1
THE BREAKFAST CEREAL INDUSTRY
Xandra Hompe, Dani Gredoña, Stephanie Lau,
and Shannon Tierney
Agenda
2






Industry Choice
Industry Structure
Advertising: Overview
Advertising Mediums
Advertising Strategies
Analysis & Recommendations
Why Breakfast Cereals?
3


Products we know and love
Product differentiation extremely important
 Pricing


High Ad-to-Sales Ratio
Spend more than any other packaged food
category in marketing products to children
 $229

not as important
million in 2006
Demonstrates many different advertising strategies
4
Industry Structure
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|
|Advertising Mediums|
|Advertising Strategies|
|Analysis & Recommendations|
Products
6
Hot Cereals
12%
Ready-to-eat
Cereal
53%
|Industry Structure|
|Advertising: Overview|
Cereal Bars
35%
|Advertising Mediums|
|Advertising Strategies|
|Analysis & Recommendations|
Supply Chain
7
|Industry Structure|
|Advertising: Overview|
|Advertising Mediums|
|Advertising Strategies|
|Analysis & Recommendations|
Sales by Market Segments
8
Food & Service Providers
Exports
Grocery Wholesalers
Supermarkets & Convenience
Stores
|Industry Structure|
|Advertising: Overview|
|Advertising Mediums|
|Advertising Strategies|
|Analysis & Recommendations|
Cost Structure
9
Profit
13.3%
|Industry Structure|
Other
Wages
1.8%
7.4%
Rent
Purchase
1.1%
72.2%
Utilities
Depreciation
1.1%
3.1%
|Advertising: Overview|
|Advertising Mediums|
|Advertising Strategies|
|Analysis & Recommendations|
Key External Drivers
10
Per capita
disposable
income
Demand from
grocery
wholesaling
Price of coarse
grains
|Industry Structure|
|Advertising: Overview|
|Advertising Mediums|
Healthy eating
index
World price of
wheat
|Advertising Strategies|
|Analysis & Recommendations|
Operating Conditions
11






Life Cycle Stage: MATURE
Revenue Volatility: MEDIUM
Concentration Level: HIGH
Regulation Level: HEAVY
Technology Change: HIGH
Barriers to Entry: HIGH
|Industry Structure|
|Advertising: Overview|
|Advertising Mediums|
|Advertising Strategies|
|Analysis & Recommendations|
International Trade
12



Domestic demand accounts for 95.9% of revenue
Exports  LOW and DECREASING
Imports  LOW and INCREASING
 International
|Industry Structure|
facilities supply foreign markets directly
|Advertising: Overview|
|Advertising Mediums|
|Advertising Strategies|
|Analysis & Recommendations|
Industry Trends
13




Increase in per capita disposable income
Acquisitions/consolidation
Healthy private-label brand cereals
Convenient products
 Breakfast

bars
Stable profit margins
|Industry Structure|
|Advertising: Overview|
|Advertising Mediums|
|Advertising Strategies|
|Analysis & Recommendations|
Industry Concentration
14
Kellogg- 33.3%
General Mills- 17.9%
PepsiCo- 8.0%
Ralcorp Holdings- 6.7%
Other- 34.1%


|Industry Structure|
HHI = 1,539.19
Four-Firm Concentration Ratio= 65.9
|Advertising: Overview|
|Advertising Mediums|
|Advertising Strategies|
|Analysis & Recommendations|
Competition
15
Kellogg’s
|Industry Structure|
General
Mills
|Advertising: Overview|
|Advertising Mediums|
PepsiCo
|Advertising Strategies|
Ralcorp
Holdings
|Analysis & Recommendations|
Kellogg’s Company
16

Largest cereal
manufacturer

2011 Expected Revenue


$8.9 billion
Innovation is key
2000 - Acquired Kashi
brand
 2011- Gluten-free
cereals like Rice Krispies

|Industry Structure|
|Advertising: Overview|
|Advertising Mediums|
|Advertising Strategies|
|Analysis & Recommendations|
General Mills
17

