The Breakfast Cereal Industry

1. AEM 4550 April 20,2011 The Breakfast Cereal Industry Li Li Jennifer Wang XinYiran

2. Outline • Introduction • Industry Analysis • Advertising Strategies • Investment & Recommendation

3. 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

4. Industry Analysis

5. 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

6. Industry Structure

7. Industry Structure Highly Concentrated!! • HHI = 1822.86 • C4 = 76% • Mergers will be challenged since HHI >1800 • Industry is an oligopoly with four main firms

8. Industry Structure

9. Industry Analysis Life Cycle Stage Mature Barriers to Entry High Capital Intensity High Technology Change High Competition Level High Regulation Level Heavy

10. Key Success Factors

11. 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

12. Employment

13. Distribution

14. Imports & Exports • Insignificant as major companies own facilities internationally • Major trading countries: Canada & Mexico • Imports are growing while exports are declining

15. Primary Advertising Methods • Persuasive Advertising • Informative Advertising • Memory Jamming • Celebrities • Humor • Emotional Appeal • Promotions & Giveaways • Segmentation

16. Persuasive Advertising • Persuasive advertising is effective for experience goods • Honey Bunches of Oats – “There’s a box here with your name on it!”

17. Honey Bunches of Oats Commercial

18. Informative Advertising • Direct Signaling • Educational. Tells the consumer the health benefits • Cheerios:

19. 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. Kellogg’s high fiber cereal

20. Memory Jamming • Repeated commercial plays • Signaling efficiency effect • Recognizable Mascots • Catchy slogans and Jingles: • “They’re Gr-r-r-eat!” – Kellogg’s Frosted Flakes • “Silly Rabbit, Trix are for kids!” – Trix

21. Memory Jamming

22. Celebrity Endorsement • Celebrities can increase brand equity • Wheaties: “The Breakfast of Champions” • Need to be careful of impact on brand • Michael Phelps

23. Humor • Keeps audience attentive • Difficult to appeal to everyone because people have different preferences • Cocoa Puffs:

24. Emotional Appeal Form stronger connection to consumer General Mills used special promotion boxes with retro designs Seeks to motivate parents, by using nostalgia

25. Cheerios Commercial

26. 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

27. Segmentation • Many commercials targeted children with highly animated commercials • Saturday morning cartoons is perfect time to target the young audience • Cap’n Crunch:

28. Segmentation • After FTC’s warnings, cereal companies have shifted toward targeting the adult audience • More health-conscious • Multi-Grain Cheerios:

29. 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)

30. Cheerios Targeted Toward Both Children and Adults

31. Advertising Mediums • TV • Product Placement • Print • Online

32. 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

33. 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 Mill’s Trix Rabbit • Focuses on nutritional content to target adults

34. Average Advertising Cost per Day of Week

35. Top 10 Brands with the Highest Total Advertising Expenditures

36. Top Program Types to Advertise On

37. Healthy vs. Unhealthy Cereal Popular Program Types to Advertise Healthy Cereal Popular Program Types to Advertise Unhealthy Cereal

38. 10 Most Popular Shows to Advertise On

39. Most Expensive Ad Spots for Cereal Ads

40. 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

41. Product Placement in Days of Our Lives

42. Ad Spending of Top 4 Firms

43. Ad-to- Sales Ratio Comparison

44. 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

45. 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

46. 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

47. 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

48. PepsiCo Inc. • Brand Names: Quaker Foods North America (QFNA), Quaker Oatmeal, Life , Cap'nCrunch • Richmond, Jacksonville, Norfolk

49. Perceptual Map Good Nutrition Quaker Oatmeal Fiber One Kashi MultiGrain Cheerios Post Shredded Wheat Special K Cheerios Rice Krispies Honey Nut Cheerios Better Tasting Worse Tasting Post Raisin Bran Cocoa Puffs Frosted Flakes Cinnamon Toast Crunch Cap’n Crunch Poor Nutrition

50. Print Advertising • More informative (direct) but still persuasive • More targeted than TV ads • Less common nowadays 2008 1926