New leader at Post finds cereal lovers still love the sweet stuff

Without cereal, Post Consumer Brands wouldn't exist.

Of the nation's three dominant cereal manufacturers, the Lake­ville-based maker of Fruity Pebbles and Honeycomb is the only one that exclusively sells bowl-ready breakfast food. As the company looks back on 100 years of its Malt-O-Meal business and 125 years for its Post-branded cereals, a new chief executive is looking into a future rife with challenges to its bedrock food.

Cereal remains the No. 1 breakfast food, but consumption has been in gradual decline for several years. It's losing ground to eggs, fruit and breakfast sandwiches as consumers are increasingly trying to reduce sugar in their diet and incorporate healthful, on-the-go and satiating morning meals.

Last year, Post hired a new CEO, Howard Friedman, who previously played a key role in the integration of Kraft and Heinz in 2015 and says "the death of cereal" is overstated.

"All the changes happening across so many dimensions simultaneously is causing everyone to scratch their heads a bit. I think that's true for us and for the entire industry," Friedman said.

Post Consumer Brands was created in 2015 when St. Louis-based Post Holdings bought Northfield-based MOM Brands, best known for making the large bagged Malt-O-Meal cereals, and merged it with its Post Foods subsidiary. The parent company consolidated its cereal business at a new headquarters in Lakeville, making it the third-largest cereal company in the U.S. behind Golden Valley-based General Mills and Michigan-based Kellogg Co.

Those three companies control 80% of all cereal sold in the United States.

Post sold $1.8 billion worth of cereal last year, a 1% increase when excluding newly acquired brands that can artificially inflate growth rates. Despite consumers moving toward less sugar and better-for-you options, it was the sugary breakfast cereals that saved the day.

The biggest contributors to that growth were Honey Bunches of Oats, Fruity Pebbles and its new licensed-brand cereals, including Sour Patch Kids, Hostess Honey Buns and Oreo O's, which are actually made from crushed-up Oreo cookies.

"We've seen a lot of growth on the indulgent side of our business," Friedman said.

Post isn't alone. Market leader General Mills has also seen big boosts to its cereal business from new versions of its sweeter cereals, like Lucky Charms with unicorn marshmallows and Cinnamon Toast Crunch Churros.

About 72% of U.S. adults now say they are trying to avoid sugars, said Darren Seifer, a consumer food analyst with the NPD Group. Yet his company's research confirms that some sweet cereals have seen a slight uptick in consumption recently because of a movement toward "permissible indulgence."

"On one hand, we as a country are increasingly trying to avoid sugars," Seifer said. "So you need to be careful when providing those indulgent cereals that it is still providing some sort of benefit, like whole grains, as well. I think it is a very delicate balance to strike."

Some companies, including both Minnesota companies Post and General Mills, are managing to eke out cereal sales growth better than others.

General Mills expanded its market share to more than 31.5% and Post to nearly 20%, while Kellogg's lost a bit of share, falling to 28.5% of the category in the last year ending Sept. 8, according to IRI, a Chicago-based market research firm. Quaker and private label brands also saw sales decline, dropping to 6.1% and 6.7% of the cereal category, respectively.

A food industry veteran, Friedman has spent the past 14 months reacquainting himself with the cereal segment — an area of food he hasn't worked in for two decades.

"What was surprising to me was how little has changed in cereal over the last 20 years," Friedman said. "I think we [in the industry] convinced ourselves over time that stability was a good thing and consumers will come no matter what."

Friedman's appointment to the top office caused some alarm among employees at Post's Lakeville home office. After all, he was coming straight from Kraft Heinz, where austere cost-cutting took place after the firms merged. That transaction by owner 3G Capital was initially applauded by investors who loved saving money on expenses. But now, investors are punishing the Chicago-based food company for focusing too much on cost-cutting and failing to give fresh oxygen to its brands. Last winter, Kraft Heinz had to write down the value of its Oscar Mayer and Kraft brands by $15 billion, as they were losing power with consumers.

In many ways, Friedman is still a believer in some of 3G's strategies. He preaches the importance of processes, efficiencies and rewarding high achievers.

But, he said, he's only bringing "the best applications of what I learned at Kraft Heinz and bringing it here." He wants Post to be faster. He likes the idea of celebrating failures because it means they are taking risks. Friedman wants to maintain that 3G-like focus on costs, but not to the same extreme.

He has no plans of embracing a zero-based budget initiative, a hallmark of 3G's Kraft-Heinz merger, which requires the company to justify every single expense, from office snacks to travel costs. And, perhaps of most interest to workers, Friedman has not enacted workforce layoffs.

But Post has to focus on evolving beyond just making nips and tucks to the business model.

"Like everyone, innovation is our lifeblood and it's always going to be the cause of, and solution to, our problems," Friedman said.

The company is much smaller than its competitors, so it can't spend as much on new product launches.

"So how do we address emerging trends smarter? Right now, we are highly responsive, but not as proactive on trends as we could be," he said. "As soon as it's obvious you need to do something, it is too late."

Friedman sees opportunity to invest more in e-commerce and convenience. During the past decade working with refrigerated foods, he saw how products can be adapted for people who are on-the-go or in a hurry.

"I'm not sure we have played the convenience trend very well as an industry," he said. "That's an area for us to explore. Are there ways to be more convenient than a 16-, 18-, 20-ounce box?"

The Malt-O-Meal business, which represents about 30% of the company's overall sales, has faced unexpected declines recently. Its bagged cereal line often appeals to cost-conscious or large households. Three years ago, Malt-O-Meal basically owned the bagged cereal segment, claiming about a 90% market share, Friedman said. But in 2017 and 2018, General Mills introduced bagged cereals that heated up competition. The sudden rivalry resulted in a yearlong lawsuit, with Post accusing General Mills of patent infringement. The federal lawsuit was settled in U.S. District Court in Minnesota last year, and both brands of bagged cereal remain on store shelves today.

"We are not getting back to 90% market share, but we've stabilized a bit," Friedman said. "And the structure of the bagged category has largely stabilized."

Post also sees a chance to increase its contract work for private labels, also known as store brands, which is about 10% of its overall business.

Many large food producers won't accept private label contracts for fear of cannibalizing their own products. But Friedman says it aligns with Post's business philosophy of providing consumers with a wide variety of choices.

"For some consumers who want or can only afford to buy private label, this is the best thing we can do for them," he said. "But we will continue to be selective in how we do it."

As a subsidiary of Post Holdings, Post Consumer Brands doesn't provide forecasts. But Friedman signaled one way to measure its future performance.

"My goal is to grow at industry level or better," he said. "And market share is a reasonable proxy for growth."

Kristen Leigh Painter • 612-673-4767