Cereal Breakfast Foods

SIC 2043

Companies in this industry

Industry report:

This industry is comprised of establishments that manufacture cereal breakfast foods. Establishments that primarily manufacture granola and other types of breakfast bars are categorized in SIC 2064: Candy and Other Confectionary Products.

Industry Snapshot

The seventh most popular supermarket product behind carbonated beverages, milk, beer/ale/alcoholic cider, fresh bread and rolls, salty snacks, frozen dinners and entrees, and natural cheese, cereal is staple of American kitchens. In fact, the United States is among the leaders in per capita consumption rate of cereal in the world.

As of the mid-2000s, the cereal market was divided into thirds among Kellogg Company, General Mills, and all other industry players, of which there were about 200 establishments at the end of the decade. States with the highest concentration of cereal manufacturers were California, Illinois, Minnesota, and Michigan. Consumer awareness of health and nutrition also played a major part in shaping the industry in recent years. Cereal manufacturers began to tout the benefits of eating breakfast cereal right on the package--vitamin-fortified, low in fat, and a good source of fiber.

According to the Annual Survey of Manufactures cereal manufacturing totaled $9.1 billion in 2008, well below the $11.5 billion reported in 2005. The sluggish sales were the result of many factors. Gone are the days of the family breakfast, of which a bowl of cereal was standard fare. The fast-paced American lifestyle had more and more consumers eating breakfast on the go, and many did not eat breakfast at all. Quick serve restaurants like McDonald's, ready-to-eat breakfast bars, bagels, and muffins offer consumers less labor-intensive alternatives to cereal.

Background and Development

Ready-to-eat cereals first appeared during the late 1800s. According to one account, John Kellogg, a doctor who belonged to a vegetarian group, developed wheat and corn flakes to extend the group's dietary choices. John's brother, Will Kellogg, saw potential in the innovative grain products and initiated commercial production and marketing. Patients at a Battle Creek, Michigan, sanitarium were among Kellogg's first customers.

Another cereal producer with roots in the nineteenth century was the Quaker Oats Company. In 1873, the North Star Oatmeal Mill built an oatmeal plant in Cedar Rapids, Iowa. North Star reorganized with other enterprises, and together they formed Quaker Oats in 1901.

The Washburn Crosby Company, a predecessor to General Mills, entered the market during the 1920s. The company's first ready-to-eat cereal, Wheaties, was introduced to the American public in 1924. According to General Mills, Wheaties was developed when a Minneapolis clinician spilled a mixture of gruel that he was making for his patients on a hot stove. The clinician approached the Washburn Crosby Company with his product and, following many tests and refinements, Wheaties was born. Other General Mills cereals followed in rapid succession. In 1937, Crispy Corn Kix was introduced. The company also launched the world's first ready-to-eat oat cereal in 1941. Originally named Cheerioats, the product later became "Cheerios."

During the 1940s cereal makers benefited from improved methods of puffing cereal products. Puffing methods employed a principle somewhat analogous to popping corn. Cereal ingredients were cooked and formed into pellets with precisely monitored amounts of water. The product was heated in an enclosed container called a "gun." As the heat increased, the water within the pellets turned to steam. The steam expanded and built up pressure within the gun until the intensity of the pressure caused the end of the gun to open. When the gun opened, the force of the escaping steam propelled the pellets out of the gun into a receiving bin and, as the steam erupted from the pellets, it left them permeated with thousands of air holes. These air holes caused the pellet to become larger and less dense. For example, one type of puffed product made with a pellet measuring 0.156 inches in diameter measured 0.5 inches after puffing. During the first decade of the 1900s, before the development of modern puffing procedures, puffed products were actually shot from cannons.

Many kinds of cereal were manufactured with a device called a food extruder. The extruder mixed and cooked cereal ingredients in a process that also shaped and colored the mixture. Ingredients were added at one end of the extruder and conveyed through its inner mechanisms by spiraling screws. A die at the other end of the extruder squeezed out cereal shapes and a blade cut the pieces at a predetermined size.

These food extruders were similar in operation to meat grinders. The first extruders, used during the 1930s, had only a single screw and often had problems caused by dried pieces of food. The machines were improved by the development of twin screws. Twin-screw extruders had two screws that intermeshed and cleaned each other as they propelled the cereal mixture.

The second half of the twentieth century brought rapid increases in brand offerings and growing national interest in ready-to-eat cereals. Many popular pre-sweetened cereals aimed at the children's market were introduced during the 1950s. Trix and Lucky Charms were launched in 1954. Cocoa Puffs made its first appearance in 1958. Adult cereals made an impact during the 1960s. Total, touted as a product containing 100 percent of the officially established U.S. recommended daily allowance (RDA) of vitamins and iron, was introduced in 1961. In 1970, the ready-to-eat cereal market was valued at $659 million, and it had reached $1.9 billion by 1979.

