Innovation and focus lift Kellogg above General Mills

Kellogg is expected to increase its lead on General Mills over the next three years after consistently outperforming its rival in America's two largest product segments for breakfast cereals - adult, premium/health and kids, fun - according to a new report from financial analysts Goldman Sachs​.

Both companies spend 1.4 per cent of their sales revenue on research and development, yet Kellogg has achieved vastly higher sales than General Mills from new cereal products launched in the last five years, except for last year when both firms got $36 million.

Kellogg overtook General Mills at the top of the North American ready-to-eat cereal sector back in 2001 and now holds a 34 per cent share compared to General Mills' 32 per cent.

Goldman Sachs says Kellogg has been helped by cunning innovations in the right cereal segments, such as expanding its strong Special K brand to include Red Berries and Vanilla Almond varieties as well as signing lucrative promotion deals with Disney and the Cartoon Network.

General Mills may pull some ground back in 2005 with its switch to using wholegrains in all Big G cereals, but Kellogg's more focused product portfolio means it is still able to spend twice as much ($18 million) as General Mills on product innovations per category.

Kellogg has the second most concentrated portfolio among its cereal sector rivals - sales in its top three categories make up 66 per cent of total turnover, compared to 52 per cent for General Mills.

And this focused strategy has also provided a good platform for growth in a demanding retail market.

"This focus provides a competitive advantage for Kellogg in key areas such as consumer targeting, product innovation and retail-partner relations. Focus is becoming increasingly important due to a broadening mix of retail channels, including smaller-scale formats such as convenience stores,"​ says the report.

North American ready-to-eat cereal, although a very mature market valued at around $8 billion, supplies Kellogg with more than half of the firm's total sales, and the company will need to use all of its leverage to profit from a steady, though modest market growth of two or three per cent.

So far the firm's strategy has done well. Both Kellogg and General Mills have witnessed declining cereal volumes since 1999, yet Kellogg has managed to maintain prices whereas General Mills has not.

The Goldman report also highlighted that Kellogg has successfully adapted its cereal brands such as Froot Loops and Special K into a new wholesome snacks portfolio, including snack bars and fruit snacks.

Wholesome snacks is now Kellogg's most profitable business unit and Goldman predicted it would grow by around eight per cent annually up to 2009, twice as fast as the total forecast for Kellogg North America.

Kellogg's net earnings were up by 13 per cent to more than $890 million in 2004. General Mills suffered a 19 per cent drop in profits after its 2005 first quarter, blamed mainly on rising raw materials costs, yet the company later recovered to post a three per cent rise for the first half.