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General Mills hopes natural ingredients will boost U.S. cereal sales

CEO of General Mills, Ken Powell gestures as he gives an interview to CNBC on the floor of the New York Stock Exchange July 8, 2014. REUTERS/Brendan McDermid

By Anjali Athavaley

NEW YORK (Reuters) - By removing artificial colors and flavors and selling gluten-free cereals, General Mills Inc (GIS.N) Chief Executive Officer Ken Powell is betting his company can buck a broader decline in U.S. cereal sales.

General Mills will begin marketing five of its biggest Cheerios varieties as gluten free later this summer. The company also said in June that it is removing artificial flavors and colors from all of its cereals, a move that its competitors have made with other products.

"We've developed what we think is a good model and a good theory about how people are thinking about breakfast," Powell said in an interview on Wednesday. "We've learned that part of what's happening with the cereal category is there are things people are avoiding."

The moves illustrate how General Mills is tweaking its offerings as consumer perception of what is healthy changes. While people used to make decisions based on calorie counts, they are now looking for other attributes such as ingredients that are easier to understand and foods higher in protein, according to industry executives.

One casualty of that shift has been cereal, whose U.S. sales at General Mills fell 3 percent to $2.3 billion in fiscal 2015. Cereal is General Mills' second-largest business in the United States.

Overall, U.S. cereal sales are expected to decline at an annual rate of 1 percent to 2 percent through 2019, according to Euromonitor International.

But Powell dismissed the idea that U.S. consumers want to leave the category entirely, noting that cereal is still a $10 billion business in the United States.

"It's more about providing the right product profile," he said.

General Mills, like its peers, is under pressure from investors to grow amid changing consumer tastes. The company's overall sales declined 2 percent in fiscal 2015 to $17.6 billion.

"It does get down to making sure that the product ultimately resonates with consumers," said Morningstar analyst Erin Lash.

The company also aims to increase sales in its natural and organics business from roughly $700 million to more than $1 billion by 2020.

The increase would come partly through widening distribution of organic macaroni-and-cheese maker Annie's Inc, which General Mills purchased in October, Powell said.

He also said the company would be open to more acquisitions of natural and organic companies. Its portfolio currently includes brands like Cascadian Farm and Larabar.

"We’re interested in this space, so if we see other properties that fit well with what we got, we’ll acquire them," Powell said.

(Reporting by Anjali Athavaley; Editing by Lisa Shumaker)