In the 1980s and on into the 1990s, U.S. consumers became increasingly interested in health issues and, consequently, in improving their diets. In response, Kellogg introduced Nutri-Grain, the first line of flaked, whole grain, ready-to-eat cereals with no sugar or preservatives. Other Kellogg offerings aimed at the health-conscious market included Crispix in 1983, Just Right in 1985, and Smart Start in 1998.

In 1985, Kellogg held a 40 percent share of the total ready-to-eat cereal market, which had grown to $4.35 billion. General Mills held a 22 percent share, followed by Post (14 percent), Quaker Oats (8 percent), and Ralston Purina (6 percent). All other cereal manufacturers combined held the remaining 10 percent. According to a report published by Prepared Foods, 92.4 percent of U.S. households used ready-to-eat cereal. The average household had four packages, and the country consumed more than 20 billion bowls annually.

According to figures published by the U.S. Department of Commerce, the cereal breakfast foods industry shipped $6.6 billion worth of products in 1987. The total included $5 billion in products considered primary to the industry and $1.3 billion in secondary products. Miscellaneous transactions accounted for $319 million. These figures yielded a specialization ratio of 79 percent, an increase from the 77 percent specialization ratio recorded in 1982.

The largest and most rapidly growing segment within the industry consisted of ready-to-eat (RTE) cereals. By the end of the 1980s, the RTE market was estimated at $4.8 billion. By 1992, industry analysts valued it at $7.3 billion.

A much smaller segment, hot cereals experienced virtually no growth between 1982 and 1987. In 1988, however, the hot cereal market garnered sales of $600 million, a 20 percent increase over figures for the previous year. The sudden surge was attributed to a national focus on the reported health benefits of oat bran.

Much of the growth within the ready-to-eat cereal segment during the later part of the 1980s was attributed to interest in oat bran. Products specifically labeled "oat bran" were valued at $34.9 million in 1987, $105.2 million in 1988, and $328.2 million in 1989. Oat bran's popularity, however, was short-lived. A study published in the New England Journal of Medicine debunked advertising claims that oat bran possessed the ability to lower cholesterol levels. The study led to consumer skepticism and a downturn in the success of new products based on key ingredients. In 1990, ready-to-eat cereal sales increased only 0.2 percent.

Another ingredient to suffer from health controversies was psyllium. Psyllium, a grain grown mainly in India, was said to help reduce cholesterol and thereby reduce risks of heart disease. A study done by the University of Minnesota, reporting a nine percent reduction in cholesterol levels among people who ate a cereal containing psyllium, was used to document the claims. Subsequently, General Mills incorporated it in "Benefit" and Kellogg used it in "Heartwise."

The Food and Drug Administration (FDA) had previously approved psyllium for use as a laxative, but its use as a food had not been certified. The FDA expressed concern that it could result in damaging health consequences to the intestinal tract such as constipation, fecal impaction, depletion of necessary colon bacteria, and shifts in the body's ability to absorb nutrients. Allergic reaction posed another problem related to psyllium use. Consequently, General Mills discontinued Benefit in January 1990, and Kellogg encountered problems with regulatory challenges to its advertising. Six states--Iowa, California, Florida, Minnesota, Texas, and Wisconsin--brought suit against the company regarding the health benefit claims for Heartwise and other products including Special K, 40+, Bran Flakes, and Frosted Flakes. In addition, Texas banned Heartwise. The suits were settled in 1991 when Kellogg agreed to pay each of the six states $30,000 to use for consumer or nutritional education and changed the name from "Heartwise" to "Fiberwise."

The 1990s were notable for shifts in traditionally held markets. Kellogg's Frosted Flakes had lost its top position to General Mills' Cheerios, and the cereal giant's previous 40 percent market share slipped to 32 percent in 1998. At the same time, General Mills' market share increased to 31.4 percent. Fortune magazine estimated each percentage point was worth about $75 million per year.

In addition, many of the country's major cereal manufacturers faced problems because of changing patterns regarding brand loyalty. Customers preferred purchasing a variety of cereals rather than one favorite. Another challenge was the growing percentage of market share being captured by private labels marketed by a supermarket or grocer. Private labels accounted for 7.8 percent of the ready-to-eat cereal market.

