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

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
Highly Concentrated!!

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

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

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

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'n Crunch
Richmond, Jacksonville, Norfolk

49. 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

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

51. 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)

52. Social Media

53. Brand Equity Crucial in order to stand out among hundreds of brands
Makes demand less elastic to price
Emotional branding

54. 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”

55. False Health Claims
Kellogg Co. came under scrutiny in 2009 and 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

56. 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

57. Recommendation for Investment
High profit margin
Branded revenue likely to increase as the US economy recovers
Breakfast bar has great growth potential

58. Questions?

59. Videos
Honey Bunches of Oats:
Cocoa Puffs:
Cheerios 1:b. bQpA
Cheerios 2:
Multigrain Cheerios: IZ9CL4phPk
Product placement: