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Bowled Over

October 11, 2011 at 11:17 AM

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By Jordan Brandes

As you crawl out of bed in the morning two facts become apparent: you need to brush your teeth and you need to eat something. Finding the right morning meal can be difficult for some. A nutritious breakfast provides approximately one-fourth of the recommended dietary allowances for key nutrients such as protein, vitamin A, vitamin B6, calcium, magnesium, iron and zinc, explains a report done this February by the Dairy Council of California.

Yet out of the many choices out there for consumers cereal is usually the quick and easy option. As millions of Americans sit down for breakfast every day it is cereal that they are pouring into their bowl.

Last year was not a good one for private label cereal as national brands stepped up promotional activities and priced more aggressively. But this year, analysts feel more optimistic that, despite looming market challenges, private label cereal sales will bounce back.

“Growth for private brands may not be as robust as at the height of the recession, but we still expect to see gains,” says LaDonna Hale, consumer segments manager of the Earth City, Mo.-based grocer Save-A-Lot.  “During the economic downturn, many consumers stretched their food dollars by switching to private brands.  As the economy shows small signs of improvement, consumers now know the quality and value of private label, and are comfortable offering it to their families – they won’t feel the need to switch back to brands.”

Private Label Advantage

“Private label cereal volumes could benefit from consumers trading down in the face of higher prices, but we do not expect a momentous shift,” says Heather Jones, consumer and agribusiness analyst at the Richmond, Va.-based consultant agency BB&T Capital Markets.

Private label cereal brands sales have grown by 22.5 percent since 2005, according to a study done by the Chicago, Ill.-based research firm Mintel International Group Ltd. The recession has helped drive the growth of the category, explains the study, as the sagging economy has encouraged more consumers to try private label. It is unlikely consumers will switch back to national brands after the recession, Mintel predicts.

“With a fragile consumer-spending environment, consumers aren’t just willing to pay up,” says Erin Lash, equity analyst at Chicago-based investment research firm Morningstar. Branded players have been increasing promotional spending, essentially reducing the price of their offerings. So while consumers might have had to pay up a bit to buy a branded product versus private label, the premium was not as significant as it had been in previous years, explains Lash.

Cold vs. Hot

Both cold and hot private label cereals saw a decline in the 52 weeks ending Jan. 23, 2011, according data by the Chicago-based research firm SymphonyIRI. Private label hot cereal saw a dip of 4.52 percent in dollar sales compared with last year’s sales and a decrease of 3.28 percent in unit sales. Private label ready-to-eat cereals saw a decrease in dollar sales of 8.5 percent and a drop of 8.67 percent in unit sales.

Within private label cereal, Mintel reports, cold cereal has dominated with a 75.5 market share while hot cereal holds only 24.5 percent of the market as of last year, Mintel says. This gap is attributable to year-round use of cold cereal while hot cereal tends to be eaten primarily during the colder seasons.

“The biggest thing is that we are our own worst enemies in the retail sector,” says Tom Lonsway, vice president of sales and marketing for the San Dimas, Calif.-based private label and contract manufacturing cereal company the Organic Milling Corp. “As we [private label cereal manufacturers] continue to make price our priority and not value, we are never going to be seen as equals in the eyes on consumers. A company that puts value over price would be a game changer in the business right now.”

The Ideal Consumer

Both gender and ethnicity play a factor in finding the ideal consumer, says Mintel’s report. While gender is not the sole factor influencing cereal purchases, women tend to be the primary shoppers in a majority of households. Women are more likely to buy private label cereal because it is the cheapest option, Mintel finds in polling consumers. As the primary shoppers, women generally are more in-tune with the family food budget and, according to Mintel, more likely to cut corners to stay within that budget when shopping.

When it comes to ethnicity, whites and Hispanics are more likely than other races/ethnicities to buy store brand cereals. African-Americans are the least likely to buy store brands. Only 25 percent of African-Americans told Mintel they buy store brand cereals compared to 58 percent of whites and 61 percent of Hispanics. Given this data, private label cereal marketers likely could gain sales by promoting more heavily to Hispanic females.

Rising Commodity Prices

Rising commodity prices will challenge private label competitiveness in the coming months, says  Lash. “I don’t think private label is immune to higher costs and even the bigger national brands have begun rising their prices in their portfolios,” says Lash. The standard price gap, roughly two dollars in both hot and cold cereals, held by private labels could significantly decrease as commodity costs rise, hurting private label’s ability to attract shoppers looking for lower-cost alternatives, she says. For instance, Lash notes that brand name heavyweight Kellogg’s has increased the price of 25 percent of its current portfolio with plans to increase the price of up to 50 percent of it by the end of the year due to rising commodity prices.

