By Anjali Athavaley
NEW YORK (Reuters) - General Mill Inc (N:GIS), which owes its return to growth in the United States to its purchase of organic macaroni-and-cheese maker Annie's Inc and the popularity of its yogurt, faces a challenge with its traditional cereal brands.
The maker of Yoplait, Nature Valley and Cheerios reported a 1 percent rise in U.S. sales in the third quarter ended on Feb. 22. It said the results marked an inflection point from the declines of the first half of the fiscal year.
But without a 2 percentage point bump from the October acquisition of Annie's, sales were down. U.S. cereal sales, a key focus area of the company, were flat.
The numbers illustrate a growing shift by consumers toward foods they consider healthier, whether due to their organic origins or the main nutrients associated with them. The trend has weighed on the performance of the most entrenched processed food makers, including General Mills , Kraft Foods (NASDAQ:KRFT) Group Inc (N:KFT) and Kellogg Co (N:K).
Besides the Annie's purchase, General Mills has altered its Yoplait yogurt to appeal to health-conscious consumers by simplifying ingredients and removing high fructose corn syrup and artificial colors and flavors. Yogurt sales were up 10 percent in the third quarter.
But breakfast cereals, the company's third-biggest category behind snacks and yogurt, remain a tough spot. Cereals accounted for roughly $2.9 billion of the company's $17.9 billion in annual sales in fiscal 2014.
Industrywide, U.S. cereal sales are expected to decline at a rate of 1 percent to 2 percent through 2019, according to Euromonitor International.
"We think the category will need more innovation and renovation of core brands," General Mills Chief Executive Officer Ken Powell told Reuters. "We feel that we are quite competitive."
But he added: "Frankly, we'd like to gain more share."
General Mills has introduced Cheerios with protein, added more cinnamon to its Cinnamon Toast Crunch and reintroduced its French Toast Crunch, all moves that it says have produced positive results. It also plans to make the bulk of its Cheerios products gluten-free.
Still, it is too early to tell whether the cereal business can replicate yogurt's turnaround, said Morningstar analyst Erin Lash.
"General Mills has always been, with regards to gluten-free, an early promoter of that category," she said. But overall, cereal "doesn't lend itself to the convenient, on-the-go factor."