Category Review: Cereal -- Bowled Over
by Lynn Petrak
September 5, 2008
In an economic downturn, private label cereals might win over consumers seeking value, quality and choice on the shelf.
They’re not quite flaking out over it, but retailers increasingly are finding success with the clusters of private label cereals that line their shelves.
Puns aside, the private label cereal category has some observers thinking that a perfect storm — one of high grocery and fuel costs, product innovation, marketing savvy and retail and manufacturing industry changes — is brewing.
“Private label cereal could have the biggest increases of any consumable category sold in food stores between now and the end of the decade,” remarks Burt P. Flickinger III, managing director of the New York-based consumer industry consulting firm Strategic Resource Group.
That’s a big statement from a seasoned industry observer. As Flickinger points out, private label cereal is a top consumable category delivered from retailers’ own warehouses, adding to its strength and potential.
Other analysts agree that growth opportunities remain dynamic.
“Private label cereals are continuing the long-term trend of improving market share at the expense of branded. Quality as much as price is driving this development in trend,” remarks Rick Shea, president of Minneapolis-based Shea Marketing Consulting Inc., adding that retailers are continuing to expand the number of products and SKUs available in the private label cereal category.
Manufacturers of private label cereals agree that the market is opening up in what long has been a category marked by steadfast loyalty to national brand leaders such as General Mills, Post and Kellogg’s.
“We have had a stable group of customers, but we have gotten more calls in the last couple of months,” reports Mark Graham, president of California Cereal Products Inc., Oakland, Calif.
Likewise, Robn Cassidy, national sales director for the Nutritious Living division of Organic Milling Corp., Anaheim, Calif., says there has been a trickle-down effect from higher grocery costs.
“If it’s any indication, I get calls — sometimes two or three a day — asking, ‘Can you do this?’ or saying,‘I want to do that.’ I think retailers are going more toward private label. Everyone is pinching pennies,” she says.
Indeed, sales of private label cereal are up. According to Chicago-based Information Resources Inc. (IRI), sales of private label ready-to-eat (RTE) cereals produced by industry leaders Ralcorp, The Malt-O-Meal Co. and others climbed 4.8 percent in the 52-week period ending May 18, 2008 — a feat, considering the sluggish economy and the overall 1.9 percent growth rate for the entire category. Sales of private label hot cereal also have moved beyond tepid, IRI data show, up 5.2 percent compared to 0.5 percent for that entire segment.
According to the 2007 Private Label Yearbook (the latest edition) published by the Private Label Manufacturers Association (PLMA), cereal remains one of the top 20 private label categories by unit volume, ranked 18 with $374 billion in volume. That amounts to 15.7 percent of private label dollar share.
Flickinger says part of the growing interest in private label cereals and the sophistication of such offerings can be attributed to fallout from decisions and actions by the major cereal millers.
“In terms of what you see in the marketplace, at one point it cost more for an equivalent portion of many brands of cereals than it did to buy a pound of steak,” he says, bringing up another compare-and-contrast indicator. “You can talk to a farmer, and they’ll say what they get paid for the grains inside a cereal box could range anywhere from seven to 47 cents an equivalent pound, but the branded cereal manufacturers sell that product for five dollars.”
Another boon to private label cereal makers is the fact that retailers are pushing ahead into that category in new and stronger ways.
“Retailers are smart about private label. Sometimes, they’ll have three different levels of private label cereals — the higher end, the average level that is equivalent to the national brands, and then the value brand,” Cassidy relates, noting that such positioning is designed to help merchandisers snare a more expansive consumer profile.
Despite this receptive operating environment, the major cereal players should never be dismissed.
“Branded cereal companies are formidable competitors and continue to innovate and provide value for their products,” Shea remarks.
Seeds of Change
As they go head to head, or last least box to box, with the leading cereal brands, private label manufacturers and marketers — from top producers to specialty and regional suppliers — are developing more products that mesh with consumers’ discerning palates and lifestyles. With the pendulum swinging back to interest in better-for-you products, that means more healthful cereals.
“The health and natural segments will do extremely well for retailers that are in a real profit squeeze,” Flickinger predicts.
In fact, several private label varieties of healthful cereals are stacked alongside their branded counterparts in mainstream supermarkets, as well as specialty stores such as private label-oriented Trader Joe’s. Many private label companies now offer RTE cereals containing flax, whole grains, bran and antioxidant-rich fruits.
Some even enhance those good-for-you grains: Kroger, for example, added omega-3 fatty acids to one of its organic multi-grain cereals.
“There has been a trend in the last couple of years [toward] interest in whole grains, more fiber, a little less sugar and lower sodium,” Graham reports. He also cites the burgeoning audience for California Cereal Products’ gluten-free cereals.
Other producers of private label better-for-you cereals agree that consumers who didn’t even know what flaxseed was a decade ago are flocking to that and other cereal ingredients.
