Breaking Down the Breakfast Wars

The battle for your morning meal has gotten more and more aggressive.

You’ve got the likes of Taco Bell, which rolled out breakfast this year, and Starbucks (NASDAQ: SBUX), which continues to roll out more sandwiches and wraps. McDonald’s (NYSE: MCD) started offering all-day breakfast a couple months back. 
Imagine what this has done to the old guard of the industry, cereal. For the longest time, cereal was the healthy alternative to a “heavy” breakfast. But even most “healthy” cereals aren’t all that healthy and are still packed with sugar and carbs.
Great marketing has, in the past, allowed cereal companies to get away with advertising variations of their cereals as high protein or whole grain. When Grape-Nuts cereal first hit the market in the early 1900s, it was said to prevent disease and even cure the desire for liquor.
Shoppers are wising up. Cold cereal consumption has fallen by about a percentage point a year over the last decade. Meanwhile, the yogurt and hot cereal markets have exploded. But there could be a turnaround play among the typical cereal companies.

The Head of the Table

The company making the best effort right now in the breakfast wars is General Mills (NYSE: GIS). While Post Holdings (NASDAQ: POST) has been aggressive on the merger-and-acquisition front, it’s still a small player.
Post Holdings has been a serial (no pun intended) acquirer, which has helped diversity it away from cereal. However, it’s now in various other markets – including PowerBars and eggs – and it’s tough to see how all these brands really fit together and help Post address its growth issues.  
Then there’s Kellogg (NYSE: K), which has its own issues, including lackluster innovation. Kellogg is clinging to the cereal market and still has issues in Europe, where sales have fallen by more than 50% in the last decade. Even its major health-conscious brand, Kashi, is seeing weakness.
The best play might well be the biggest player: General Mills.
General Mills is the No. 1 packaged-food company in the U.S., with a 30% market share in the ready-to-eat cereal market. But it also owns 70% market share in refrigerated baked goods and 40% in grain snacks.
General Mills has its own yogurt brand, Yoplait, which has performed well in 2015. That has helped take some pressure off its cereal brands. Yoplait has its own Greek yogurt brand, Yoplait Greek 100. It’s also planning to cut more than a quarter of the sugar from its Original yogurt brands.
In addition, General Mills also bought organic snack foods company Annie’s a couple years ago. It could be on the prowl for more deals too. With these market share advantages, it has one of the best networks of retailers, where these retail relationships create a competitive advantage for the company.
Look for General Mills to continue to find ways to innovate at the breakfast table, which includes pitching more of its cereals as mix-ins for Greek yogurt. Its Yoplait brand has already been working on Plenti, which is Greek yogurt that already has whole grain oats and flax mixed in.
As an added sweetener, General Mills offers a 3% dividend yield. That should be tasty enough for any income investor.

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