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Food fight: General Mills vs. Kellogg

Cereal market instability evens match

Editor’s note: Food fight evaluates competing food and beverage companies based on earnings, marketing, transparency, and other relevant factors.​ 

The battleground between Kellogg and General Mills lies in consumers' great shift in breakfast preferences, most evident now that both have released recent earnings. Both are navigating changes in breakfast trends to earn market share, boost profits, and win the cereal wars.

To win in the U.S. cereal industry, which is down from about $14 billion in yearly sales in 2000 to $10 billion in 2013, according to Euromonitor, requires a whole-company effort — marketing, leadership, research and development and smart, forward-looking investments.

Kellogg's CEO, John Bryant, said on an earnings call success would be stabilizing the U.S. cereal business in a stable category. 

While Kellogg admits cereal is no longer a big bottom-line booster, it is a relevant category.

Further complicating breakfast choices is the way protein and healthy food is challenging the dazzling, bright colors that once filled breakfast bowls. Which company is staking the best claim for consumers' purchases?

"We are much closer to the consumer now," said General Mills' CEO Ken Powell in regards to new products in an interview with The Street. "So when the development team has something they think is pretty good, they now take it to a store or somewhere else and actually sell it themselves. They are very close to what's actually happening out there, and are getting direct feedback. What we actually call it is setting up a 'lemonade stand.' " He’s been with General Mills since 1979 and has been at the helm since 2007.

Bryant has been at Kellogg since 1998 and became CEO in 2011. He defended Tuesday's earnings troubles and said consumption trends were on the rise for adult cereal brands like Special K and Rasin Bran despite decreased retailer inventory levels.

"We're succeeding with bringing consumers back into the category, particularly adults," he said.

Earnings

General Mills

The company enjoyed a 24% profit increase in its last quarter, not to mention growth in a key category, retail sales. Sales here ticked up 3.6%, hitting $2.53 billion, thanks to its cereal, meals, yogurt, and snacks categories. The gains come in the categories where the company is investing — a clear synergy.

The company shed its Green Giant and Le Sueur frozen vegetable business to B&G Foods, and is continuing to grow its Annie's acquisition. Sales and distribution of Annie's have grown 9.4% and 11% in the last year. 

Other contributors to the profit increase are trimmed input costs and reducing administrative expenses. Additionally, the company announced it would be shutting down two plants, in West Chicago, and Joplin, MO. 

Kellogg

Kellogg's profit dipped 8.5% to $205 million on turnaround efforts and one-time costs. Its revenue also fell 8.5% — marking its eighth in nine quarters of sales declines.

Its snacks business fell 1.5%, while its morning foods business (including cereals) sank 2.6%, its third quarter in a row of decreased sales for each.

Kellogg in August joined many CPG companies with zero-based budgeting implementation.

WINNER: General Mills

Marketing

General Mills

The company is highlighting its Trix cereal artificial ingredient removal by hosting a contest in search of a real rabbit — or other pet with bunny ears — to showcase for a limited time on boxes. The "real" push is clear, and it is designed to send the message to consumers that the product they're getting has changed. The company announced the cereal would be missing its blue and green colors, a casualty of the switch from artificial to natural.

It's also veered into web series content, like with its revamped French Toast Crunch and ensuing campaign to boost consumer re-engagement with cereal — and what better way to attract millennials specifically than with a digital component.

This is consistent with what a General Mills spokesperson told Ad Age about its recent ad agency pick in Mindshare to take over its U.S. business and assist across the world: "[Mindshare's] engagement, insights and ideas across paid, owned, earned and shared media will enable General Mills to continue to advance its consumer-first approach to growing our brands across these markets."

Kellogg

As sales suffer, the company has been making management shifts, including in marketing. The previous Kraft Foods CMO, Deanie Elsner joined the company to help its U.S. snack business.

"The company's move to reposition its struggling Special K cereal as a 'wellness' brand — and away from a diet marketing approach — is showing signs of promise," according to executives.

