," Mr. Mauboussin said. "The company has spent generously on its marketing."

Sales continue to soar for Post's Banana Nut Crunch and the company's newest addition, Blueberry Morning, which was introduced last year.

Post's sales rose 14.9% to $1.1 billion for the year ended April 2, 1995, putting it at No. 3 in the category. The company has captured 13.6% of the $8.2 billion ready-to-eat cereal market.

Sales for Kellogg were up 7.3% to $3 billion and No. 4 player Quaker Oats Co.'s sales surged 13% to $646.6 million.

Much has changed for General Mills since its boom in the late 1980s, when the marketer relied on smart management and consumers' obsession with oat bran. The company has struggled to create blockbuster new products, and sales from continuing operations for the fiscal year ended May 28, 1995, were down 5.6% to $5.03 billion.

"General Mills needs new cereal products," Mr. Mauboussin said. "At this stage, it is important to gain share and grow the category."

As of late, Big G has hit a dry spell when it comes to new cereals. Sun Crunchers and Sprinkle Spangles, a kids' cereal, didn't produce the anticipated blockbuster sales since the two products were introduced in the past two years.

But with the spinoff of its $3.1 billion restaurant division last December, General Mills is better able to focus on its core package-goods business, especially cereal.

As of June 1, General Mills is now broken into two separate companies-Food Operations and Restaurant Operations, with the chairman, president and CEO posts at each held by Steve Sanger and Joe Lee, respectively.

Restaurants owned by General Mills include Red Lobster, Olive Garden and China Coast.

Mr. Mauboussin said that the spinoff was a terrific move by General Mills. "Fifty-five percent of General Mills' earnings that came out of the food business were going to fund the restaurant business," he said.

The restaurant business will be fine, but it will have to learn to rely less on the core food enterprise, Mr. Mauboussin said.

Analysts say General Mills is positioned for a strong comeback in cereal.

Now that the short-term problems are behind them, "General Mills is in a great position in the cereal business," Mr. Mauboussin said. "The company has a history of being profitable and innovative."



General Mills

Headquarters: Minneapolis

Sales from continuing operations: $5.03 billion for fiscal year ended May 28, 1995.

Leadership: Steve Sanger, chairman, president and CEO, Food Operations; Joe Lee, chairman, president and CEO, Restaurant Operations.

Top brands: Big G Cereals (Wheaties, Cheerios, Lucky Charms, Kix); Betty Crocker baking products; Yoplait yogurt; Red Lobster and Olive Garden restaurant chains.

Ad spending: $569 million

Agencies: Saatchi & Saatchi Advertising, New York; DDB Needham Worldwide, Chicago; Campbell Mithun Esty, Minneapolis; Grey Advertising, New York.

Recent successes: Spun off its restaurant operations effective June 1, which will allow the company to focus on its core $2.1 billion ready-to-eat cereal business.

Challenge: Revive sagging cereal sales, down 8.1% this year, as competing cereal marketers continue to use heavy promotion and successful new products.

Source: Advertising Age and company reports

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