The Breakfast Cereal Industry AEM 4550 April 20,2011 The Breakfast Cereal Industry Li Li Jennifer Wang Xin Yiran

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

Industry Structure

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

Product Differentiation Key Success Factors Product Differentiation EOS Supply Contract Adaptability Cost Control

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 2006 2007 2008 2009 2010 Average Wage ($) 64183.4 60770.7   2006 2007 2008 2009 2010 Average Wage ($) 64183.4 60770.7 61061.9 62173.3 63730

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 – “There’s 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. Kellogg’s high fiber cereal

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

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 Cap’n Crunch:

Segmentation After FTC’s 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 Mill’s 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

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

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

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

Online Advertising Social media becoming a more popular marketing tool Kellogg’s 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 child’s immunity,” with “25 percent Daily Value of Antioxidants and Nutrients – Vitamins A, B, C, and E” FTC delivered strong message – won’t 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