Snap! Crackle! Pop! Cereal biz gets stale

With cereal sales in decline, Kellogg's next CEO David Mackay needs to think beyond the bowl.

By Matthew Boyle, Fortune writer

(Fortune Magazine) -- On Oct. 23, veteran Kellogg executive David Mackay, 51, was tapped to succeed chairman Jim Jenness as CEO of the cereal giant. A native Australian, Mackay says it's in his nature to "push the boundaries and explore things."

Good thing. The Aussie's success will depend on his ability to find opportunities for Kellogg (Charts) far beyond the cereal aisle.

Grrrreat Challenge: It's becoming harder to move cereal off the shelf.
Beyond the bowl
Kellogg is finding growth in non-cereal goods.
Dollar sales growth (Q3 2006)
Morningstar Farms
$44 million in sales; +11.2%
Rice Krispies
$28 million in sales; -4.5%

Over the past few years, this once-hearty market has grown increasingly stale. For the 12 weeks ended Oct. 7, cereal sales for U.S. retailers declined 2.2 percent, according to ACNielsen, whose data do not include sales at Wal-Mart (Charts).

What's ailing Tony the Tiger and his flaky friends? High commodity prices have pinched margins, forcing Kellogg to raise cereal prices.

There's also the public outcry over sugar-laden products being pitched to kids. And busy parents are fed up with milk in a bowl and are looking for more portable ways to feed the tots.

Surprisingly, these problems have not been reflected in the share prices of Kellogg or fellow cereal titan General Mills (Charts): Both stocks are up 18 percent so far this year. Why? A big reason is that the companies are finding growth in new food groups.

General Mills is riding sales of its Yoplait yogurt and Progresso soup. Kellogg, meanwhile, has found success pushing Pop-Tarts, Eggo Waffles and Morningstar Farms veggie items, all of which have posted strong sales gains this year.

The breakfast specialist has also taken good-for-you cereal brands such as Kashi and Special K and extended them into frozen entrées, protein bars, and even bottled water. In fact, Prudential Equity Group analyst John McMillin estimates that noncereal products now account for 47 percent of Kellogg's revenues.

The way things are going, Mackay may someday find that exploring new terrain means finding his way back into the cereal market.


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