Kellogg Is the Cereal Leader, But for How Much Longer?

Includes: CAG, GIS, K, PEP, THS
by: Rick Shea

We are what you would call a heavy user household in the cereal category. With four teenage and junior high school kids, what could be easier on those busy Monday through Friday mornings than a quick bowl of cereal. It’s convenient, nutritious and tastes good. The adult brands like Special K and Fiber One also work well for Mom and Dad.

I also happen to know a little bit about the cereal market. I was former VP of Marketing [CMO] for Malt-O-Meal cereal. They are the number four branded and private label cereal maker with $550 mm in annual sales competing with the likes of Kellogg’s (NYSE:K), General Mills (NYSE:GIS), Ralcorp (RAH) (Post) and Quaker. Malt-O-Meal makes those big bags of cereal with strong sales in the value segment at places like Wal-Mart Supercenters.

Kellogg recently announced a shortfall in earnings in Q3 2010 due to lower sales and continued competitive pressures in the ready-to-eat cold cereal market. Competition based on value and nutrition continues to be driven by a deal-seeking consumer. Two-thirds of every box of cereal is sold on some form of deal. (Cents off, feature, coupon) This makes it critical for leading cereal manufacturers to have a strong product innovation pipeline and cost-effective trade and consumer promotion programs. Unfortunately for Kellogg’s, 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.

Let’s take a look at the leading cereal manufacturers and their competitive positions

  • Kellogg’s (K): Number one in market share with just under 34% of the $9 Billion cereal market, but is losing share to General Mills and private label. They are struggling to rebound with their kids' brands (Apple Jacks, Corn Pops, and Frosted Flakes) after their packaging contamination issues. The kids segment of the cereal market continues to lose share to more adult or all family brands. Unfortunately for Kellogg’s, they happen to have a greater share of the kids segment. While they are doing well with Special K (Adult) and Frosted Min Wheats (All Family) it’s not enough to offset volume losses on their kids cereal. Newly launched Fiber Plus is designed to attack General Mills' successful Fiber One brand.
  • General Mills (GIS) : Number two player with market share improving to just over 31%. Strength continues with their Cheerios franchise including top-selling brands Honey Nut Cheerios (All Family ) and their core Cheerios (Adult) brand. They also have performed well with their Fiber One (Adult) and Cinnamon Toast Crunch brands (All Family).General Mills does have exposure to the kids segment (Trix, Cocoa Puffs) but appears to be have taken advantage of Kellogg’s recall.
  • Ralcorp (RAH): Leading private label manufacturer and also owner of Post division. Ralcorp purchased Post a few years back from Kraft. Continued leadership of the private label segment with 65% of the $1 Billion in private label cereal sales. Growth in private label cereal has been decent but not spectacular. However, Ralcorp has struggled with their Post brands. They continue to lose share and face the same situation as Kellogg’s: weakness in their kid’s brands and not enough growth and innovation in adult cereals. Honey Bunches of Oats (All Family) has been their top performing brand, but its growth cannot offset the weakness from its other cereals.
  • Malt-O-Meal: Number four player with a combination of branded (Super Size bags at Wal-Mart) and private label offerings. Growth has been unspectacular the last few years despite an economy that would be perfectly suited to their value brand and presence in private label. Lack of name brand recognition has always been their number one issue in a category driven by advertising. Look for them to be more aggressive on private label vs. Ralcorp in 2011.
  • Quaker: Led by their Capn Crunch and Life brands, Quaker continues to struggle in a highly competitive market. Scale does matter in the cereal market and Quaker doesn’t have it. Quaker is a division of Pepsico (NYSE:PEP)
  • Gilster Mary Lee: Leading non public private label manufacturer with strong sales and relationships with all the top retailers.Their strategy is similiar to Treehouse (NYSE:THS) in that they specialize in only private label foods. Ralcorp, Malt-O-Meal and Gilster provide more than 90% of all private label cereals sold in the US.

So what’s in store for the cereal market for 2011? Will Kellogg’s lose its crown as leader of the cereal category to BIG G? Signs point to that already occurring. Both General Mills and Ralcorp’s Post division have announced small price increases (+4%) on 25% to 33% of their product lines. Normally price leadership is led by the top dog. In this case, General Mills has the momentum and Ralcorp desperately needs a more stable price environment for its Post division. All companies are faced with higher commodity prices in 2011. Kellogg's will likely respond with their own price increases.

General Mills is also leading in the all-important adult and all family segments. Their Cheerios brand continues to be the best franchise in the cereal category for both growth and profit. Big G’s Fiber One brand has also been a strong success and should see further growth. All in all we would bet on General Mills and private label continuing to do well with Kellogg’s and Post struggling. Either way we know as a consumer that cereal will continue to play a big part of our breakfast occasions.

Author's Disclosure: No Positions