2nd largest producer of
breakfast cereals

2011 Expected
Revenue
 $10

billion
New products in 2011
 Chocolate
Cheerios
 Wheaties Fuel
|Industry Structure|
|Advertising: Overview|
|Advertising Mediums|
|Advertising Strategies|
|Analysis & Recommendations|
PepsiCo
18

Leading global
manufacturer,
distributor, and
marketer of food and
beverages

2011 Expected Revenue


|Industry Structure|
|Advertising: Overview|
|Advertising Mediums|
$1.9 billion
2001- Merger with
Quaker Oats Company
|Advertising Strategies|
|Analysis & Recommendations|
Ralcorp Holdings
19

2011 Expected
Revenue
 $4.7
|Industry Structure|
|Advertising: Overview|
billion

Private label brands

2008 - Acquired Post
Cereals
|Advertising Mediums|
|Advertising Strategies|
|Analysis & Recommendations|
Government Regulation
20

Public health
Nutrition Labeling and Education Act
 Food Ingredient Safety Program


Product labeling


Environmental regulation


FFDC Act, FPL Act
EPA- food processing
Advertising to Children
Children’s food marketing calls for change
 Concerns of rising childhood obesity

|Industry Structure|
|Advertising: Overview|
|Advertising Mediums|
|Advertising Strategies|
|Analysis & Recommendations|
21
Advertising: Overview
Advertising Spending
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
Spend half of budgets
on child and family
brands

General Mills and
Kellogg’s dominate
cereal advertising
|Industry Structure|
|Advertising: Overview|
|Advertising Mediums|
|Advertising Strategies|
|Analysis & Recommendations|
Advertising-to-Sales Ratio
23
10
9
8.62
Ad-Sales Ratios
8
7
6
4.41
5
4
3
2.86
2.83
PepsiCo Inc.
Ralcorp Holdings,
Inc.
2
1
0
Kellogg Co
Kraft Foods, Inc.
Companies



Numerous introductions of new products
Grain Mills Product Industry (bulk is cereal): 1.2x higher than
average value for food sector
Substantial product differentiation
|Industry Structure|
|Advertising: Overview|
|Advertising Mediums|
|Advertising Strategies|
|Analysis & Recommendations|
Number of Ads- Four Industry Leaders
24
|Industry Structure|
|Advertising: Overview|
|Advertising Mediums|
|Advertising Strategies|
|Analysis & Recommendations|
Number of Ads by Brand
25
|Industry Structure|
|Advertising: Overview|
|Advertising Mediums|
|Advertising Strategies|
|Analysis & Recommendations|
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|
|Advertising Mediums|
|Advertising Strategies|
|Analysis & Recommendations|
Brand Equity
27

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.
|Industry Structure|
|Advertising: Overview|
|Advertising Mediums|
|Advertising Strategies|
|Analysis & Recommendations|
Advertising & Brand Loyalty
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

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|
|Advertising Mediums|
|Advertising Strategies|
|Analysis & Recommendations|
29
Advertising Mediums
Advertising Mediums
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

Television
Internet
 Child-targeted
websites
 Banner advertising
 Social media marketing

In-Store
 Product
packaging
 Shelf space allocation
 Displays and promotions
|Industry Structure|
|Advertising: Overview|
|Advertising Mediums| |Advertising Strategies|
|Analysis & Recommendations|
Television
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

