Kellogg’s, Kraft and Quaker Oats have followed General Mills in raising prices. Kellogg’s, the world’s largest cereal maker, on Monday raised prices for its ready-to-eat cereal range, the first such change in eight years. The move could be a chance for Kellogg’s to break out of a spiral of declining margins in its most important market, but doubt remains as to whether the US cereal market has really turned the corner.
The prices of most Kellogg’s cold cereal brands in the US, including Grape Nuts and Raisin Bran rose by 2.4% on average or roughly 8 cents per box on Monday. The company has blamed higher product development costs for the price rise. The decision was announced at the same time as Kraft, owner of the Post cereals, and follows hard on the heels of a similar 3% rise instituted by Quaker Oats on about 80% of its cereal ranges and a 2% increase by General Mills.
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So what’s behind this cereal inflation? The hope is that cereals may at last have begun to see some revival in consumption in the US, a market where they have been in long-term decline. In the 1980s cereal prices rose by 6% per year, supported by heavy marketing expenditure to drive volumes, enabling the main manufacturers to enjoy healthy margins. But in the 1990s this growth slowed dramatically as consumers switched to away-from-home breakfasts, forfeiting their cornflakes for a Starbucks Latte.
At the same time, higher quality private label competitors that closely mimic the characteristics and marketing of branded products have entered the market, putting downward pressure on the prices of Kellogg’s and its competitors. Meanwhile cereal manufacturers found it hard to develop new brands that captured consumers’ attention. While cereal bars have provided a snack alternative, manufacturers found it hard to establish new brands and increasingly came to rely on aging brands such as Cornflakes and Cheerios.
The price rises signal a renewed confidence by cereal manufacturers that the worst is behind them. However, it would be foolish to assume that this is necessarily a turning point. For a true cereal revival there will need to be a switch back to in-the home consumption combined with greater consumption of cereals outside of breakfast time. So far there is little evidence that this is happening. More innovation will be needed to renew growth in the market.
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