Where next for cereals?

Cereal sales increased in 2003, but can growth be maintained? Manufacturers are undertaking a range of strategies including promotions, new product development and brand extensions, but can they really tap into on-the-go snack culture?

At home breakfast decline impacts cereals

As the on-the-go snack culture continues to take hold of lifestyle and eating habits, traditional breakfast products including bread, pastries and cereals are beginning to feel the pinch. Nonetheless, despite flat sales between 1998 and 2002, Euromonitor’s latest research shows that global cereal sales picked up again in 2003 by more than 3%.

Both exchange rate fluctuations and price increases by leading players late in 2002 contributed to this increase. However, modest volume gains indicate the success of increased promotional activity, and an exceptional growth in children’s breakfast cereals, while hot cereals struggled to maintain the strong growth seen over the past few years.

This renewed focus on children’s cereals, however, does not mean that adult products have been left behind. Indeed, innovation and brand extension have been key to developing adult brands. Single-portion with milk cereal options have started to develop and cereal-branded breakfast bars saw double-digit growth in 2003.

Promotion and licensing strategies successful but costly

Although children’s cereals did less well in the US due to health and pricing issues, globally growth in children’s breakfast cereal was driven by licensing and by innovative NPD, which resisted private label gains and added incremental value. In the UK key newcomers included Monsters Inc (Cereal Partners Worldwide) while Kellogg expanded its global Disney licence with launches of Hunny B’s and others.

Mexico, the third largest cereal market in the world in dollar terms, is known for exceptionally strong promotional activity where it is unusual to find a cereal product without some kind of promotion. This includes anything from free volumes, to prize draws for cars and holidays.

While promotional activity of this kind does drive sales, it is also expensive for the companies concerned. Kellogg, while engaging in licensing and other promotions globally, has also developed a strategy which drives sales without significant cost to itself through its 2 week diet plan. The concept, which taps into adult health concerns by claiming that consumers can loose 6lb in 2 weeks by replacing 2 meals a day with cereal, was first launched in 2000 and has appeared regularly around the world since.

This type of strategy is far more successful than mere flavour variations. Even adding fruit to cereal, which Kellogg promoted in 2001 with the launch of Special K Red Berries, only tends to encourage switching between cereal brands, whereas the Kellogg diet plan is designed to boost overall cereal consumption.

Single portion cereals to grow in Europe

Single portion cereal servings with milk/yoghurt and spoon have appeared in a number of countries around the world, and the jury is still out on whether these will become a significant new product development for cereals. Certainly, in the US, where convenience is inextricably combined with car culture, any product which cannot be hand-held is not going to be a success.

Here cereals are under severe competition from hand-held morning goods and single-serve cereal portions are not going to help. Kellogg launched one such product in 1999, Breakfast Mates, which failed to make a significant impact on the market.

By contrast, in the UK single-serve cereals are gaining increasing interest. Following on from Ennis Foods’ launch of Rumblers in 2000 which offered cereal pots with milk or yoghurt, Kellogg launched To Go Twinpots in 2001. High price points deterred customers and Kellogg re-launched the concept in the UK and Germany in 2003 with core brands Corn Flakes and Frosties.

Also in 2003 Ennis Foods is about to launch a children’s version of Rumblers called Breakfastables, which will be positioned alongside Kraft Lunchables in stores. In Western Europe, convenience relates more to at-work snacking, rather than literally on-the-go, which means that unlike in the US, single-serve cereals may successfully compete with other convenient breakfast options.

Hot cereals benefit from microwave culture

Hot cereals too are looking at ways to beat competition. In the US they have been successful in appealing to health conscious consumers, and the sector benefited from the Food and Drug Administration’s 1997 ruling on health information, which permits oatmeal manufacturers to display claims about the health benefits of oatmeal consumption on product packaging. Also in the US the sector has benefited from ease of preparation combined with the psychological satisfaction of preparing a hot breakfast.

Indeed, convenience was key in hot cereals globally with the UK offering multipacked sachets of microwavable cereal in the form of Quaker’s Oatso Simple and Rip, Mix and Micro under the Ready Brek brand from Weetabix since 2001. In the US Quaker Instant Oatmeal Express, packaged in portable, microwave-safe cups is very popular too.

Brand extension into breakfast bars is hit option

Another, arguably more successful, strategy undertaken by several cereal manufacturers including Quaker and Kellogg, has been to accept that the most portable and convenient way to eat cereal is without milk. Turning cereal into bars, which have a much higher price point than the equivalent volume of cereal, actually boosts company revenues, rather than damaging them.

Kellogg’s Nutri-grain created the breakfast bar category, and still leads it, but cereal branded bars are rapidly gaining share as consumers pick up a bar version of their favourite cereal, instead of a pastry or muffin which are typically regarded as less healthy.

Thus, barring Kraft, the top 5 cereal manufacturers in the world have all launched breakfast bars based on top cereal brands. PepsiCo also has some granola bars under the Quaker brand. Euromonitor expects Kraft to launch a bar under one of its top cereal brands like Honey Bunches of Oats in the near future, as the company’s acquisition of Nabisco provided it with expertise in both cereals and snack bars.

Mini-bites and snacks offer both opportunity and competition

Nutri-grain has recognised the success of both other breakfast bars and alternative snacking options, and has not stood still, launching a mini-bite version in 2003 which targets between meal snacking as well as breakfast times. This allows a breakfast product to compete with snack alternatives to traditional breakfast products which include mini-packs of biscuits, as well as extending potential consumption patterns.

In the UK, United Biscuits has also recognised this potential and has launched a new McV a:m range of morning/lunch products including bars, muffins and mini-bites similar to the Nutri-grain formula. Also in the UK, Weetabix has extended its cereal brands into snacking options, launching Weetabix Crrrunch and Minibix Chocolate as a portable snack last year.

With pricing for boxed cereals under pressure from private labels, and volumes impacted by lack of convenience despite considerable (and expensive) promotional, licensing and new flavour development, manufacturers are under pressure to open up alternative channels. Single portion products could have limited success, while bars are definitely a winning formula. However, the issue for manufacturers is whether they can indefinitely extend their cereal brands into bars and other snack products, or whether they need to look at the bigger picture and start considering new brand and new sector development.