Post, MOM Brands combo may help companies as cereal market declines

Maybe one bigger firm can handle the cereal industry's malaise better than two smaller ones.

That's the backdrop to Monday's announcement that the nation's third-largest cereal maker, Post Holdings, would buy fourth-ranked MOM Brands for $1.15 billion.

Cereal is still king of the breakfast table, but sales are falling. The category is under competitive fire as consumers opt for choices such as Greek yogurt or the comeback classic of eggs and bacon. To compound matters, fast-food chains are upping their breakfast offerings.

In this environment, even MOM Brands — a big player in the less-hard-hit "value" end of the cereal business — has seen sales fall by some estimates.

For the year ending Dec. 28, MOM Brands' ready-to-eat cereal sales fell by almost 11 percent over the previous year, according to IRI, which tracks sales in conventional supermarkets, drugstores and some mass-market retailers. Overall, the cereal category experienced a sales drop of 4 percent, according to IRI.

Post was the only one of the four biggest U.S. cereal makers, according to IRI, to tally a sales increase — 2 percent. Post's Honey Bunches of Oats ranked third among top-selling individual cereals. And unlike numbers one and two — respectively, Honey Nut Cheerios and Frosted Flakes — it posted a sales gain.

Post coveted MOM Brands for its solid position in the "value" or low-price cereal business. The value business had a compound annual sales growth rate of 0.2 percent from 2010 to 2014, better than the entire industry's 1.5 percent decline over the same period, according to Post.

"We are far and away the leader in bagged cereal," said Chris Neugent, MOM Brands' chief executive.

The company's bagged business took off in the 1980s and grew steadily over the next two decades. Indeed, MOM Brands' revenue more than doubled between 2001 and 2011.

Bags lead to lower cereal prices, since bags cost about 75 percent less than boxes. And boxes of cereal, since they have more wasted space than bags, require more room in trucks while being shipped.

MOM Brands also saves money by doing very little traditional advertising, a major cost for most cereal makers. Essentially, it piggybacks off the advertisements of major brands.

The roughly $9 billion cereal business is dominated by Golden Valley-based General Mills and Michigan's Kellogg, each of which has just over 30 percent of the market. Post is next with 11 percent, then MOM Brands with 7 percent.

MOM Brands "is a good fit from a Post standpoint, and the price seems good from a Post standpoint," said Rick Shea, a consumer products industry consultant based in Chanhassen.

Investors sure think so. Post's stock settled at $48.83 Monday, up $7.39, or 17.8 percent.