A soggy cereal market: despite being borne of the convenience trend, breakfast cereals have found themselves outpaced in that regard by other, quicker alternatives. As the population of young people in the U.S. is predicted to grow minimally over the next several years, manufacturers face a shrinking market of consumers that have traditionally been their stronghold

Prepared Foods, August, 2004 by William A. Roberts, Jr.

In its report on the U.S. breakfast cereal market, Mintel International Group (Chicago) finds a category with increasing competition and a consumer base abandoning breakfast entirely. With those notable hurdles, the market for breakfast cereal has managed to post growth over the past several years, albeit slow. In current dollars, sales grew from $8.5 billion in 1998 to $9 billion in 2003, representing a 1% annual increase.

Cereal faces competition on several fronts: competing convenient breakfast alternatives, a large (and perhaps growing) number of consumers opting to skip the morning meal, and little growth in the population of children and teenagers. In the midst of these challenges, however, manufacturers have managed to maintain, indeed improve upon, dollar sales. Promotions tied to television shows or movies have boosted the interest of younger people, while technological advancements have inserted real fruit into cereal to attract adults as well as youngsters. Nevertheless, Mintel does draw one conclusion likely to concern cereal manufacturers: "Nearly all households eat cereal, and do not appear to be increasing consumption."

Leading the way in the cereal segment are four companies: Kellogg (Battle Creek, Mich.) and its market-leading 29.2% share, followed by the 27.4% held by General Mills (Minneapolis), PepsiCo's (Purchase, N.Y.) Quaker Oats' (Chicago) 13.8% and the 12.8% share of the Post division of Kraft (Glenview, Ill.). The acquisition of Pillsbury led General Mills to divert some efforts from its cereal development, or the company might have been the category leader, a spot it held as recently as 1999.

Acquisition served as PepsiCo's route into the cereal market, with its purchase of Quaker Oats. However, PepsiCo clearly longed for Quaker's Gatorade sports drinks. Mintel speculates on several occasions about the possible sale of Quaker's strong cereal brands. As Mintel notes, these brands may be highly prized, but to maintain their status among the market leaders, they will require strong investment.

That being said, it is important to note that Quaker has innovated to maintain its dominance of the admittedly slim hot cereal market. For that matter, the next-leading "brand" in the segment is private label. Cementing its place atop the oatmeal brands, Quaker's innovative efforts have included such kid-friendly introductions as Dinosaur Eggs and Treasure Hunt, which contain eggs or treasure chests that dissolve to reveal surprises. Both exemplify the need to connect with children's sense of play and, according to Mintel, "give them a reason to want it rather than some other cereal or convenient breakfast food."

However, children have not been Quaker's sole focus. Its Instant Express is an effort to make oatmeal more convenient, and Nutrition for Women has a precise target and has managed to grow sales.

Getting Hotter

This is not to say that Quaker is without competition in the hot cereal category, but others have failed to innovate. Cases in point are Kraft's Cream of Wheat, Cream of Rice and Malt-O-Meal hot cereal. All are packaged and presented rather plainly, have little marketing support and hold a small and deteriorating share of the hot cereal market. As a consequence, the limited shelf space for hot cereal products typically is shared between Quaker and private label options.

The true benefit to the hot cereal category has been on the health front. Sales increased much faster than those of cold cereal between 1998 and 2003, which Mintel attributes largely to the explicit heart-health claims for whole oats that manufacturers have been allowed to make since January 1997. The FDA says that 3g per day of beta-glucan can be effective in reducing cholesterol levels, and manufacturers of whole oat products are allowed to state such claims as "Soluble fiber from foods such as oats, as part of a diet low in saturated fat and cholesterol, may reduce the risk of heart disease." Touting such health benefits could boost already-high consumption levels among older adults, and government efforts to reduce obesity also may work in hot cereal's favor over the coming several years.

Nonetheless, hot cereal boasts none of the convenient advantages even of its cold counterparts. Yogurt tubes and breakfast bars, which epitomize convenience, serve as the morning meal of choice for many on the go. Furthermore, while hot cereal is consumed in roughly two-thirds of households, consumption levels drop dramatically between the ages of eight and 12. Despite some efforts to make hot cereal a quicker meal (placing it in single-serve containers that require only the addition of hot water), Mintel believes the industry would be well served to apply the same innovations and marketing support as enjoyed by cold cereal products.

Such Characters

One of the most successful marketing efforts for cold cereals has been to relate the product to established spokescharacters such as Tony the Tiger or the Snap, Crackle and Pop characters, or such movie and television stalwarts as Disney (Orlando, Fla.) icons, Marvel (New York) superheroes Spider-Man and Hulk, or DreamWorks' (Glendale, Calif.) Shrek. While not a new phenomenon (licensing dates back to 1930s' appearances by Buck Rogers on Kellogg's cereals), tie-ins are increasing in number and sophistication, believes Mintel. Kellogg's January 2002 introduction of products based on well-known Disney characters Mickey Mouse and Winnie the Pooh resulted in strong sales for the company. Around the same time, the company added a cereal based on Buzz Lightyear from Toy Story fame, which has since been replaced with a cereal boasting characters from The Lion King. Kraft got into the act for cereals based on the Spider-Man and Hulk films, but may not have enjoyed quite the level of success as Kellogg's, which this year boasts a cereal tie-in to the second installment of the Spider-Man film franchise.