1. THE BREAKFAST CEREAL INDUSTRY Xandra Hompe, Dani Gredoña, Stephanie Lau, and Shannon Tierney 1

2. Agenda  Industry Choice  Industry Structure  Advertising: Overview  Advertising Mediums  Advertising Strategies  Analysis & Recommendations 2

3. Why Breakfast Cereals?  Products we know and love  Product differentiation extremely important  Pricing not as important  High Ad-to-Sales Ratio  Spend more than any other packaged food category in marketing products to children  $229 million in 2006  Demonstrates many different advertising strategies 3

4. Industry Structure 4

5. Industry: An Overview 5 Revenue Annual Growth 07-12 Annual Growth 12-17 Profit $13.3bn 4.9% 0.9% $1.8bn |Industry Structure| |Advertising: Overview| |Analysis & Recommendations| |Advertising Strategies||Advertising Mediums|

6. Products Ready-to-eat Cereal 53% Cereal Bars 35% 6 |Industry Structure| |Advertising: Overview| |Analysis & Recommendations| |Advertising Strategies||Advertising Mediums|

7. Supply Chain 7 |Industry Structure| |Advertising: Overview| |Analysis & Recommendations| |Advertising Strategies||Advertising Mediums|

8. Sales by Market Segments 8 |Industry Structure| |Advertising: Overview| |Analysis & Recommendations| |Advertising Strategies||Advertising Mediums|

9. Cost Structure Profit 13.3% Wages 7.4% Purchase 72.2% Depreciation 3.1% Utilities 1.1% Rent 1.1% Other 1.8% 9 |Industry Structure| |Advertising: Overview| |Analysis & Recommendations| |Advertising Strategies||Advertising Mediums|

10. Key External Drivers Per capita disposable income Demand from grocery wholesaling Healthy eating index Price of coarse grains World price of wheat 10 |Industry Structure| |Advertising: Overview| |Analysis & Recommendations| |Advertising Strategies||Advertising Mediums|

11. Operating Conditions  Life Cycle Stage: MATURE  Revenue Volatility: MEDIUM  Concentration Level: HIGH  Regulation Level: HEAVY  Technology Change: HIGH  Barriers to Entry: HIGH 11 |Industry Structure| |Advertising: Overview| |Analysis & Recommendations| |Advertising Strategies||Advertising Mediums|

12. International Trade  Domestic demand accounts for 95.9% of revenue  Exports  LOW and DECREASING  Imports  LOW and INCREASING  International facilities supply foreign markets directly 12 |Industry Structure| |Advertising: Overview| |Analysis & Recommendations| |Advertising Strategies||Advertising Mediums|

13. Industry Trends  Increase in per capita disposable income  Acquisitions/consolidation  Healthy private-label brand cereals  Convenient products  Breakfast bars  Stable profit margins 13 |Industry Structure| |Advertising: Overview| |Analysis & Recommendations| |Advertising Strategies||Advertising Mediums|

14. Industry Concentration  HHI = 1,539.19  Four-Firm Concentration Ratio= 65.9 14 |Industry Structure| |Advertising: Overview| |Analysis & Recommendations| |Advertising Strategies||Advertising Mediums|

15. Competition 15 |Industry Structure| |Advertising: Overview| |Analysis & Recommendations| |Advertising Strategies||Advertising Mediums|

16. Kellogg’s Company  Largest cereal manufacturer  2011 Expected Revenue  $8.9 billion  Innovation is key  2000 - Acquired Kashi brand  2011- Gluten-free cereals like Rice Krispies 16 |Industry Structure| |Advertising: Overview| |Analysis & Recommendations| |Advertising Strategies||Advertising Mediums|

17. General Mills  2 nd largest producer of breakfast cereals  2011 Expected Revenue  $10 billion  New products in 2011  Chocolate Cheerios  Wheaties Fuel 17 |Industry Structure| |Advertising: Overview| |Analysis & Recommendations| |Advertising Strategies||Advertising Mediums|

18. PepsiCo  Leading global manufacturer, distributor, and marketer of food and beverages  2011 Expected Revenue  $1.9 billion  2001- Merger with Quaker Oats Company 18 |Industry Structure| |Advertising: Overview| |Analysis & Recommendations| |Advertising Strategies||Advertising Mediums|

19. Ralcorp Holdings  2011 Expected Revenue  $4.7 billion  Private label brands  2008 - Acquired Post Cereals 19 |Industry Structure| |Advertising: Overview| |Analysis & Recommendations| |Advertising Strategies||Advertising Mediums|

20. Government Regulation  Public health  Nutrition Labeling and Education Act  Food Ingredient Safety Program  Product labeling  FFDC Act, FPL Act  Environmental regulation  EPA- food processing  Advertising to Children  Children’s food marketing calls for change  Concerns of rising childhood obesity 20 |Industry Structure| |Advertising: Overview| |Analysis & Recommendations| |Advertising Strategies||Advertising Mediums|

21. Advertising: Overview 21

22. Advertising Spending  Spend half of budgets on child and family brands  General Mills and Kellogg’s dominate cereal advertising 22 |Industry Structure| |Advertising: Overview| |Analysis & Recommendations| |Advertising Strategies||Advertising Mediums|

