Cereal sales go stale, hurting breakfast companies' bottom lines

"They're Gr-r-reat!"

Or, they were.

The obesity epidemic that has soured consumers' tastes for high levels of sugar and carbohydrates has become a financial health hazard to cereal companies. And Kellogg is the latest victim.

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The worlds top cereal maker reported a 16 per cent drop in profits late Thursday, and its outlook for the year has turned grimmer.

Known for its Special K and Frosted Flakes brands, Kelloggs breakfast unit sales were largely to blame, slipping fiveper cent in the second quarter. In the U.S., its biggest market, its the fifth straight quarterthat's happened.

"While we saw growth in various areas of our business including Pringles and the international segments, the cereal category in developed markets remained challenging," Kellogg's CEO John Bryant said.

Sugar becomes a bitter pill for consumers

The reason, according to Toronto-based certified nutritional practitioner Mandy King, is that people are waking up to the sugar-to-protein ratio in cereals.

Even the cereals that are marketed as healthy often have twice the sugar content [as] protein, said King. Kelloggs Vector, for example, is marketed as a meal replacement, but actually has 11 grams of sugar and only 5.5 grams of protein per serving.

Sales for Special K in particular have been drying up, a brand the company has spent billions of dollars promoting as a low-calorie choice used to maintain a healthy weight. But dieters are increasingly opting for a balanced, high-nutrition approach over counting calories.

Erin Lash, an analyst atMorningstar who covers the food industry, saidshe may cut her estimate for the companys year if the soggy developed-market cereal sales continued to plague Kellogg.

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While health and wellness trends are all the rage, consumers are shying away from diet-focused products toward those they perceive to have an all-around healthy profile, said Lash.

More people are stocking their fridges and cupboards with protein-packed Greek yogurt, eggs and fibre-heavy oatmeal. In the U.S., yogurt sales are up nearly 40 per cent in just four years, while overall cereal sales have fallen about two to three per cent per year since 2010.

Breakfast sandwiches popular

Fast-food companies are also eating into Kellogg's bottom line.

As people work longer hours and more women choose not to stay at home, the sit-down breakfast is increasingly a vision of the past. According to research firm NPD Group Inc., the average person has just 12 minutes a day to eat breakfast, compared with 28 minutes for lunch or 24 minutes for dinner.

Pressed for time, consumers are springing for the cheap breakfast sandwich to go at McDonald's or Tim Hortons. Breakfast now accounts for 12 per cent of America'srestaurant industry, adding up to a $42-billion business every year.

Cheerios' sales not so cheery

Kelloggs competitors are suffering, too. General Mills reported its third straight quarterly decline in cereal sales in March. Even its Yoplait yogurt sales fell four per cent from a year ago at the hands of growth in the Greek yogurt sector. While a Light Yoplait contains 14 grams of sugar, a single serving of Danones non-fat Greek yogurt carries just six grams.

Earlier this month, General Mills unveiled 150 new products it said would appeal to the new food trends, including Cheerios Protein. But according to King, its still the iconic cereal disguised by a new title.

The majority of the changes we're starting to see with cereal are marketing tactics, said King. If we look at what's in the Cheerios Protein, Oats & Honey,while there is double the protein content,there is actually a whopping 17 grams of sugar, which to put in perspective, is more than a Tim Horton's double chocolate doughnut.

Kellogg to revamp menu

Kellogg also says it plans to introduce new products toward the end of this year, but wouldnt provide any details.

Kellogg will need to ensure that its products win with consumers or face further top- and bottom-line deterioration, noted Lash.

Overall, Kellogg reported a second-quarter profit of $295 million, down from $352 million. Revenue slipped nearly one per cent to $3.69 billion.

For the full year, Kelloggnow expects total sales to fall by up to two per cent, after previously forecasting a slight bump of oneper cent.