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

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THE BREAKFAST CEREAL INDUSTRY

Xandra Hompe, Dani Gredoña, Stephanie Lau, and Shannon Tierney

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Agenda

Industry Choice Industry Structure Advertising: Overview Advertising Mediums Advertising Strategies Analysis & Recommendations

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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

4 Industry Structure

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Industry: An Overview

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|

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Products

Hot Cereals12%

Ready-to-eat Cereal

53%Cereal Bars35%


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Supply Chain

Raw Materials

Storage Facilities Processors Distributors Retailers


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Sales by Market Segments

Food & Service Providers

Exports

Grocery Wholesalers

Supermarkets & Convenience Stores


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Cost Structure

Profit13.3%

Wages7.4%

Purchase72.2%

Depreciation3.1%

Utilities1.1%

Rent1.1%

Other1.8%


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Key External Drivers

Per capita disposable

income

Demand from grocery

wholesaling

Healthy eating index

Price of coarse grains

World price of wheat


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Operating Conditions

Life Cycle Stage: MATURE Revenue Volatility: MEDIUM Concentration Level: HIGH Regulation Level: HEAVY Technology Change: HIGH Barriers to Entry: HIGH


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International Trade

Domestic demand accounts for 95.9% of revenue Exports LOW and DECREASING Imports LOW and INCREASING

International facilities supply foreign markets directly


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Industry Trends

Increase in per capita disposable income Acquisitions/consolidation Healthy private-label brand cereals Convenient products

Breakfast bars Stable profit margins


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Industry Concentration

Kellogg- 33.3%

General Mills- 17.9%

PepsiCo- 8.0%

Ralcorp Holdings- 6.7%

Other- 34.1%

HHI = 1,539.19 Four-Firm Concentration Ratio= 65.9

HIGHLY CONCENTRATED|Industry Structure| |Advertising: Overview| |Analysis & Recommendations||Advertising Strategies||Advertising Mediums|

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Competition

Kellogg’s General Mills

PepsiCo Ralcorp Holdings


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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


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General Mills

2nd largest producer of breakfast cereals

2011 Expected Revenue $10 billion

New products in 2011 Chocolate Cheerios Wheaties Fuel


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PepsiCo

Leading global manufacturer, distributor, and marketer of food and beverages


2001- Merger with Quaker Oats Company


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Ralcorp Holdings


Private label brands

2008 - Acquired Post Cereals


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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


21 Advertising: Overview

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Advertising Spending

Spend half of budgets on child and family brands

General Mills and Kellogg’s dominate cereal advertising


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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

Kellogg Co Kraft Foods, Inc. PepsiCo Inc. Ralcorp Holdings, Inc.

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1

2

3

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5

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8

9

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8.62

4.41

2.86 2.83

Ad-Sales Ratios

Companies


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Number of Ads- Four Industry Leaders


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Number of Ads by Brand


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Advertising Effects on Target Markets

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.


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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


Source: Harris, Schwartz, Kelly Brownell, and Vishnudas Sarda. ”Evaluating the nutrition quality and marketing of children’s cereals." Cereal FACTS. (2009): 1-102. Online.

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Advertising & Brand Loyalty

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.


29 Advertising Mediums

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Advertising Mediums

Television Internet

Child-targeted websites Banner advertising Social media marketing

In-Store Product packaging Shelf space allocation Displays and promotions


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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

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.


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Number of Ads According to Daypart


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Number of Ads According to Channel


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Number of Ads According to Day of Week


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Number of Ads according to Program Type


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General Mills Advertising Distribution According to Program Type


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Kelloggs’ Advertising Distribution According to Program Type


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Ralcorp Holdings’ Advertising Distribution According to Program Type


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Pepsi’s Advertising Distribution According to Program Type


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Internet Advertising

6% of youth advertising budgets

Forms of digital media Child-targeted websites Banner advertising Social media marketing

Highly entertaining and interactive content



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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


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Share of Shelf Space Data



43 Advertising Strategies

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Primary Advertising Methods

Persuasive Advertising Informative Advertising Memory Jamming Celebrity Endorsement Humor Emotional Appeal Product Placement


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Persuasive Advertising

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


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Informative Advertising

Direct: Nutritional benefits Ex: Cheerios

Indirect: Match products to buyers

Ex: Lucky charms commercial Signal efficiency effect

Ex: General Mills


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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


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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


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Humor Appeals

Connection through humor is often delivered by cereal mascot Mascot can be depicted in humorous situations


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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


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Product Placement

Further integrating products into TV programs Children’s programs, movies, soap operas

Days of Our Lives: Cheerios Dickie Roberts: Former Child Star

http://www.youtube.com/watch?v=oGtig5DiTxc&feature=player_embedded&noredirect=1


http://www.youtube.com/watch?v=oGtig5DiTxc&feature=player_embedded&noredirect=1

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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

General Mills

Kellogg’s


53 Analysis & Recommendations

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Investor Recommendations

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


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Advertising Recommendations

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


56 Questions?

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