Lack of innovation holding back US breakfast cereal growth, analyst

By Jane Byrne

- Last updated on GMT

Related tags: Breakfast cereal, General mills

Sluggish demand for breakfast cereals in the US market has been noted by a UBS Securities research report, citing fewer new product innovations as a contributing factor.

Analyst David Palmer notes that breakfast cereal volumes have been declining in 2010, and this is occuring despite a drop in prices.

He claims a lack of innovation in the sector and the fact that children are increasingly replacing cereal with fruits and yoghurt are possible reasons for the weakness in demand, according to an article in The Globe and Mail

Also, the lack of inflation in the economy in recent years may have caused consumers to stock up on cereals less than in the past, noted the analyst.

Palmer added that the recall of 28 million boxes of cereal by Kellogg’s at the end of June due to tainted packaging may also have impacted breakfast cereal sales negatively in recent months.

Kellogg’s issued the voluntary nationwide recall of four types of breakfast cereal after customers complained of off-tastes and flavours that had caused sickness and nausea. An investigation revealed elevated levels of hydrocarbons – including methylnaphthalene - in the packaging liners had leached into and tainted the product.

The company itself reported in July that the recall was a major factor behind it posting a 15 per cent drop in profits for the second quarter. It also cited a dip in consumer demand for breakfast cereals as a contributing factor to its year-on-year fall in net earnings to US$302m.

Niche targeting

However, Kendall Powell, chairman and chief executive officer of General Mills, speaking to analysts in September at Barclays Back-To-School​ consumer conference, said that market share for its Big G cereal brands is “holding up pretty well in the first quarter.”

“We expect Big G to show modest net sales growth in this year’s first quarter despite a tough comparison to 9 per cent net sales growth last year,”​ he said.

The company’s newly released cereal brand, Chocolate Cheerios, is set to deliver first-year sales of $65m to $70m, he added. Meanwhile, its Wheaties Fuel, the first cereal created specifically for men and again launched earlier this year, has also been deemed a success with that consumer base, said the CEO.

“It’s doing well and it’s helping to increase sales for original Wheaties, too,”​ claims Powell, who added that sampling at key events such as NFL games is a key driver of baseline sales for the new product.

Global market

According to Euromonitor International's projections, global demand for wheat-intensive packaged food categories, such as breakfast cereals, is projected to remain relatively stagnant.

Global breakfast cereal sales are forecast to grow by a compound average rate (CAGR) of just 1 per cent in total volume terms over the 2010-2015 period.
As in other bakery categories, breakfast cereal sales in North America are predicted to remain stagnant from 2010 to 2015. Market penetration in the category involves about 90 per cent of US households.

Meanwhile, sales in Western Europe are projected to grow by a mere 4 per cent in total volume terms over the same period.

Euromonitor cites research indicating that low birth rates will constrain the children's segment while mounting competition from more convenient snack bar formats in the adult segment will slow overall consumer demand for breakfast cereals in developed regions.

Despite a stronger performance in emerging regions, breakfast cereals' relatively high retail unit prices will prevent them from becoming mainstream in markets such as China, India or Pakistan, especially beyond relatively affluent urban areas.

Innovation afoot

However, global breakfast cereal manufacturers have been reporting significant investment in their cereal divisions to boost the segment globally as well as to improve their quality.

Nestlé has established a new innovation centre for breakfast cereals in Switzerland in collaboration with General Mills under the Cereals Partners Worldwide at a cost of CHF 50m (€33m).

CPW said the innovation centre will work on breakfast cereals that provide consumer benefits, like improved nutritional content, as well as freshness, taste and texture.

Related topics: Markets

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