The US cereal industry has been highly price sensitive in recent years, as evidenced by the rise in popularity of cheaper private-label and bagged cereals. And, as the US economy continues to stagnate, competition has intensified.
Last week, market leader Kellogg was forced to cut its 2010 profit and sales growth targets, in part as a result of weak cereal prices and continued “competitive intensity” in the US – the second time it has reduced its earnings guidance for the year.
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According to Rick Shea, president of Shea Marketing and ex-VP of marketing for Malt-O-Meal – the fifth-largest cereal maker in the US – competition is being driven by a “deal-seeking consumer”.
“Two-thirds of every box of cereal is sold on some form of deal (cents off, feature, coupon),” Shea says. “This makes it critical for leading cereal manufacturers to have a strong product innovation pipeline and cost-effective trade and consumer promotion programmes. Unfortunately for Kellogg, General Mills and private-label brands appear to be executing better at retail these days. If Kellogg’s doesn’t turn the ship around, they may lose their leadership position to General Mills.”
According to figures from Datamonitor, Kellogg accounts for around 31.5% of the US market, and together with General Mills, the pair dominate the category in value terms. They have a combined market share of around 61%, so General Mills is a very close second to the Frosties maker.
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PepsiCo holds third position with its Quaker cereal brand, while Ralcorp Holdings is in fourth place followed by Malt-O-Meal.
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By GlobalDataLast week, Cheerios maker General Mills raised eyebrows when it upped the list price for selected lines in the US by an average of 2.5% due to pressure from higher commodity costs. The products represent about a quarter of General Mills cereal volumes.
A spokesperson for the cereal maker says General Mills had been able to forestall price increases through productivity on these brands for several years but, in the face of rising raw-material costs, it has decided to up its prices on 15 November.
A price increase in such challenging economic conditions in the US could be seen as something of a gamble but General Mills appears to have managed to maintain sales of higher-priced cereals better than its rivals, in part because of new products and loyalty to Cheerios. What’s more, the price increase will no doubt help foot the bill for launching three General Mills brands: an organic cereal called Sunrise, Honey Nut Chex and Nesquick – a chocolate cereal sold only outside the US.
And with more money to spend on marketing, it seems General Mills could continue to generate strong sales even with the higher prices, as chairman and CEO Ken Powell confirmed at the Barclays Back-to-School Conference last month.
“Our goal is to lead growth for this $9bn category going forward. And the best way to do that is by building our brands and delivering meaningful innovation. We’ve got a strong line up of innovation in the market right now.
“Chocolate Cheerios – which we launched back in January – is on track to deliver year-one retail sales of $65-70m across all channels. That would put it among the biggest new product launches in the category in the past decade,” he added.
Cheerios represents around 13% of all cereal sales in the US, according to the firm, and these moves by General Mills could put even more pressure on Kellogg and Ralcorp’s Post unit, according to analysts.
Roger Dickerson, an analyst for Consumer Edge Research, believes that historically, an increase in pricing has helped grow the US cereal category and if Kellogg attempts to regain its share by increasing advertising and improving innovation, this may increase relative competition in the category for General Mills.
Whether Kellogg will lose its crown as leader of the category is debatable, although signs point to that already occurring.
“[The pricing environment] has been pretty intense this year,” Dickerson tells just-food. “They’re all trying to gain share….and they need pricing for growth. The question now is, can General Mills continue to close the gap on market share?
“In the US track channels, on a 52-week rolling basis, General Mills has gone from a 30% market share at the beginning of 2008 to a 32% market share year-to-date,” Dickerson adds. “So it has increased its market share by almost 200 basis points in the last three years. Whereas Kellogg in the past three years has gone from about a 34.5% market share down to around 33%. So General Mills has picked up about a 1.5% share in the past two years.”
Dickerson believes that for Kellogg to now increase its share of the market, it either needs to increase prices or grow its volumes more than General Mills.
“The question is whether Kellogg can grow its volumes more than General Mills, while increasing pricing,” he adds.
Last summer Kellogg said it would aggressively step up its spending in a bid to protect its share of the market, but the higher costs hurt profits and as a result its shares suffered.
Morningstar analyst Erin Swanson believes that while Kellogg is not immune to aggressive competition, its “inability to get its hand around these issues” is a “concern”.
“In our opinion, increased promotional spending throughout the industry is conditioning consumers to expect lower prices, and in the absence of product innovation that resonates with consumers, weaning them from lower prices could prove challenging, particularly as unemployment levels remain elevated,” Swanson said.
Dickerson believes that passing on price increases to consumers could ultimately benefit private-label cereal suppliers.
“As long as an increase in prices is small, year-over-year, we would expect the retailer to pass that through to consumers, which in turn could potentially help the re-emergence of private-label growth, as long as the US consumer remains weak.”
Good news for Ralcorp no doubt, which holds leadership of the private-label segment with 65% of the $1bn sales of own-label cereal.
Ralcorp has struggled with the Post brand it acquired from Kraft Foods in 2008, losing share as it pulled back sharply on promotional activity last summer to concentrated its efforts on integrating the business.
As a result, General Mills and Kellogg gained significant share between May and November 2009. However, Ralcorp is likely to come back to “normal” spending levels for promotional activity by the end of the year, according to Sanford Bernstein analyst Alexia Howard.
“When I speak to General Mills and Ralcorp, I actually think that the outlook for next year is pretty good because General Mills has already announced price increases of low-single digits across much of their US cereal portfolio which will actually bump prices up a little bit, as commodity cost pressures kick in,” Howard tells just-food.
“If you look right now at the data, Ralcorp is actually seeing a step up in pricing which is great news,” Howard says. “That implies that they’re hitting easier comps on promotional activity. Even Kellogg’s market share has improved.
“I actually think it’s shaping up to look pretty good next year,” she adds.