23. Advertising-to-Sales Ratio  Numerous introductions of new products  Grain Mills Product Industry (bulk is cereal): 1.2x higher than average value for food sector  Substantial product differentiation 23 Companies |Industry Structure| |Advertising: Overview| |Analysis & Recommendations| |Advertising Strategies||Advertising Mediums|

24. Number of Ads- Four Industry Leaders |Industry Structure| |Advertising: Overview| |Analysis & Recommendations| |Advertising Strategies||Advertising Mediums| 24

25. Number of Ads by Brand |Industry Structure| |Advertising: Overview| |Analysis & Recommendations| |Advertising Strategies||Advertising Mediums| 25

26. Advertising Effects on Target Markets 26  Primary target market:  Children: Age 5-12  Children see 2x as many TV ads for cereal than adults  Compared to non-advertised products:  Advertised child-targeted cereals were purchased 13x more frequently  Family-targeted brand purchases were 10x higher  Adult-targeted cereals were purchased 4x more Source: Castetbon, Katia, Jennifer Harris, and Marlene Schwartz. "Purchases of ready-to-eat cereals vary across US household sociodemographic categories according to nutritional value and advertising targets." Public Health Nutrition. (2011): 1-10. Print. |Industry Structure| |Advertising: Overview| |Analysis & Recommendations| |Advertising Strategies||Advertising Mediums|

27. Brand Equity  Blind vs. Branded Test  Choice increase from 47% to 59% when Kellogg’s brand identified  Sub brands within brand drive overall brand value  Kellogg’s Top 3 Brand Values  General Mills 27 |Industry Structure| |Advertising: Overview| |Analysis & Recommendations| |Advertising Strategies||Advertising Mediums| Source: Harris, Schwartz, Kelly Brownell, and Vishnudas Sarda. ”Evaluating the nutrition quality and marketing of children’s cereals." Cereal FACTS. (2009): 1-102. Online.

28. Advertising & Brand Loyalty 28  Studies show brand loyalty is a strong feature in consumer product markets  However, advertising overcomes brand loyalty in this industry  Encourages “switching” behavior at the household level  Persuades households to try new brands  Advertising may effective option for new entrants Source: Shum, Matthew. "Does advertising overcome brand loyalty? Evidence from the breakfast cereals market." Journal of Economics & Management Strategy. 13.2 (2004): 241-72. Print. |Industry Structure| |Advertising: Overview| |Analysis & Recommendations| |Advertising Strategies||Advertising Mediums|

29. Advertising Mediums 29

30. Advertising Mediums  Television  Internet  Child-targeted websites  Banner advertising  Social media marketing  In-Store  Product packaging  Shelf space allocation  Displays and promotions 30 |Industry Structure||Advertising: Overview| |Analysis & Recommendations| |Advertising Strategies| |Advertising Mediums|

31. Television  TV ad expenditures by cereal producers are second only to expenditures by automobile manufacturers  “There is a clear pattern of evidence showing that Saturday morning television advertising has an important influence on children’s asking for cereal and toy products.” - The Journal of Communication, Charles Atkin & Gary Heald 31 Source: Nevo, A. (2001). Measuring market power in the ready-to-eat cereal industry. Econometrica, 69(2), pp. 307-342. Atkin, C. and G. Heald. “The Content of Children’s Toys and Food Commercials.” Journal of Communication 27(1), Winter 1977, pp. 107-114. |Industry Structure||Advertising: Overview| |Analysis & Recommendations| |Advertising Strategies| |Advertising Mediums|

32. Number of Ads According to Daypart |Industry Structure||Advertising: Overview| |Analysis & Recommendations| |Advertising Strategies| |Advertising Mediums| 32

33. Number of Ads According to Channel |Industry Structure||Advertising: Overview| |Analysis & Recommendations| |Advertising Strategies| |Advertising Mediums| 33

34. Number of Ads According to Day of Week |Industry Structure||Advertising: Overview| |Analysis & Recommendations| |Advertising Strategies| |Advertising Mediums| 34

35. Number of Ads according to Program Type |Industry Structure||Advertising: Overview| |Analysis & Recommendations| |Advertising Strategies| |Advertising Mediums| 35

36. General Mills Advertising Distribution According to Program Type |Industry Structure||Advertising: Overview| |Analysis & Recommendations| |Advertising Strategies| |Advertising Mediums| 36

37. Kelloggs’ Advertising Distribution According to Program Type |Industry Structure||Advertising: Overview| |Analysis & Recommendations| |Advertising Strategies| |Advertising Mediums| 37

38. Ralcorp Holdings’ Advertising Distribution According to Program Type |Industry Structure||Advertising: Overview| |Analysis & Recommendations| |Advertising Strategies| |Advertising Mediums| 38

39. Pepsi’s Advertising Distribution According to Program Type |Industry Structure||Advertising: Overview| |Analysis & Recommendations| |Advertising Strategies| |Advertising Mediums| 39

40. Internet Advertising  6% of youth advertising budgets  Forms of digital media  Child-targeted websites  Banner advertising  Social media marketing  Highly entertaining and interactive content 40 |Industry Structure||Advertising: Overview| |Analysis & Recommendations| |Advertising Strategies| |Advertising Mediums| Source: Harris, Schwartz, Kelly Brownell, and Vishnudas Sarda. ”Evaluating the nutrition quality and marketing of children’s cereals." Cereal FACTS. (2009): 1-102. Online.

