Cereal makers seek fresh start

by Eric Schroeder
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Tis the season. For hot breakfast cereal makers, it’s the time of year when sales begin to heat up as temperatures outside drop. For ready-to-eat cereal makers, it’s a time to regroup and gear up for a new year and new trends.

The R.-T.-E. cereal industry no doubt will be looking for a fresh start in 2015 after 2014 proved to be challenging.

In the 52 weeks ended Nov. 2, dollar sales in the R.-T.-E. cereal category totaled $8,955,986,944, down 4% from the same period a year ago, while unit sales also fell 4% to 2,799,655,680, according to Information Resources, Inc., a Chicago-based market research firm.

Few R.-T.-E. cereal makers were immune to the declines in the category. Segment sales leaders General Mills, Inc. and Kellogg Co. sustained dollar sales declines of 3% and 6%, respectively, during the 52 weeks ended Nov. 2, while MOM Brands’ sales fell 11% and Quaker Oats dipped 3%. Private label also struggled, falling 6% in the period tracked by I.R.I.

Positives at Post

Among the major participants in the category, only Post Holdings Inc., St. Louis, was able to generate positive year-over-year dollar sales growth, climbing 2% to $1,004,500,864, according to I.R.I. Dollar sales of the company’s Honey Bunches of Oats brand increased nearly 5% to $390,983,712, while Great Grains inched up 0.39% to $124,455,536. Perhaps most impressive was the performance of Fruity Pebbles, which increased 15% to $122,946,992, by far the sharpest year-over-year dollar sales increase among the top 20 R.-T.-E. cereal brands tracked by I.R.I. Pebbles has benefitted from the launch of Pebbles in large bags, and also behind an uptick in the core box business.

But even with its success, Post executives were cautious in their comments about the R.-T.-E. cereal category.

“While we have stabilized our cereal business, the category itself remains challenged, and it resulted in a reduction in the long-term growth rates that underlie the fair value calculation,” Rob Vitale, president and chief executive officer, said during a Nov. 25 conference call with analysts to discuss fourth-quarter results. “In fact, our F.Y. 15 plan assumes a 4% category decline.”

The outlook for the R.-T.-E. cereal category was further discussed following comments and then a question from Andrew Lazar, an analyst at Barclays Capital.

“It would seem to us … the category will have to take a much more severe look, I guess, at the cost structure to preserve profitability longer term,” Mr. Lazar said. “I wanted to get your perspective on that. You had four plants at the time of the spin (Post Foods’ spin-off from Ralcorp Holdings in 2012). You’ve closed the smallest one (Modesto, Calif.). Volumes in general in the category are quite a bit lower than they were even then, when I think you had mentioned you probably had some excess capacity. I guess I’m trying to get a sense, longer term, if the category continues to decline at this sort of pace, I’m assuming your belief would be some other things you’re going to have to cap in from a category perspective, whether it’s cost work or consolidation activity. It seems like it can’t go on at that rate without some additional actions. Your perspective would be helpful.”

Mr. Vitale called Mr. Lazar’s characterization of the situation “quite fair.”

“If the category rate of decline is in the 2% to 4% range, that will create additional excess capacity and require a reaction to that,” Mr. Vitale said. “We’re not prepared to say today exactly what that reaction may be because we want to let some of that time develop and see where that greater decline and hopefully the rate of decline changes.

“We obviously, as an 11% share (of the R.-T.-E. cereal category), don’t have the ability to drive category volumes. We compete for share more than trying to impact the category. If the category continues to decline at that rate, it will require a reassessment of the cost structure, some of which may occur through consolidation and some of which may be self-directed.”

‘Ks’ get care at Kellogg

At The Kellogg Co., Battle Creek, Mich., company executives have talked at length in recent months about the need to find a way to invigorate the R.-T.-E. cereal category, especially within the company’s Special K and Kashi brands.

In the 52 weeks ended Nov. 2, dollar sales for Kashi plummeted 20% to $194,440,848, according to I.R.I.

In describing plans to revive the two brands, John Bryant, chairman and chief executive officer of Kellogg, said during an Oct. 30 conference call that a shift in approach for Special K will move the brand away from a weight-loss focus.

“We have communicated Special K around dieting, ‘lose weight over a two-week period,’ and we really need to move that to a weight wellness discussion,” Mr. Bryant said. “(We need to) move away from reduced calories and to the food itself having tremendous nutrient benefits.”

Mr. Bryant said new packaging and advertising will highlight “simplicity and goodness.”

In November the company announced plans for an expansive new product launch of R.-T.-E. cereals featuring protein, sprouted grains and gluten-free. In total, the company plans to debut seven new cereals over the next few months to meet consumer demand for taste, innovation, protein, less sugar and gluten-free.

For people looking for good sources of protein as they manage their weight, Kellogg is introducing Special K Protein Cinnamon Brown Sugar Crunch. The cereal provides a crunchy shape and 11 grams of protein with ½ cup skim milk.

Special K Gluten Free cereal features multi-grain flakes (corn, sorghum and rice) with a touch of brown sugar.

New Kashi Sprouted Grains Multi-Grain organic cereal is made with 100% sprouted grains in its whole grain flakes made with wheat, brown rice, oats, barley, spelt and amaranth. The cereal is U.S.D.A. Certified Organic and Non-GMO Project Verified.

Kellogg is combining raisins and cranberries in its Kellogg’s Raisin Bran with Cranberries. The new cereal is considered an excellent source of fiber and antioxidant vitamin E. It has a “tart and sweet flavor” combination and “crisp bran flakes,” the company said.

Froot Loops Bloopers cereal provides a good source of fiber, is made with whole grains and has 10 grams of sugar per 28-gram serving.

Finally, Kellogg will add to its Bear Naked Granola line with the launch of two new flavors: sea salt caramel apple and coconut almond curry.

General Mills eyes innovation

Minneapolis-based General Mills maintains a narrow lead over Kellogg in the battle for the top spot in the R.-T.-E. cereal sector, holding a 30.45% share of the market to Kellogg’s 29.89% share, according to I.R.I. But, like Kellogg, General Mills has faced challenges within its business. In the 52 weeks ended Nov. 2, R.-T.-E. dollar sales for General Mills totaled $2,727,340,288, down 3% from the same period a year ago, according to I.R.I.

“We believe that returning the cereal category to growth will require more product news, better innovation, and increased investment behind consumer directed marketing from all the branded players,” Ken Powell, chief executive officer of General Mills, said during a Sept. 17 conference call with analysts to discuss first-quarter results. “We are working hard across each of these areas. For instance, consumers love great tasting cereals. We renovated Cinnamon Toast Crunch this year, adding more cinnamon taste, and retail sales for this brand were up 7% in the quarter.

“Today’s consumers are seeking more protein options for breakfast. We introduced two flavors of Cheerios Protein in June. It’s still early, but the initial results are encouraging. This new line reached a nearly 1% market share in August.”

In late October, General Mills unveiled plans to expand its Cheerios franchise early next year with the launch of Cheerios + Ancient Grains.

“We have a variety of Cheerios products to meet consumers’ changing taste preferences,” said Alan Cunningham, marketing manager for innovation in the cereal division of General Mills. “Our new product was created to provide consumers with a great tasting cereal that contains ancient grains.”
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