The US cereal category is a competitive market, with volumes under pressure

The US cereal category is a competitive market, with volumes under pressure

Kellogg's lowered earnings forecast has led an analyst to warn that the US food group's challenges in the cereal sector could last longer than expected.

Yesterday, the US cereal giant cut its full-year 2010 earnings target amid a "weaker performance" in some of the US giant's "core" cereal markets.

"Kellogg's new guidance range implies that weakness will persist longer than we - and consensus - originally anticipated," said Sanford Bernstein analyst Alexia Howard said today.

The company's share price closed down only 0.5% yesterday and Howard suggested that investors may have already anticipated a tough quarter "due to the negative impact from the Eggo waffle plant disruption, the cereal recall over the summer and the aggressive promotional activity from its competitors".

Nonetheless, Howard argued that Kellogg's volumes are facing more problems than in the second quarter when the company blamed the recall and the competitive environment in the category.

"Anecdotally we understand that the company is now pointing to volume shrinkage as a reason for its disappointing third quarter - specifically, consumers now appear to be reducing product "waste" by buying fewer products."

However, Howard said that "on balance" Kellogg's woes were "temporary", although the slowdown in the US cereal category in the US and Europe "gives us pause". She said she believes the company will see a recovery in mid-2011, rather than in the first quarter of 2011, as she had originally expected.

Nonetheless, the analyst warned that Kellogg's "history of conservatism" suggested that the company could issue 2011 targets that could dismay investors and hit the group's shares further. "We suspect that guidance for FY11 may also be a disappointment, which could weigh on the stock going into the quarter," Howard said.