Another change noted during the early 1990s was a shift away from products promoted solely on the basis of health benefits. Although consumers continued to look at nutritional content, other factors such as taste, variety, convenience, and price were also important. The "all-family" cereal segment held almost half the ready-to-eat market. All-family cereals were not as sweet as children's cereals but had more sugar than traditional adult cereals. Examples included General Mills' Wheaties Honey Gold and Kellogg's Frosted Bran.

The snack market, which was estimated to be more than three times larger than the ready-to-eat cereal market, represented an emerging growth area for cereal makers. Following the U.S. Department of Agriculture's (USDA) release of its recommendation that Americans eat six to eleven servings of grain per day, cereal makers began promotions touting their products as tasty treats with positive health benefits. An estimated seven percent of ready-to-eat cereals were consumed as snacks throughout the day. For example, Cheerios was promoted as a snack for toddlers, and an estimated one-third of all Chex cereal was purchased for use as an ingredient in snack mixes rather than for breakfast consumption. Two new products aimed directly at the snack market were Kellogg's Rice Krispies Treats and General Mills' Fingos.

Although cereal sales grew by seven percent a year throughout the 1980s, growth came largely from price hikes. A price war erupted in the U.S. breakfast cereal market in 1996 following a long period of high cereal prices. According to The Financial Times, analysts said that producers had been greedy and continued to raise prices in the belief that their brands were so strong that consumers would pay inflated prices. When cereal prices were as high as $5 per box, consumers balked and began looking at alternatives to the brand name cereals such as the private label offered by the supermarket or bagged cereals. As a result, according to Supermarket Business, private cereal brand name products had seen market share grow by 60 percent since 1990, to total 7.8 percent in 1998.

At the end of the century, cereal makers were looking at new ways to market and advertise products, particularly toward adults who ate cereal in the morning, at lunch, and for snacks. New products and marketing campaigns aimed at adults seemed to pay off. New products made up 11.0 percent of the $7 billion cereal market in 1997, up from 4.6 percent in 1996. Kellogg's introduced Honey Crunch Corn Flakes as the sponsor of a NASCAR auto race in 1996. In 1997, it was a $72 million brand with a one percent market share, which is respectable for a new brand. Kellogg's also promoted its cereal by partnering with Microsoft to offer software for both kids and adults. General Mills' Cinnamon Grahams and Old Navy paired up to offer coupons for Old Navy on the back of the cereal boxes and featured Cinnamon Grahams in Old Navy stores. "The old way of launching a new product, through promotions and coupons, is not sufficient anymore," noted Debbie Scott, a marketing manager for General Mills.

Growth in the cereal industry was slow to nonexistent in the early 2000s. Ten of the top 15 cereal producers reported losses in 2002, and the ready-to-eat category of cereals, which reached $8.6 billion in 1995, fell to $8.1 billion in 2001. In addition, cereal companies were committing fewer dollars to their marketing budgets. Overall ad spending fell from $913 million in 1995 to just $577 million in 2001, a 37 percent decline.

Under these market conditions, cereal packaging is receiving new attention. In a 2003 Brand Week article, Sonia Reyes noted, "Decades ago, when times were simpler consumers were interested mostly in the product's taste and value. Packaging was a secondary consideration, other than throwing in special offers to tempt kids. But these days, with meal occasions boiled down to their bare essentials, packaging and delivery have emerged as key weapons in the cereal marketer's arsenal." New ideas circulating around the industry usually included doing away with the traditional cereal box, which has undergone little change in its lifetime. Alternatives range from clear plastic containers to a return of the small variety six-packs. By the mid-2000s, convenience and food-on-the-go was a major focus of cereal marketing as single serve plastic containers with peel-off lids could be taken while traveling or to school or the office.

In 2004, a Mintel study reported that 76 percent of adults, 89 percent of teenagers, and 98 percent of children ate cereal, which kept growth at a mere one percent annually. By 2008, a marked decline in the number of households with children was expected, with only 30 percent of all households projected to have people under the age of 18 by the closing years of the decade. Adults, primarily women, were the most likely target for future marketing.

The question at hand for the industry was how to remake cereal's image in light of the new culture. Tinkering with flavorings and offerings, such as the trend toward the addition of dried fresh fruit, provided some relief, but with more than 150 different choices on store shelves and about 20 new offerings added annually, variety had done more to overwhelm than excite consumers. The push in the mid-2000s was for reduced sugar and whole grain varieties, and these brands were responsible for most of the growth in this sector. By 2004, all of General Mills' Big G cereals were converted to whole grain with Kellogg's following their lead. Other growth categories were hot cereals, fruit-added cereals, and high fiber cereals. Also, companies began promoting their products as an option for those seeking to lose or control their weight, including the use of the slogan "Why Diet Hungry?" by Post cereal's classic line. Varieties of cereal flavored with chocolate and aimed at the adult market appeared in the late 2000s, with products such as Special K's Chocolatey Delight marketed as a sensible but indulgent-tasting snack choice.

