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Lackluster cereal demand hurting General Mills

General Mills (GIS), the maker of Cheerios, Lucky Charms and Wheaties, today reported worse-than-expected quarterly earnings. It's the latest sign that America's long-time love affair with cold cereal is starting to fade.

Net income at the Minneapolis-based company, which also makes Betty Crocker cake mixes and Yoplait yogurt, was $549.9 million, or 84 cents per share, compared with $541.6 million, or 82 cents, a year earlier.  Sales were little changed at $4.88 billion due to higher ingredient costs and what the company described as "soft" U.S. demand for cereal. On an adjusted basis, profit was 83 cents, lagging the 87 cents Wall Street analysts expected. Sales also lagged the $4.94 billion consensus forecast.

General Mills, which expects cereal demand to improve in the second half of the fiscal year, and rival Kellogg (K) have been trying to stimulate cereal demand by adding products such as breakfast bars. The results have been mixed so far. Earlier this year, Battle Creek, Mich.-based Kellogg announced job cuts because of lackluster cereal sales.  

"We are supporting our cereals with strong levels of consumer directed marketing and advertising including traditional TV, digital media and Hispanic focused advertising and for the first time in 18 years, General Mills will be on the air during the Super Bowl with a spot for Cheerios," General Mills Chief Operating Officer Ian Friendly told Wall Street analysts today during the company's earnings conference call.

There are some bright spots in the cereal aisle. General Mills' Cinnamon Toast Crunch sales rose 4 percent in the first half of the year as consumers snapped up a new chocolate variety. Even so, cereal sales have been stagnant for a while. First, though it's often called "the most important meal of the day," Americans spend around 15 minutes a day preparing and eating breakfast. Increasingly, people are eating their first meal on the go, which explains why sales of breakfast sandwiches have soared in recent years.

Then there's the problem with cereal itself.  Many parents are leery about giving their children brands such as Frosted Flakes, Froot Loops and Cap'n Crunch that they might have enjoyed when they were younger because of concerns about sugar intake, though there is less of it in cereals than in past years. 

Further complicating the picture for cereal is concern over how it's marketed to children. Government officials have taken a dim view of mascots such as Tony the Tiger, which has forced companies to scale back on their use. Advertisers have also voluntarily scaled back their use in response to criticism of the marketing of unhealthy food to children.

When mascots are being used, they have changed with the times, promoting healthy eating and exercise. In a recent spot, Tony's rotund belly was transformed into washboard abs. Whether Tony and his pals such as Toucan Sam can win over a new generation of consumers is tough to say.