“Interest in healthy cereals seems to be on the rise. With health concerns being what they are, our line of healthy hot cereals provide good nutrition, fiber and, in some cases, the added benefit of soy and flax,” says Tom Freeman, account manager for Effingham, Ill.-based hot cereal maker Hodgson Mill. The company produces hot cereals including oat bran, bulgur wheat with soy, cracked wheat and multigrain with flax.
Tied into the better-for-you trend is the emergence in the past three to five years of more natural and, to a lesser extent, organic cereals. Most retailers, including mainstream chains, big box stores and organic and natural markets, include cereal in their stores’ organic food lines.
“Growth is being achieved in more higher-quality organic and natural private label offerings,” Shea observes.
Others predict a bigger piece of the pie for natural cereals as they penetrate into the mainstream cereal segment.
Flickinger, for his part, says organic and natural will continue to score gains, but notes that such niches are limited in size and scale, and can be harder logistically to distribute.
Cassidy, meanwhile, observes that interest in natural products is up, while organic is moving ahead at a slower pace.
“A lot of [companies] have asked for organic, but depending on the retailer and their store format, you have to answer the question of whether or not the market can bear the price point. Even though the retailer may ask for organic, it may not work, so they’ll look to all natural,” she explains.
Cassidy also points out that consumers who regularly shop at natural and organic food stores are distinctive in that they routinely are willing and able to pay higher prices for organic foods across the board.
A Family Affair
Interestingly enough, middle-of-the-road cereals — at least in terms of their crossover appeal — also seem to be a hotspot in cereal R&D and SKU movement.
“Penetration is also increasing through more all-family cereals,” Shea relates.
Cassidy, likewise, reports more queries related to such products.
“The all-family segment is growing faster than the kids segment, and that tells us that moms aren’t all buying the Cap’n Crunches of the world — they want something healthier to feed the children,” she says.
To accommodate the broad audience, Cassidy says many healthful cereals appeal to palates of all ages and are available in fun shapes such as balls or moons to catch kids’ attention.
Market research underscores the fact that all-family cereals are doing well in both branded and private label. On the branded side, products such as Cheerios, Honey Bunches of Oats, Special K and Honey Nut Cheerios each scored sales gains in the past year, while sweeter cereals such as Frosted Flakes, Fruit Loops and Cookie Crisp slid in dollar sales.
Retailers are getting more competitive marketing family-targeted cereals as well. Boxes of private label cereals such as Crunchy Rice Squares, Honey Oats with Flakes and Corn Flakes sold in Albertson’s stores, for example, are merchandised in brightly colored boxes with high-impact graphics and suggestions for fun family activities (day trips, board games, kite flying) on the back. Likewise, Trader Joe’s has garnered a loyal following for its Joe’s Os dry cereal, which is now complemented by Triple Berry Joe’s Os and Strawberry Yogurt Joe’s Os.
Kidding Around
Although some frosted cereals fall into the family category, others are the stuff of kids’ mornings. To be sure, the youth market remains a large part of the RTE and hot cereal market.
“Branded cereal manufacturers continue to aggressively promote kid-oriented cereals in order to protect market share and maintain optimal plant capacities,” Shea remarks.
If a quick scan of supermarket shelves is any indication, the ubiquitous cartoon characters associated with leading brands are getting some company on the shelf. Most major chains, including Safeway and Albertson’s, among scores of others, offer store brands of sugar-sweetened cereal complete with characters such as cute alligators, squirrels and birds on the brightly colored boxes. The names of these private label cereals also are straight from the children’s marketing playbook, with titles such as Tootie Fruities, Marshmallow Mateys, CocoaChippers and Krunchy Nutties.
Not Boxed In
Anyone who sat through a marketing lecture in college might recall that one of the “Four Ps” of marketing is packaging. To that end, cereals, including private label brands, are getting packaging treatment that goes beyond the traditional box and bag.
For example, Target has ramped up its Archer Farms store brand in the past decade, and now sells some of its Archer Farms cereal in round canisters. That move has created a flurry of interest among consumers and competitors alike.
Standup pouches of dry cereal also are making their way into stores. In addition to granolas merchandised in that format, some types of dry cereals are sold in pouches with resealable closures. PLB
Sidebar: Tastes Budding
With cable television’s Food Network making superstars of chefs, cookbooks topping bestseller lists and restaurants exposing consumers to a host of new tastes, cereal makers are adding their own culinary twists to some products.
The Trader Joe’s chain of stores, for instance, offers a Ginger Almond and Cashew cereal. Many private label cereal makers are adding ingredients such as yogurt, vanilla and a host of berries and nuts to their grains. The Northfield, Minn.-based Malt-O-Meal Co., for example, now offers a Blueberry Muffin Top cereal, capitalizing on the cache of that particular foodstuff.
Mark Graham, president of Oakland, Calif.-based California Cereal Products Inc., agrees that cereal eaters are getting more choosy and adventurous.
“We have some mixes where you add particulates like fruit or granola with multi-flakes and crisped rice products. To me, it says that consumers want different tastes and crunches,” he notes.
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