Cereal makers have also come into scrutiny for marketing sugary cereals to children. The Institute of Medicine estimated that American companies spend approximately $15 billion in advertising directed at children 12 years old and younger, and about one-third of that group is either obese or borderline. In the summer of 2007, Kellogg responded to the Center for Science in the Public Interest's (CSPI) claim that it promoted unhealthy foods to children by promising to improve products or discontinue advertising to that age group. The CSPI had served notice in January 2006 to both Kellogg and Nickelodeon cable TV of its intent to sue if the matter was left unaddressed. However, the agreement did not impact other breakfast-type foods such as Pop-Tarts.

Current Conditions

In 2009, General Mills and Kellogg held most of the market share. In 2009, Quaker was the top performer in the hot cereal category, followed by Ralcorp's private label. Cereal manufacturers saw their bottom lines increase during this time as record commodity prices were passed onto store shelves.

At decade's end, a few cereal manufacturers continued to receive negative publicity, with the majority of their ad dollars spent on promoting cereal high in sugar to children. Still, cereal companies spent $156 million in 2008 advertising and were on target for a repeat performance for 2009. On the other hand, Quaker spent less than $200,000 promoting its Cap'n Crunch cereal and canceled all television ad spending for promotions directed at children. Of all cereal manufacturers, General Mills products were 60 percent of all cereal advertisements viewed by children.

General Mills promised to lower its sugar content in ten of its sugary cereals that are promoted to children under the age of 12. While the company has added whole grain, its goal was to cut the sugar content to the single digits in early 2010. The Center for Science in the Public Interest hoped other cereal manufacturers would follow suit.

Unfortunately, Kellogg Co. came under scrutiny in 2009 and again in 2010 following false health claims through advertisements. A strong message from the Federal Trade Commission (FTC) in June 2010 showed the industry at large that false health claims would not be tolerated. The FTC was particularly disappointed to learn the Kellogg Co. had been working on "dubious claims" on yet another one of its cereals, Rice Krispies, at the same time it agreed not to make "unsubstantiated" health claims on Frosted Mini-Wheats.

Industry Leaders

General Mills of Minneapolis, Minnesota, knocked its rival out of the top spot in 2008, when company revenues were $14.7 billion. Big G cereals included Cheerios, the leading U.S. cereal; flaked products such as Total, Raisin Bran, and Country Corn Flakes; and puffed varieties such as Kix, Trix, and Cocoa Puffs. The company's consumer foods division included its line of Big G cereals, Gold Medal Flour, Betty Crocker mixes, and Hamburger Helper. It also operated Pillsbury and its frozen line of breakfast foods such as pancakes and toaster strudels. General Mills employed 33,000 people.

Battle Creek, Michigan-based Kellogg Company was close behind its rival, with 2009 revenues of $12.5 billion. Established in 1906, Kellogg was the world's market leader in ready-to-eat cereals throughout most of the twentieth century. With 30,900 employees overall, its presence spanned 180 countries, including manufacturing facilities in 17 countries. A few well-known products were Corn Flakes, Frosted Flakes, Frosted Mini-Wheats, Rice Krispies, Corn Pops, and Fruit Loops. In addition to its ready-to-eat cereal division, Kellogg also operated Mrs. Smith's Frozen Foods. In 2001, the company purchased Keebler Foods, the cookie and cracker company, which along with the 2000 purchase of natural cereal producer Kashi Company enabled the company to regain the top industry spot in 2002 after briefly losing it to General Mills.

Kraft Foods Inc. of Northfield, Illinois, produced cereal under the Post label, including Grape Nuts, Raisin Bran, Honeycomb, Fruity Pebbles, and Cocoa Pebbles. However, Kraft sold the division to Ralcorp Holdings Inc. of St. Louis, Missouri, for $1.7 billion in stock. Ralcorp reported revenues of $3.8 billion in 2009 with 9,350 employees. It was a leader when it came to private-label ready-to-eat and hot breakfast cereals. The company's branded products included Ralston Hot Cereal and Post dry cereals.

© COPYRIGHT 2018 The Gale Group, Inc. This material is published under license from the publisher through the Gale Group, Farmington Hills, Michigan. All inquiries regarding rights should be directed to the Gale Group. For permission to reuse this article, contact the Copyright Clearance Center.

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