By Ramkumar Iyer and Anjali Athavaley
(Reuters) - General Mills Inc reported a lower-than-expected quarterly profit as the maker of Cheerios cereal and Betty Crocker cake mixes lost further ground to cheaper store-branded foods amid rising demand for alternative breakfast options.
The company's shares fell more than 4 percent on Wednesday.
General Mills said sales at its U.S. retail business, which sells cereals and items such as Green Giant canned and frozen vegetables and Progresso soup, fell 5 percent in the first quarter ended Aug. 24.
The division, which accounts for more than half of the company's total revenue, has been hit by intense competition from private label brands and new breakfast options such as frozen egg sandwiches and yogurt.
In an interview, Chief Executive Ken Powell pointed to a tough retail environment where sales of non-durable goods, which include food and beverage items, have been flat to down.
"That's been a fairly broad trend over the last several quarters. We think it links generally to lack of income growth ... it shows up in consumers being very, very careful."
The company is aiming to capitalize on consumer trends such as a growth in snacking and demand for organic and natural food.
It has been cutting costs and increasing its share of the fast-growing natural foods market to revive sales, which have now declined for four quarters in a row.
The company said last week it would buy organic food producer Annie's Inc for about $820 million.
General Mills said on the call that it could benefit from Annie's marketing prowess in the natural food category. In the meantime, it plans to use its scale to increase the distribution network of Annie's products.
The food retailer has also launched protein-based Cheerios cereals and Nature Valley granola bars as it seeks to expand its offering of healthier foods.
It struck a deal with McDonald's Corp to have its Yoplait yogurts offered with Happy Meals in thousands of outlets.
General Mills said on Wednesday it expects to save about $100 million in costs by fiscal 2017 as it continues to review its North American operations and cuts costs.
The company's net income fell to $345.2 million, or 55 cents per share, in the first quarter, from $459.3 million, or 70 cents per share, a year earlier.
Sales fell 2.4 percent to $4.27 billion.
Excluding items, the company earned 61 cents per share.
Analysts on average had expected the company to earn 69 cents per share on revenue of $4.38 billion, according to Thomson Reuters I/B/E/S.
The Minneapolis, Minnesota-based company's shares were trading down 4.2 percent at $50.94 late morning on the New York Stock Exchange.
(Editing by Sriraj Kalluvila and Saumyadeb Chakrabarty)