The Breakfast Cereal Industry

The Breakfast Cereal Industry

Li Li

Jennifer Wang

Xin Yiran

AEM 4550

April 20,2011

Outline

Introduction

Industry Analysis

Advertising Strategies

Investment & Recommendation

Why the Breakfast Cereal Industry?

Breakfast is the most important meal of the day Metamorphosis, Franz Kafka, 1915

Body fasts for 6-9 hours the night prior break-fast- breaks the fasting

93% of respondents reported household use of cold cereal, 68% - hot cereal (Experian Simmons NCS data)

Americans buy 2.7 billion packages of breakfast cereal each year. If laid end to end, the empty cereal boxes from one year's consumption would stretch to the moon and back. Cerealizing America: The Unsweetened Story of American Breakfast Cereal

Industry Analysis

Industry Definition

US Cereal Production industry takes raw materials like corn, wheat, flour, and sugar from different sources and turns these ingredients into ready-to-eat cereals, hot cereals, and cereal bars

Main activities involve manufacturing:- cold and hot breakfast cereal

- breakfast and snack bars

Industry Structure

Industry Structure

HHI = 1822.86

C4 = 76%

Mergers will be challenged since HHI >1800

Industry is an oligopoly with four main firms

Highly Concentrated!!

Industry Structure

Major Companies

Major CompaniesKellogg CompanyGeneral Mills Inc.Ralhorp Holdings Inc.PepsiCo Inc.Other34.20000000000000319.89999999999999913.9824

Industry Analysis

Life Cycle Stage Mature Barriers to Entry High

Capital Intensity High Technology Change High

Competition Level High Regulation Level Heavy

Key Success Factors

Product Differentiation

Adaptability

EOS

Cost Control

Supply

Contract

Industry Trend

Expected Slower Growth

-High price of wheat

-Increasing price of coarse grains

Attitude change towards health consciousness

e.g. Lower sugar and cholesterol, more fiber

More convenient product to accommodate busy lifestyle

e.g. Breakfast bars

Employment

20062007200820092010Average Wage ($)64183.460770.761061.962173.363730

Distribution

Imports & Exports

Insignificant as major companies own facilities internationally

Major trading countries: Canada & Mexico

Imports are growing while exports are declining

Primary Advertising Methods

Persuasive Advertising

Informative Advertising

Memory Jamming

Celebrities

Humor

Emotional Appeal

Promotions & Giveaways

Segmentation

Persuasive Advertising

Persuasive advertising is effective for experience goods

Honey Bunches of Oats Theres a box here with your name on it!

Honey Bunches of Oats Commercial

Informative Advertising

Direct Signaling

Educational. Tells the consumer the health benefits

Cheerios:

Informative Advertising

Indirect Signaling

Match product to buyers effect

Saturday morning cartoons

Measurable change in consumer preference and market share of advertised products

E.g. Kelloggs high fiber cereal

Memory Jamming

Repeated commercial plays

Signaling efficiency effect

Recognizable Mascots

Catchy slogans and Jingles:

Theyre Gr-r-r-eat! Kelloggs Frosted Flakes

Silly Rabbit, Trix are for kids! Trix

Memory Jamming

Celebrity Endorsement

Celebrities can increase brand equity

Wheaties: The Breakfast of Champions

Need to be careful of impact on brand

Michael Phelps

Humor

Keeps audience attentive

Difficult to appeal to everyone because people have different preferences

Cocoa Puffs:

Emotional Appeal

Form stronger connection to consumer

General Mills used special promotion boxes with retro designs

Seeks to motivate parents, by using nostalgia

Cheerios Commercial

Promotions and Giveaways

Incentive for the consumers to buy the cereal

Draws attention

Include a toy or opportunity to win

Kashi Kick-Off Event at Cornell

Segmentation

Many commercials targeted children with highly animated commercials

Saturday morning cartoons is perfect time to target the young audience

Capn Crunch:

Segmentation

After FTCs warnings, cereal companies have shifted toward targeting the adult audience

More health-conscious

Multi-Grain Cheerios:

Segmentation

General Mills increased Hispanic-targeted media spending in 2009 and 2010

Cinnamon Toast Crunch particularly appeals to Hispanics

Baby Boomers- another key market

Highest per capita cereal consumption by people over 55

Seek to add fiber to diets (Fiber One, Multi-Grain Cheerios)

Cheerios Targeted Toward Both Children and Adults

Advertising Mediums

TV

Product Placement

Print

Online

Television Advertising

Advertised mostly on Mon, Tues, Fri

Mostly Advertised during 7-8 PM, 9 AM

Dollars spent most on Cheerios, Fiber One, Mini-Wheats

Largest Ads Spending during July, Aug

Spent most on cold cereals especially the healthy category such as Honey Nut Cheerios, Fiber One, Multi-Grain Cheerios, but highest average dollar spent per advertisement on hot cereals

Television Advertising

Uses segmentation to target different audience

More colorful, energetic, and animated commercials for young children

Use character mascots to connect to kids such as Tony the Tiger, General Mills Trix Rabbit