41. In-Store Marketing  Child and family cereals ½ shelf space in cereal aisle; prime middle shelf; in-store displays and promotions  Cereal box  Child engagement messages Average box: 1.4  Health messages Average box: 2.0 41 |Industry Structure||Advertising: Overview| |Analysis & Recommendations| |Advertising Strategies| |Advertising Mediums|

42. Share of Shelf Space Data 42 Source: Harris, Schwartz, Kelly Brownell, and Vishnudas Sarda. ”Evaluating the nutrition quality and marketing of children’s cereals." Cereal FACTS. (2009): 1-102. Online. |Industry Structure||Advertising: Overview| |Analysis & Recommendations| |Advertising Strategies| |Advertising Mediums|

43. Advertising Strategies 43

44. Primary Advertising Methods  Persuasive Advertising  Informative Advertising  Memory Jamming  Celebrity Endorsement  Humor  Emotional Appeal  Product Placement 44 |Industry Structure||Advertising: Overview| |Analysis & Recommendations| |Advertising Strategies| |Advertising Mediums|

45. Persuasive Advertising 45  Dangerous to those who don’t understand persuasive intent  Children limited in ability to detect until age 8 or 10  Ex: Frosted Flakes “They’re grrreat!”  Effective for experience goods |Industry Structure||Advertising: Overview| |Analysis & Recommendations| |Advertising Strategies| |Advertising Mediums|

46. Informative Advertising  Direct: Nutritional benefits  Ex: Cheerios  Indirect:  Match products to buyers Ex: Lucky charms commercial  Signal efficiency effect Ex: General Mills 46 |Industry Structure||Advertising: Overview| |Analysis & Recommendations| |Advertising Strategies| |Advertising Mediums|

47. Memory Jamming  Average preschooler sees 642 ads/year on TV  Memorable slogans  Lucky Charms: They’re magically delicious!  Paired with creative cartoons- easily recall figures and mascots 47 |Industry Structure||Advertising: Overview| |Analysis & Recommendations| |Advertising Strategies| |Advertising Mediums|

48. Celebrity Endorsement  Can strengthen brand’s equity, make claims of ad appear more credible  Wheaties: The Breakfast of Champions  Can pose great risks to the company too  Kellogg’s: Michael Phelps  Wheaties: Tiger Woods 48 |Industry Structure||Advertising: Overview| |Analysis & Recommendations| |Advertising Strategies| |Advertising Mediums|

49. Humor Appeals  Connection through humor is often delivered by cereal mascot  Mascot can be depicted in humorous situations 49 |Industry Structure||Advertising: Overview| |Analysis & Recommendations| |Advertising Strategies| |Advertising Mediums|

50. Emotional Appeals  Consumers’ emotional connection to the ad can be strengthened by cereal mascot  Kellogg’s  Rice Krispies, Life: Family bonding  Mini-Wheats: claims help child do well in school 50 |Industry Structure||Advertising: Overview| |Analysis & Recommendations| |Advertising Strategies| |Advertising Mediums|

51. Product Placement  Further integrating products into TV programs  Children’s programs, movies, soap operas  Days of Our Lives: Cheerios  Dickie Roberts: Former Child Star 51 http://www.youtube.com/watch?v=oGtig5DiTxc&feature=player_embedded&noredirect=1 |Industry Structure||Advertising: Overview| |Analysis & Recommendations| |Advertising Strategies| |Advertising Mediums|

52. Differences in Strategies Across Companies  Child and family brands on TV; significant child- targeted presence on internet  Speak directly to parents on boxes: 3.2 health messages/box  Target specific consumers  Supermarket, in-store displays + promotions  Most promotions on boxes 52 General Mills Kellogg’s |Industry Structure||Advertising: Overview| |Analysis & Recommendations| |Advertising Strategies| |Advertising Mediums|

53. Analysis & Recommendations 53

54. Investor Recommendations 54  Positive outlook on breakfast cereal industry  Large innovation capability and opportunities  Increasing competition: Private-label brands  Cost-cutting and consolidation  Recession-proof products  Stable industry Companies have variety of products with different pricing options  Huge potential for growth in emerging markets Cultural acceptance barrier |Industry Structure||Advertising: Overview| |Analysis & Recommendations| |Advertising Strategies||Advertising Mediums|

55. Advertising Recommendations 55  Advertise more based on nutritional facts  Especially for children – appealing to parents  Increase use of the memory-jamming technique  Advertise more to teens and young working adults |Industry Structure||Advertising: Overview| |Analysis & Recommendations| |Advertising Strategies||Advertising Mediums|

56. Questions? 56