Is Big Cereal going the way of Big Pharma?

I ask because there seems to be some evidence of sagging innovation in the all-important breakfast cereal market.

Consider this article in Fortune that extols the relentless efforts by General Mills, the maker of Cheerios, Wheaties and Lucky Charms, to fatten its margins by cutting costs. It cites General Mills’ elimination of letter shapes in its Hot’n'Spicy Chex Mix, which has provoked this online protest petition.

Then consider this chart of branded cereal innovation in the 20th century produced by Geek Out New York. It shows a burst of cereal creativity in the mid-century that brought us such great names as Rice Krispies (1928), Cheerios (1941) and Special K (1956). There is a history of Cheerios here.

So what will higher commodity prices and discontent among McDonald’s franchisees do to the Dollar Menu?

The question arose yesterday after McDonald’s disclosed its second quarter results and said it was considering changes to the Dollar Menu, which offers US customers items such as a double cheeseburger or a McChicken Sandwich for a dollar.

That is pretty cheap and it is much more popular among customers than franchisees, which in effect have a price cap imposed upon them by McDonald’s. For other items they sell, they have more freedom to charge a premium.

The effect on franchisees’ profits since McDonald’s introduced the Dollar Menu in has been striking, according to a Stanford University study published last year. It found that McDonald’s had constrained franchisees’ ability to set higher prices than stores directly operated by McDonald’s.

The study found that the”franchisees’ premium” for a Big Mac Meal in 199 was 12.5 per cent but dropped to 3.5 per cent by 2006. In contrast, the premium for Chicken McNugget meals, which did not have a ready substitute on the Dollar Menu, had changed only slightly.

Meanwhile, McDonald’s has been spending the majority of its national advertising budget on marketing budget items such as the Dollar Menu. That has placed further strain on relations with franchisees.

Now, it seems as though something is going to have to give. So it is time to go out and buy that double cheeseburger for a dollar while stocks last.

I have reviewed a new book by Donald Keough, the former president of Coca-Cola, called The Ten Commandments of Business Failure in tomorrow’s FT.

Here are the first few paragraphs of the review:

The thing that bothers me about this book is the author’s grandfather’s toe. According to Donald Keough, the former president of Coca-Cola and life-long friend of Warren Buffett, his grandfather John was an Iowa homesteader who was cutting wood one day when “he swung the axe and cut off his toe. He simply shoved the toe back on, bound it up with burlap, and finished his work… the toe, the foot and my grandfather survived.”

I am sorry, but I do not believe that. You cannot amputate a toe, fasten it back on with a bit of cloth and re-attach it, bones, tendons, muscle and all. This is the kind of hearsay that goes down well in a bar, where standards of proof are low, but would not work in a court of law.

Grandpa Keough’s toe sticks out, so to speak, but the rest of Keough’s narrative also has a touch of Irish-American blarney. There is plenty of tough, no-nonsense advice dispensed here, much of it undeniably valid, but is it the whole truth and nothing but the truth?

The evidence suggests not. Keough has plenty of stories he could tell about Coca-Cola, where he served as president under chief executive Roberto Goizueta and then joined the board. From this vantage point, he not only oversaw what Coke’s chief executives did but also had a fearsome reputation for interfering.

You can read the rest here. Feel free to leave comments below.

I cannot say that I was keen on New York City passing a law to force fast food restaurants to post the number of calories on the food items they sell. It struck me as a single state initiative that would cause of lot of bureaucratic difficulty for no very good reason.

Still, I am intrigued by the results, now that outlets have started to comply, and by the lesson that one’s instincts about which foods are calorie-rich are not always accurate.

A case in point: the Starbucks next to our office in Manhattan, which now has calorie labels on its cakes and pastries.

So, which one of these would you guess had the most calories and which the least?

1. A slice of marble cake with a chocolate swirl in it

2. A slice of banana nut loaf

3. A slice of lemon cake

The answer is 3. For the record, the first has 430 calories, the second 460 calories and the last 500 calories. Somehow, I was fooled by the fact that lemons sound healthy, and nuts and bananas natural, while chocolate sounds sinful.

Just goes to show. Mind you, I am still not sure that I favour the law.

If Warren Buffett does team up with Mars to buy Wrigley for more than $22bn, it will be not only a quintessential Buffett deal but a reminder of where value lies in a downturn.

Mr Buffett has a sweet tooth, not only personally (he is known for his devotion to Cherry Coke) but as an investor. Berkshire Hathaway’s 8 per cent stake in Coca-Cola is among his longstanding stakes in big consumer brands.

Famously, confectionery companies are often good investments during in recessions as people cut back on luxuries and comfort themselves with small indulgences such as chocolate bars.

They also meet the Buffett test, which he used recently to justify not taking a stake in Google, that he has to be able to grasp a company’s product and the sustainability of its competitive edge.

One might put chewing gum at the opposite end of the scale to Bear Stearns. Mr Buffett was said to have discussed taking a stake in the Wall Street firm last September but rejected the idea, which was a smart decision.

He has more faith in chewing gum than credit derivatives.

The world moves fast these days. Barely has one heard of something than it turns into a phenomenon.

Take the Clover filter coffee machine, which I learned the other day from perusing a local blog is an $11,000 machine that somehow makes better filter coffee than almost any of the alternatives.

It is being installed in a coffee bar that is about to open up near the subway station I use every morning so I was planning to go in and try a sip.

Now Starbucks announces that it is buying the company that makes the Clover and will start installing the machines in all many of its outlets. It is part of Howard Schultz’s plan to bring some sorely-needed magic back to his chain.

If all Clovers are going to be commandeered for Starbucks outlets, does that mean it will try to confiscate the Clovers that are already out there? Presumably not, in which case my  local machine will have scarcity value.

Somehow, however, my anticipation of trying a Clover-brewed coffee has been spoiled by the disclosure that there will shortly be one on every street corner.

I am encouraged to return to the topic of supermarkets and plastic bags by the Daily Mail, my former employer (a long time ago). It has just launched a campaign to stop the proliferation of plastic bags in the UK under the slogan: Banish the Bags.

The Mail estimates that 13bn flimsy plastic bags are handed out by British high street stores each year. It is a classic example of companies and consumers not having to pay the financial cost of environmental destruction and therefore not caring about it.

There are some efforts to curb plastic bag use in the US but I have a suggestion for one thing that all US supermarkets could stop: the pernicious habit of “double-bagging”.

Most stores in New York hand out extremely flimsy and cheap plastic bags which tear if any heavy load is placed in them. The staff therefore routinely place every plastic bag in another one, thus doubling the number of plastic bags at a stroke.

This is an absurd practice that all stores, even if they do nothing else, ought to stop.

Further to my post the other day on the remarkable staying power of Marcel Ospel, the chairman of UBS, it seems the clock is ticking.

By cutting his term of office – and those of all board members – from three years to one, UBS is throwing a sop to investors who would like him to step down.

More generally, the problem of managerial entrenchment has always seemed to me to be bigger at continental European companies than those in the UK and US, where terms of office on board can often be short.

The tide is, however, moving in the Anglo-Saxon direction. It is bound to do so, given that investors have become more active and obstreperous in countries such as Germany and France.

There is a sort of irony here. The continental European institutions that have been the keenest to bring an “equity culture” to their countries have been the big banks such as Deutsche Bank and UBS. They have tried to break out of low-profit domestic retail banking into the volatile world of international investment banking.

Live by the sword, die by the sword.