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.
|Industry Structure|
|Advertising: Overview|
|Advertising Mediums| |Advertising Strategies|
|Analysis & Recommendations|
Number of Ads According to Daypart
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|Industry Structure|
|Advertising: Overview|
|Advertising Mediums| |Advertising Strategies|
|Analysis & Recommendations|
Number of Ads According to Channel
33
|Industry Structure|
|Advertising: Overview|
|Advertising Mediums| |Advertising Strategies|
|Analysis & Recommendations|
Number of Ads According to Day of
Week
34
|Industry Structure|
|Advertising: Overview|
|Advertising Mediums| |Advertising Strategies|
|Analysis & Recommendations|
Number of Ads according to Program
Type
35
|Industry Structure|
|Advertising: Overview|
|Advertising Mediums| |Advertising Strategies|
|Analysis & Recommendations|
General Mills Advertising Distribution
According to Program Type
36
|Industry Structure|
|Advertising: Overview|
|Advertising Mediums| |Advertising Strategies|
|Analysis & Recommendations|
Kelloggs’ Advertising Distribution
According to Program Type
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|Industry Structure|
|Advertising: Overview|
|Advertising Mediums| |Advertising Strategies|
|Analysis & Recommendations|
Ralcorp Holdings’ Advertising
Distribution According to Program Type
38
|Industry Structure|
|Advertising: Overview|
|Advertising Mediums| |Advertising Strategies|
|Analysis & Recommendations|
Pepsi’s Advertising Distribution
According to Program Type
39
|Industry Structure|
|Advertising: Overview|
|Advertising Mediums| |Advertising Strategies|
|Analysis & Recommendations|
Internet Advertising
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

6% of youth advertising
budgets
Forms of digital media
 Child-targeted
websites
 Banner advertising
 Social media marketing

Highly entertaining and
interactive content
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|
|Advertising Mediums| |Advertising Strategies|
|Analysis & Recommendations|
In-Store Marketing
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

Child and family cereals ½ shelf
space in cereal aisle; prime
middle shelf; in-store displays
and promotions
Cereal box
 Child
engagement messages
 Average
 Health
messages
 Average
|Industry Structure|
box: 1.4
box: 2.0
|Advertising: Overview|
|Advertising Mediums| |Advertising Strategies|
|Analysis & Recommendations|
Share of Shelf Space Data
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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|
|Advertising Mediums| |Advertising Strategies|
|Analysis & Recommendations|
43
Advertising Strategies
Primary Advertising Methods
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
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

Persuasive Advertising
Informative Advertising
Memory Jamming
Celebrity Endorsement
Humor
Emotional Appeal
Product Placement
|Industry Structure|
|Advertising: Overview|
|Advertising Mediums|
|Advertising Strategies| |Analysis & Recommendations|
Persuasive Advertising
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
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|
|Advertising Mediums|
|Advertising Strategies| |Analysis & Recommendations|
Informative Advertising
46

Direct: Nutritional benefits
 Ex:

Cheerios
Indirect:
 Match
 Ex:
Lucky charms commercial
 Signal
 Ex:
|Industry Structure|
products to buyers
efficiency effect
General Mills
|Advertising: Overview|
|Advertising Mediums|
|Advertising Strategies| |Analysis & Recommendations|
Memory Jamming
47

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
|Industry Structure|
|Advertising: Overview|
|Advertising Mediums|
|Advertising Strategies| |Analysis & Recommendations|
Celebrity Endorsement
48

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
|Industry Structure|
|Advertising: Overview|
|Advertising Mediums|
|Advertising Strategies| |Analysis & Recommendations|
Humor Appeals
49

Connection through humor is often delivered by
cereal mascot
 Mascot
|Industry Structure|
can be depicted in humorous situations
|Advertising: Overview|
|Advertising Mediums|
|Advertising Strategies| |Analysis & Recommendations|
Emotional Appeals
50

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
|Industry Structure|
|Advertising: Overview|
|Advertising Mediums|
|Advertising Strategies| |Analysis & Recommendations|
Product Placement
51


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
|Industry Structure|
|Advertising: Overview|
|Advertising Mediums|
|Advertising Strategies| |Analysis & Recommendations|
Differences in Strategies Across Companies
52
General Mills

Child and family brands on TV; significant childtargeted presence on internet
 Speak
directly to parents on boxes: 3.2 health
messages/box
Kellogg’s

Target specific consumers
 Supermarket,
in-store displays + promotions
 Most promotions on boxes
|Industry Structure|
|Advertising: Overview|
|Advertising Mediums|
|Advertising Strategies| |Analysis & Recommendations|
53
Analysis & Recommendations
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
|Industry Structure|
acceptance barrier
|Advertising: Overview|
|Advertising Mediums|
|Advertising Strategies| |Analysis & Recommendations|
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|
|Advertising Mediums|
|Advertising Strategies| |Analysis & Recommendations|
56
Questions?