Breakfast cereal: Are cereal sales in developed markets going soggy?
Low birthrates present cereal manufacturers with a structural challenge
Breakfast cereal sales in mature markets are under growing pressure. While, broadly speaking, volume and value sales have been fairly steady, the sector has failed to generate substantial growth. Significantly, traditional cereal concepts are facing increasing challenges, pulled on the one hand by new formats and pushed on the other by concerns ranging from macro-economic issues to concerns over health and wellness. In part one of this month's management briefing, Katy Askew assesses some of the pressures boxed cereal manufacturers are grappling with.
Around 35% of the global population buys cereal products, mostly in the US and the EU. However, growth in these markets has come under mounting pressure: boxed breakfast cereal manufacturers, in particular, are increasingly facing a lacklustre category in highly competitive and somewhat saturated developed markets.
According to figures from Euromonitor International, in the US, the world's largest market for breakfast cereal products, 2012 breakfast cereal sales were largely flat. In the UK, the second-largest cereal market in the world, volumes were up just 1%, although value sales rose a healthier 5%.
The other markets in western Europe have also come under pressure, with category declines in some of the largest markets being reported. In 2012 sales in Germany booked fell 0.6% to EUR875.3m, while in Italy sales also declined moderately, dropping to a value of EUR489.7m and continuing a trend that has been in evidence since 2008, when sales were worth a total of EUR517m. In France, the second-largest European market, sales were up a more robust 3.3%.
While the performance of the category is somewhat patchy from region to region, major challenges to traditional boxed breakfast cereal sales have emerged as consumption patterns have reacted to both push and pull factors.
Perhaps one of the most significant long-term challenges that cereal makers have faced in recent years relates to demographic trends in mature markets.
A lucrative sector of the boxed cereal category is cereals aimed at kids. These cereals - which are usually defined as a "fun" product with a focus on delivering an appealing taste profile and frequent association with cartoon characters - account for a significant proportion of ready-to-eat cereal sales. For example, in 2011, children's cereals and family cereals accounted for GBP1.64bn in sales in the UK alone, Euromonitor figures reveal.
Children, young people and families are an important consumer segment for cereal manufacturers. However, falling birth rates in developed countries mean this consumer group is actually one that is either seeing a slowing of growth or - in some countries - has gone into decline.
The replacement birthrate - the number of births required to maintain a stable population - stands at 2.1 births per 1,000. Few developed countries have a birthrate that matches this: in 2012, the US had a total fertility rate (TFR) of 2; Germany, Spain and Italy's TFR stood at 1.4; the UK's TFR was 1.9; while France boasted a TFR of 2.08.
The result is that developed markets present cereal manufacturers with ageing populations, limiting the growth prospects for cereals aimed at young people and families. But this is not the only demographic challenge to cereal manufacturers. The majority of births in developed countries come from outside consumer groups that are historically large cereal consumers. For instance, in the US, the birth rate is driven up by a higher proportion of children born into Hispanic families, while in western Europe a higher percentage of births are accounted for by families of a non-EU origin.
These consumer groups frequently eat less cereal products. For instance, in the US research by NPD Group suggests 6% of Hispanic families will habitually eat hot cereal, compared to 10% of non-Hispanic families, and 24% eat cold cereal, compared to 28% of non-Hispanic households. Manufacturers therefore have to work harder to win over these expanding consumer groups.
Another issue that has impacted demand for children's cereals in particular is concerns over nutritional content. Health campaigners have linked cereals marketed to kids in particular to the growing obesity crisis - with the suggestion they are high in sugar and salt and low in nutrients becoming widespread.
According to a report published by the Yale Rudd Centre for Food Policy and Obesity, food manufacturers have made progress on reformulating cereals to contain less sugar and salt: 13 of the 14 brands marketed to children in the US were reformulated for the better - 45% had less sodium, 32% had less sugar, and 23% had more fibre.
However, lead researcher Jennifer Harris was quick to emphasise the limitations of the progress made. "Children still get one spoonful of sugar in every three spoonfuls of cereal. These products are not nutritious options that children should consume every day."
Changing lifestyles are also impacting patterns of cereal consumption in developed markets, IRI senior insights manager Leon Palmer tells just-food. "People are not sitting down to eat breakfast like they used to," he suggests.
This has prompted growing competition from more convenient breakfast options that do not require people to sit down with milk and spoon in hand.
"We are witnessing growth in adjacent categories such as morning goods, cereal bars, breakfast biscuits and instant porridge as time pressured consumers seek more convenient breakfast solutions," Palmer explains.
A parallel trend is rising competition from fast food restaurants and coffee chains, such as Starbucks or McDonald's, which hope to capitalise on the lucrative opportunity to up-sell add ons in meeting the needs of the breakfast occasion.
While convenience is driving a step up in competition on the one hand, the down economy and reduced consumer spending power is adding to the competitive environment by driving growing acceptance of own label alternatives.
Cereal - once primarily the domain of entrenched branded heavy hitters - has seen a shift towards growing uptake of private label in recent years.
The transformation of consumer attitudes to private-label cereals has been led by markets like the UK - which has been at the forefront of the "retailer as brand" drive - but is also evident in highly brand-conscious markets such as the US. With cereal brands retailing at prices in excess US$5 a box, private label has become an increasingly appealing option. Private-label manufacturers have looked to capitalise by producing cereals that are designed to resemble popular cereal options.
The growth of own label, IBISWorld analyst Patrick Ross says, has been accelerated by the economic downturn as consumers are drawn to low price points.
"Supermarket own-brand products have risen in popularity, driven by the combination of a low price point and the recent downturn. Supermarkets, as sellers of branded cereals, are perfectly placed to mimic and follow the trends in cereal products. This enables them to sell very similar products on a mass scale at a low price, stealing focus from branded offerings," Ross tells just-food.
Boxed breakfast cereal manufacturers are finding themselves increasingly squeezed between falling consumption in established markets and growing competition.
Nevertheless, cereal makers such as Kellogg, General Mills and PepsiCo's Quaker, represent some of our industry's most recognised and strongest brands. In the remainder of this month's management briefing, we take a look at the response of these industry Goliaths and examine how they are working to leverage brand strength, emerging trends and promotional tools to drive growth and support the long-term health of the category.
Click here to read the full just-food briefing into the breakfast cereal sector.
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