Breakfast cereal is still big business in the US but sales are flat and volumes down. However, there are some growing segments amid increased interest in healthier or natural options. Industry watchers argue that, until now, some of the larger players have not responded quickly enough to these trends and time is ticking, meaning the likes of Kellogg and General Mills should look at M&A for growth.
“Cereal in the US has a permanent problem. Culturally cereal is off-trend.” Such phrases will cause furrowed brows in the boardrooms of breakfast cereal manufacturers present in the US, where, for decades, consumers have grown up on a bowl of cornflakes or Cheerios.
Breakfast cereal is still big business in the US; retail sales were worth just under US$10bn in 2012, according to data from Euromonitor. However, swathes of the category appear in almost secular decline as consumers, increasingly wanting healthier or more convenient products – or those that keep them fuller for longer – put down their spoon and pick up a yoghurt cup, breakfast biscuit or muffin.
“We are not very bullish on the long-term prospects of ready-to-eat cereal growing volumetrically,” James Richardson, senior vice president at Hartman Strategy, the consulting arm of market researchers The Hartman Group, says. “In virtually every segment per capita volume is down. Culturally cereal is off-trend. It’s being replaced by other food forms that deliver similar benefits.”
In the last half a decade, the US breakfast cereal category has seen ups and downs. There was a spike in sales in 2009 as, in the teeth of the recession, US consumers went back to their breakfast bowls, seen as a value option for those watching their wallets or out of work.
However, looking at the last five years as a whole, breakfast cereal sales have been flat at best. As the US economy has slowly improved, consumers have, according to Jeffrey Cohen, cereal production industry analyst at IBISWorld, “returned to their pre-recession habits”. He says: “As people return to work, cereal producers are starting to identify that the busier people are, the less likely they are to sit down to a traditional cold or hot breakfast in the morning.”
Nevertheless, it is not just macroeconomic factors that have driven the performance of breakfast cereals in the US; consumers, looking for health and convenience at breakfast, are looking elsewhere. Analysts are divided on how effectively the larger cereal manufacturers, like Kellogg and General Mills have responded to the changing marketplace.
“It does appear that at least the major producers and some of the private-label producers, are better understanding what consumers want and are responding in kind by producing products that appeal to many of them,” Cohen says.
Richardson, however, is less complementary. Parts of the US breakfast cereal category are in growth. Demand for natural, organic, nutrient-dense and gluten-free products has been buoyant. However, Richardson says smaller manufacturers, like Nature’s Path have reacted quicker than their larger counterparts to changing consumer demand. The likes of Kellogg (Kashi) and General Mills (Cascadian Farms) do have cereal businesses that serve the growing segments. However, Richardson argues the innovation from the larger players in the sector on new product development and marketing has not reacted sufficiently to the new look US breakfast cereal sector. They have, he says, opted to launch simple additions to existing portfolios or turn to marketing campaigns for existing brands.
“We’ve seen a lot of new product launches in the mainstream cereal aisle in the last two years, which is great because it shows the industry is coming out of the doldrums of the recession. But if you look at what they are launching, a lot of it is derivative of what they have always done,” Richardson says. “For example, everything’s got chocolate on it.”
He says some manufacturers are lifting ideas from other categories, pointing to Post Holdings’ move to launch a Greek yoghurt variety of its Honey Bunches of Oats brand. “Obviously we know what they are chasing but is this an offensive move to grow a category? Not from our perspective.” Richardson says there have been some “fairly innovative” marketing campaigns from Kellogg and General Mills but questions whether they will boost sales in the longer term. “We are seeing General Mills and Kellogg engage in with both Lucky Charms and Frosted Flakes. These are good marketing ideas but they are all defensive.”
The larger brand owners like Kellogg and General Mills, which account for over 50% of US breakfast cereal sales are rolling out products to try to meet consumers’ new demands. Last week Bear Naked, a US cereal brand owned by Kellogg, launched granola lines sold in pouches for consumers to eat on the go. The line adds to the Special K granola bars, which Kellogg launched last year, emphasising their protein content.
However, some believe the giants of the sector will need to do more to breathe fresh life into their cereal sales. Looking ahead, the consensus among industry watchers seems to be that the US breakfast cereal sector is to see, at best, anaemic growth. Consumer demand for healthier and more convenient products will continue and is likely to increase and there is the argument the likes of Kellogg and General Mills need to go further into the healthier and natural segments of the breakfast cereal category.
There is, of course, a difference in the margins manufacturers enjoy from producing and selling a bowl of cornflakes when compared to offering the more complex premium products. Perhaps concern over the margins from natural or healthier products is holding back some of the larger players from making more significant strides into the more buoyant parts of the US breakfast cereal category.
For Richardson, M&A will be a vital for the larger manufacturers to boost their presence in more vibrant parts of the business – and to improve the likelihood of doing that profitably. “The challenge is going to be one of sustaining the category and then shifting their portfolio balance to get more and more of their revenue from growing end of cereal. The margin structure of those products is different to cornflakes. The challenge is how to do that and not to destroy your margins. You imagine that some of the emerging players have figured that out and certainly the big cereal giants could figure that out together with supply chain muscle and buying power.”
Richardson says he has been “mystified” at the lack of interest in recent years from the likes of Kellogg and General Mills to add to their existing but smaller natural and organic cereals business. Richardson says the incremental innovations and marketing campaigns have gone – and will only go – so far in meeting consumer demand and, critically, boosting their cereal sales above the predicted long-term trend of flat or, at best, low growth. “What we are not seeing from the big guys is really bold action i.e. buying the little guy, buying the next Kashi and blowing them up and getting them to scale,” Richardson says.
Post, the fourth-largest branded cereal firm in the US, has appeared to identify the need to acquire smaller peers in the growing segments of the breakfast cereal sector. Last month, it signed a US$158m deal to buy cereal, granola and snacks assets owned by Hearthside Food Solutions, a deal Richardson says was a “very smart move”. He adds: “Certainly other players have other opportunities and there are other companies out there to buy.” US breakfast cereal will, at least for the foreseeable future, be a staple consumer sector in the food industry.
Speaking to analysts last week, General Mills CFO Don Mulligan said demographic trends would benefit the category. “Over the balance of the current decade, children 12 and under and adults 55 and over are projected to account for over 80% of total US population growth and these groups have the highest rates of per-capita cereal consumption. So we expect these trends to provide a tailwind to category growth in the years ahead,” he said.
However, Euromonitor forecasts the category will grow; it has forecast sales of $11.41bn in 2017, compared to the revenues of just under $10bn in 2012. Year-on-year growth is forecast to be around 2.5-3% a year. Nevertheless, whether that will equate to volume growth is unlikely, given the inflation seen in the market in recent years. All is not lost for manufacturers. There are fast-growing segments to hit. Nevertheless, companies will have to devote fewer resources to launching simple variants or more flavours and pay serious attention to trends like health and wellness or natural to really see growth from their breakfast cereal businesses return. And M&A is one tool at their disposal that should turn to more readily.
Click here to read the full just-food briefing into the breakfast cereal sector.