Focuses on nutritional content to target adults

Average Advertising Cost per Day of Week

Top 10 Brands with the Highest Total Advertising Expenditures

Top Program Types to Advertise On

Healthy vs. Unhealthy Cereal

Popular Program Types to Advertise Healthy Cereal

Popular Program Types to Advertise Unhealthy Cereal

10 Most Popular Shows to Advertise On

Most Expensive Ad Spots for Cereal Ads

Show Ad Cost AMERICAN IDOL $ 823,700 GREY'S ANATOMY $ 577,800 AMERICAN MUSIC AWARDS $ 361,100 NCAA Basketball Playoff Game 22 $ 281,100 NCAA Basketball Playoff Game 21 $ 281,100

Product Placement

More common with the advent of Internet and TiVo

Popular shows feature consumption of certain cereal brands e.g. Frosted Flakes on Friends

Audience are forced to watch the ads

Careful not to overdo it

Effective if it is natural and integrated

Product Placement in Days of Our Lives

Ad Spending of Top 4 Firms

Ad-to- Sales Ratio Comparison

Ad-to-Sales Ratio

1.2 times higher than the food sector

3.5 times higher than the average value for all other industries

High profit margin

Kellogg Co

Corn Flakes, Frosted Flakes, All-Bran, Apple Jacks, Crispix, Rice Krispies, Froot Loops, Nutri-Grain

Highest Advertising Expenditure

Highest Ad-Sales Ratio

Focuses on eight top sellers and Kashi cereal

Kashi highlights healthy lifestyle, including consuming natural foods and staying active

Boston, Portland, LA

General Mills

Brand Names: Cheerios, Fiber One, Kix, Wheaties, Lucky Charms, Total

Invested heavily in R&D and product innovation

Target Large Cities e.g. New York, San Francisco, Boston

Ralcorp Holdings, Inc.

Brand Names: Honey Bunches of Oats, Pebbles, Shredded Wheat, Post Raisin Bran, Grape-Nuts, Honeycomb

Acquired Post

Both private label and branded cereals

New Orleans, Cincinnati, Green Bay

PepsiCo Inc.

Brand Names: Quaker Foods North America (QFNA), Quaker Oatmeal, Life , Cap'n Crunch

Richmond, Jacksonville, Norfolk

Better Tasting

Good Nutrition

Quaker Oatmeal

Cocoa Puffs

MultiGrain Cheerios

Kashi

Perceptual Map

Cheerios

Rice Krispies

Fiber One

Post Shredded Wheat

Special K

Worse Tasting

Poor Nutrition

Honey Nut Cheerios

Capn Crunch

Post Raisin Bran

Frosted Flakes

Cinnamon Toast Crunch

Print Advertising

More informative (direct) but still persuasive

More targeted than TV ads

Less common nowadays

1926

2008

Online Advertising

Social media becoming a more popular marketing tool

Kelloggs uses this for Special K and Frosted Mini-Wheats

Special K strong brand pioneer for new media advertising weight-loss management (support from peers important so social media is a great way to do that)

Social Media

Brand Equity

Crucial in order to stand out among hundreds of brands

Makes demand less elastic to price

Emotional branding

Regulation

Regulation level is high and increasing

2007 Self-regulation of marketing to youth

Children's Food and Beverage Advertising Initiative

Kellogg said would not promote foods in TV, radio, print or Web site ads that reach audiences at least half of whom are under age 12 unless a serving of the product follows specific guidelines

2008 Federal Trade Commission published study on food marketing to children and recommended that companies adopt and adhere to meaningful, nutrition-based standards for marketing their products to children under 12

False Health Claims

Kellogg Co. came under scrutiny in 2009 and 2010 because of false health claims in advertisements

Frosted Mini-Wheats: clinically shown to improve kids attentiveness by nearly 20%

Rice Krispies: now helps support your childs immunity, with 25 percent Daily Value of Antioxidants and Nutrients Vitamins A, B, C, and E

FTC delivered strong message wont tolerate false health claims

Kellogg prohibited from making claims about any health benefit unless backed by scientific evidence and not misleading

Recommendation for Management

Local newscast is among the cheapest

Sports events such as baseball and basketball are expensive

Talk show or soap opera as they target more towards women and they control more than 80% of spending

Follow FTC regulation, otherwise would be heavily penalized

Recommendation for Investment

High profit margin

Branded revenue likely to increase as the US economy recovers

Breakfast bar has great growth potential

Questions?

Videos

Honey Bunches of Oats: http://www.youtube.com/watch?v=em9thvkiS7I

Cocoa Puffs: http://www.youtube.com/watch?v=xBGpRLjNnzM

Cheerios 1:b. http://www.youtube.com/watch?v=pDNgbQ-bQpA

Cheerios 2: http://www.youtube.com/watch?v=aARf-XwDGFg

Multigrain Cheerios: http://www.youtube.com/watch?v=-IZ9CL4phPk

Product placement: http://www.youtube.com/watch?v=oGtig5DiTxc

Program TypeNumber of Ads

NEWSCAST (LOCAL ONLY)138348

SITUATION COMEDY93336

TALK59858

SLICE-OF-LIFE37354

Program TypeNumber of Ads

ANIMATION(LOCAL ONLY)18347

CHILDRENS/FAMILY ENTERTAINMENT4047

SITUATION COMEDY3976

FEATURE FILM2956