Lash’s prediction comes in response to a report issued by the U.S. Department of Agriculture in February stating that it will take more than two years for world grain supplies to return to levels high enough to bring prices down significantly from today’s levels. Current rising prices are due to a number of factors, including recent storms and droughts that have hit the world’s leading agriculture countries, says the report.

 “We are seeing some huge raw material prices increases,” says Lonsway. “Retailers will try to hold prices as we want to maintain psychological price points $X.99 or $Y.49 so promotions will not be as deep.  If the costs do not go down for a period longer than 90 days, everyday retails will increase.”

Commodity prices in grains commonly used in cereals have seen a dramatic increase over the past year according to data compiled by the CME Group, Chicago-based futures and options exchange operator. Wheat prices have jumped from $5.40 a bushel in June of last year to $8.98 in early March. Corn was listed at $3.80 a bushel in June of last year and has since nearly doubled at $7.17 a bushel in early March.

Lash uses the example of Ralcorp, the St. Louis, Mo.-based private label cereal manufacturers. Input cost inflation, for commodities such as sugar, oats, wheat, and cocoa, weighed on Ralcorp's profitability last year and Lash does not think these pressures subsiding because of supply constraints and increased emerging markets demand for various commodities. The company’s private-label ready-to-eat cereal volumes fell four percent from October to December of last year due to reduced promotional spending, Ralcorp declined to comment on the report.

New Products

New product introduction strategies vary greatly between private label and brand name manufacturers, states Mintel’s study. While brand names have introduced more than double the products every year for the past five years, private labels have taken the safer route of watching the trends before introducing new products.

Adding more value and function to private label products would differentiate them from other brands, says Lonsway.  Private label companies like Sedro-Wooley, Wash.-based Small Planet Foods released its whole grain oat cereal early last year fortified with calcium, and vitamins D and E to help promote a healthy immune system, for example.

“Even in the twenty-something’s there is a higher awareness of eating healthy, it is a market that cannot be ignored,” says Lonsway.

While environmentally friendly packaging became the top new attribute of last year among name brands, the introduction of new kosher products has been the most consistent trend since 2005, says Mintel. For instance, Toronto, Canada-based Shoppers Drug Mart’s Simply Food brand released its certified kosher mixed berry instant oatmeal earlier this year. The Skokie, Ill.-based Topco’s Valu Time brand also released honey nut toasted oats product at the beginning of the year. Although placement on-package is subtle, many of the private label cereals on the market carry a kosher certification.

As the market continues to evolve, private label cereal manufacturers and processors have become more in-tune with the demands of the consumer. While commodity prices may continue to rise, the recession has allowed consumers the chance to try store brands and experts agree that the trial period has given private label cereals a boost in the market. Every morning, millions of Americans roll out of bed and grab for a box of cereal; making it is a private label box is a battle that still needs to be won.

Eye on the National Brands

General Mills announced in February that it would be opening a new cereal innovation center in Switzerland with the help of Nestle. The facility will be used to create new brands and conduct research into cereal-related issues.

The Kellogg Company’s Special K brand started a marketing campaign at the beginning of the year designed to promote weight management in its female consumers. The campaign uses online applications, events and social media to engage shoppers.

Ocean Spray, traditionally known for beverages, is changing its strategy with the introduction of its new line of instant oatmeals. Available in cranberry, cranberry pomegranate, cranberry honey multigrain and cranberry orange muffin varieties, each box contains eight 1.51-ounce pouches and is ready to serve in one minute by adding boiling water.

The Kashi Co. announced the addition of its Kashi Golden Goodness brand early last month. The new cereal adds corn flakes and clusters to the recipe.

St.Louis, Mo.-based Ralcorp’s Post brand introduced its new blueberry pomegranate ancient grains cereal earlier this year as well. The multigrain cereal is a high source of fiber and other vitamins.

Cereals At-a-Glance

  1. Brand Loyalty: 60 percent of consumers indicate they are content with their cereal brands. Whether they buy name brand or private label, chances are they will stick with it for a long period of time.
  2. Female Friendly: Women are more likely to buy private label cereal.
  3. Deals: Cereal was the most popular coupon category in 2010, according to the Digital Coupons Trend report.
  4. Healthy: Big name private label retailers like Cincinnati, Ohio-based Kroger are attracting customers with new healthy items like the Living Well whole grain oat cereal which debuted last summer.
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