The market research firm predicts in a report published in January that the cereal industry’s revenue will climb 0.9% annually through 2020, when it will reach $11.6 billion, $600 million more than revenues predicted for 2015. While this may not seem like much, it is a notable reversal of the 1% annual decrease that has plagued the category for the last five years.
A key factor in the fluctuating fortunes of the cereal industry is a predicted 2.5% increase in consumers’ per capita disposable income annually for the next five years, IBISWorld said. But, it cautioned, the extra money in consumers’ pockets will cut the cereal industry both ways.
“As per capita disposable income rises, consumers can afford and are more willing to buy more costly breakfast foods outside of the home, such as breakfast sandwiches” and premium baked goods at coffee shops, which reduces the demand for cereal, the report explains.
But, higher incomes also will “encourage consumers to switch to more expensive organic and branded cereals, which offer higher profit margins,” the report notes.
Consumers’ increased interest in healthier foods dovetails nicely with their willingness and ability to pay for higher quality cereals, such as those made with whole grains, prompting manufacturers to develop products with more fiber, protein and vitamins. Gluten-free products also are increasingly popular and profitable since the plant-based protein “has been publicized as an unhealthy cause of obesity and health problems,” the report adds.
Cereal manufacturers have responded to the demand by fortifying well-known brands and introducing healthier options.
“For instance, major player General Mills introduced Multi-Grain Cheerios, while Kellogg’s enhanced its Froot Loops and Apple Jacks lines with fiber,” the report said.
Teaming with foodservice
Cereal manufacturers can try to win back consumers who use their extra money to eat out by working more closely with the food service industry to provide their products in cafes, the report suggests.
It notes the food service industry will account for 6.5% of revenue in 2015 for the cereal industry and it includes schools, hotels, hospitals and conference organizations. While this is a small slice of the pie, it likely will increase as more people eat breakfast out.
Quaker Foods North America took advantage of this trend by partnering with Burger King in 2011 to add Quaker oatmeal to the fast food chain’s menu. The deal “alleviated a second year of double-digit revenue declines for the type of cereal” and helped volume grow, IBISWorld said.
Consumer interest in healthy cereals also will inspire smaller niche cereal companies that sell granola and other items to enter the industry, the report predicts.
New entrants to the industry, however, will face significant barriers, including intense consumer loyalty to existing brands and players, IBISWorld said. Longtime players also have large advertising budgets as well as favorable contracts with buyers. They also have the advantage of large production batches which can reduce production costs.
Nevertheless, small players able to source local and organic ingredients will find luck in regional markets and at specialty groceries, IBIS said.
Improved production and technological advances also will help cereal manufacturers’ increase profit and fuel category growth, the report said.
For example, the most recent innovation is the twin-screw extruder, which can push dough more smoothly through the product cycle, reducing the time it takes from 24 hours to as little as 20 minutes, IBISWorld said. Automated mixing, baking, hulling and separating equipment also saves time, reduces waste and cuts employment needs, which increase profitability, the report notes.
Finally, falling commodity costs will east financial pressure on cereal makers and should allow them to lower prices, which will increase sales, IBISWorld said. It predicts the price of corn, wheat and coarse grains will decline in 2015.