Consumer Nation

Economic Signals From Cereal, Toothpaste and Pet Food


There has been a great deal of talk about a consumer slowdown this summer. We've seen it in consumer sentiment and confidence, but has it translated into behavior and spending?

Based on Wednesday's earnings news, the answer is an unequivocal yes.

Let's start with Kellogg , the world's largest cereal maker. The company basically had a worst-case scenario:

Revenue and profits missed estimates, and the maker of Fruit Loops and Corn Flakes lowered its full-year guidance.

In fact, profits were 15 percent lower than a year ago.

That's a departure from the general pattern of growth in earnings if not in revenue. Kellogg dropped in both categories.

Some of the drag involved a voluntary recall of 28 million boxes of cereal, which translated into 10 cents a share of lost profit, but overall, there was a weakness in cereal sales.

In North America, sales were down double-digits. Latin America and Asia did grow, but not enough to offset domestic weakness.

Another key measurement to guage growth is pricing. CEO David MacKay called it a "deflationary environment", which is not good for profits moving forward.

The news from Colgate-Palmolive was even more troubling when it comes to pricing. For the company that has more than 44 percent of the global toothpaste market, pricing was down in the US, Europe, Asia and Africa. If not for growth in Latin America, the global number would have been negative.

Kellogg Misses Estimates

Putting aside the EPS drag from a currency devaluation in Venezuela—which, believe it or not, could cost 15 cents a share for the full year—just about every metric from Colgate confirmed weakness in the US.

For example, take the company's pet-food segment, which accounts for 13 percent of total revenue. Pricing and volume saw decreases of 4 percent. For a company that has total sales of 13-billion, that's a big drop.

Even if global volumes are on the rise, without a rebound in the US—and without any strong pricing power—profits and margins will be challenging for the rest of 2010, and that's a major reason why both companies lowered guidance.

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