(FORTUNE Magazine) – Forget the commercials that depict cherubic kids leisurely eating a bowl of corn pops. The cereal business isn't much fun these days. After decades of growth, sales have been flat for five years, as many people opt to swallow a bagel at work rather than linger over a bowl of cereal at home. And like most food stocks, the major cereal makers are slumping. As one analyst moaned, "No one calls us anymore!"

That is particularly harsh news for Kellogg, whose stock has tumbled 45% in the past year to $21. As recently as April, however, Wall Street was holding out for the company's turnaround. Kellogg's board tapped Carlos Gutierrez, a promising insider who started as a sales rep in Mexico City, as its CEO. The strategy he articulated seemed sound: cutting costs on trade promotion, which gives retailers money to push the product, in order to increase profits. It has worked (profits grew 48% last quarter) but at a cost: Kellogg's sales slipped by 1%. And even more unsettling, in November perennial No. 2 General Mills dethroned Kellogg as the market leader for the first time.

Of course, it's not entirely Gutierrez's fault--the imbroglio has been building for more than a decade. During the 1970s and 1980s the cereal business was so robust that companies could raise their prices at will. When that strength eroded in the 1990s, Kellogg had to boost sales by using trade promotion, which sliced profits.

Meanwhile, the company has been slow to innovate. It didn't introduce any major new brands between 1983 and 1991. For the first half of the 1990s, it launched just two big snack items. The company finally shook off its lethargy in 1998, kicking into new-product overdrive. It launched Ensemble, a cholesterol-fighting family of foods--everything from pasta to frozen entrees to cookies. But Ensemble was a loser and was pulled after a year.

Kellogg's marketing department hasn't fared any better. Last year it produced a campaign dubbed K-Sentials--placing the logo on cereals like Corn Pops and Froot Loops to signify that they had extra nutritional value. Nobody got it. (An understandable flop: Who thinks, "This is good for me!" while munching on Froot Loops?) The company no longer uses the logo. "They don't have a terrific track record," acknowledges John O'Neil, an analyst at Paine Webber.

Unfortunately for the giant, its problems run much deeper. Many of Kellogg's core products seem, well, generic. "At General Mills, Wheaties is a brand," says William Leach, an analyst at Donaldson Lufkin & Jenrette. "But Kellogg's Corn Flakes? That just describes what's in the box." No wonder generic cereal makers have the easiest time knocking off Kellogg's products.

Even General Mills, which seems to be doing everything right, can't catch a break on Wall Street. The company's new products are logical extensions of the old--people who buy Cheerios will probably enjoy Frosted Cheerios, Honey Nut Cheerios, or even Multi-Grain Cheerios. Last quarter earnings for Big G (as it's known on the Street) jumped by 11%, while sales rose by a lovely 8%. Yet General Mills continues to tumble: The stock, now trading around $31, has sunk 10% since December. Long-time also-ran Quaker Oats is having severe problems too. OAT has dipped 19% since October. (It's now trading around $57.) In a move that reeks of desperation, Quaker Oats has updated its "Mikey likes it!" spots for Life, hoping viewers will revisit and re-embrace cereal's golden age.

Why the reticence on Wall Street? Some investors and analysts fear Kellogg may make a quick grab at market share by possibly launching a price war--a tactic that would further damage all the companies' margins. Fortunately, that doesn't seem likely. Instead, Kellogg and General Mills are furiously developing their convenience-food businesses. General Mills has had great success with its yogurt products as well as its Betty Crocker snack foods. And it seems that Kellogg has learned from its mistakes; it is now more likely to introduce, say, a Pop Tarts line extension than a new cereal brand. In the short term, it's a wise strategy--last quarter sales of Kellogg's convenience foods, including Nutri-Grain bars and Pop Tarts, rose by 5%, demonstrating that it may not be the companies that are stale--just the cereal.

--Amy Kover