WINNER: General Mills

CEO speak

General Mills

Powell has been vocal about his push for innovation but also has let-well-enough-alone when necessary — indicating he's willing to take different approaches.

He has faith in the future of e-commerce, which is in its early stages across the food and beverage industry. "So it's pretty clear that we're going to move in that direction very rapidly in the U.S," he said on an earnings call. "And this is an area that we’re investing in at General Mills to develop our capability, and make sure that we can be leaders and great partners for all of our customers who have a lot of interest in this."

Kellogg

Bryant also said on a conference call that cereal’s positioning as a snack or dessert will boost brands, specifically mentioning Special K, Frosted Flakes, and Froot Loops. This repositioning is smart, considering the popularity of snacking, but is antithetical to recent pushes for healthy products if it's going for indulgence.

Then again, it has Kashi for the health-minded, and it posted a gain in consumption and is showing potential for growth.

"U.S. retail sales of Nature's Path's ready-to-eat cereal jumped 43% between 2010 and 2014, compared with a decline of 35% for Kashi," reports The Wall Street Journal referencing market-research firm IRI. Kashi growth could help alleviate stress of the company's legacy brands.

WINNER: General Mills

Pipeline R&D

General Mills

"Follow that trend" is what every food industry executive tells employees on a day-to-day basis. General Mills' foray into new product launches suggests this was the way of thinking: "products made with simple ingredients, foods free from gluten, natural and organic foods, foods that deliver more fiber, more protein and more whole grain, and foods free from artificial ingredients." 

Its Yoplait brand introduced Yoplait Plenti to keep on trend with Greek yogurt. Banking on yogurt in addition to revamping cereal shows the company is keeping up with trends and not backing down from its signature brands it feels worth fighting for.

The company also committed to cage-free eggs in its supply chain.

Kellogg

Naturally (pun intended), the company is following its competitors and taking out artificial colors and flavors from cereals, Eggo frozen products, and certain snack bars by the end of 2018.

Kellogg announced 40+ new products in June. The new products also touch on the grab-and-go (but still healthy) mentality that consumers are having toward breakfast.

Similar to General Mills, the company will be sourcing 100% cage free eggs by 2025.

WINNER: Tie

Investments

General Mills

The company is betting on its 301 Inc. business in venture capital to invest in the competition before they gain industry traction. The business's test run is a minority stake in Beyond Meat, according to Fortune. Fortune also points out that if the company had invested in Annie's earlier, it wouldn't necessarily have needed to pay $820 million for it. The move puts General Mills in an enviable position if it can make good on the startups it chooses.

The company is also investing $100 million in energy efficiency and clean energy for company facilities around the world.

Kellogg

Kellogg is pushing international growth with its $450 million joint venture with Tolaram Africa Foods. This follows its majority stake in Egyptian packaged biscuits manufacturer Bisco Misr earlier this year. The effort is to help offset sales declines at home. Rival General Mills, as part of a restructuring plan, will be shedding 675 to 725 jobs from its international business.

Elsewhere, Bloomberg reports the company is mulling the idea of a subscription snack service. Earlier this year, General Mills shut down its version, Nibblr, after an effort that began in 2014.

WINNER: General Mills

Verdict

Both companies have taken sharp punches with consumer shifts, but General Mills trounces Kellogg in the forward-looking areas that are most likely to position the company for growth and innovation. Both companies have made targeted efforts to offset declines, though General Mills' are paying off sooner than Kellogg's.

General Mills clocked in at No. 171 on this year's Fortune 500, while Kellogg hit No. 210. That's almost 40 slots between them, though it's just one key metric in this food fight.

The 301 Inc. VC angle from General Mills is particularly a knock-out, as industry innovation is not coming from CPG companies — and it's where the next revolutionary product will come from.

Filed Under: Corporate
Top image credit: Nan Copeland