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It’s the breakfast of champions no more: cereal is in long-term decline

Kellogg’s plan to ditch its cereal business highlights the depressed outlook for what was once America’s morning staple…..

In the 80s and 90s American families gorged on cereals. Powered in part by a not-quite-right belief that eggs were dangerously high in cholesterol, carbs ruled the morning.

But families stopped going coo-coo for Cocoa Puffs more than a decade ago. The pendulum has swung with a vengeance away from sugar and carbohydrates and back toward protein.

The pandemic briefly brought out the tiger in cereal sales. Families ate more breakfast at home and got less fussy about what they were eating. Unit sales of ready-to-eat cereal in the Us rose 5.2% in 2020, according to industry tacker Circana. But they plummeted 8.7% in 2021 and another 3.9% in 2022.

Recent trends seem to have given fresh momentum to the downturn, says Barclays analyst Andrew Lazar. A general shift to frozen foods has increased the popularity and availability of alternative, high-protein options like frozen breakfast sandwiches and burritos. Meanwhile, on-the-go lifestyles have fueled demand for portable options like bars and shakes.

Fast food companies have expanded their portable breakfast offerings too. Each of those alternatives is better suited for a morning spent on the run: Just try eating a bowl of Frosted Mini Wheats while driving to work.

Stretched family budgets have also given new life to an old threat: private-label cereals started gaining share last year and jumped considerably in the first half of 2023, according to market-share data from research firm Numerator.

In recent weeks, executives from Kellogg and Post both separately said that they expect the cereal industry to return to its pre-pandemic trend of gradual decline, with sales ranging from flat to down by a low single-digit percentage per year.

What is to be done?

Kellogg, the home of faded but possibly still iconic cereal ambassadors Tony the Tiger and Toucan Sam, has the most radical solution: Make it somebody else’s problem.

Next month, the company will spin off its North America cereal division into an entirely new company, to be named WK Kellogg after its founder who invented modern cereal over a century ago. This will leave Kellogg’s top management to focus on the more attractive snacking segment, with brands such as Pringles and Cheez-It, at a company renamed Kellanova.

In recent years Kellogg has been hit with a devastating fire at a cereal factory and a strike by cereal-producing workers, causing it to lose share because it couldn’t get cereal boxes on the shelf. It hopes to boost both margins and share by investing heavily in supply-chain modernization, though this will require the new company to take on extra debt.

It also says WK Kellogg will benefit from focusing exclusively on cereal, without a sales team, for example, that would rather be pushing products in the snack aisle.

Amid all the doom and gloom in the industry, General Mills has been something of an outlier. It has gained share in cereal, rising from 33.9% of the market in 2019 to 35.1% last year, according to Numerator.

This was partly down to luck, as it took share left on the table by Kellogg’s mishaps. Indeed, General Mills’ share has fallen back to 34.2% in the first half of 2023 as Kellogg regained its footing. But the gains are also due to superior strategy and investment, especially in its flagship Cheerios brand.

“General Mills has fared the best and has executed the best in this cereal category,” says Barclays’ Lazar. “If you look at who was supporting growth in the category, through marketing and innovation, it has been falling almost completely to General Mills.”

For one thing, the company has been relentless in pushing a heart-health message for the Cheerios family of brands. The claim comes with some caveats: “Three grams of soluble fiber daily from whole grain oat foods, like Cheerios cereal, in a diet low in saturated fat and cholesterol, may reduce the risk of heart disease,” the official Cheerios website states.

But the subtleties of that message are somewhat lost in the marketing. Every box of Cheerios comes adorned with a prominent image of a heart. Television ads amplify the heart-healthy message, even for sweetened varieties like Honey Nut Cheerios. At times the company has even sold heart-shaped Cheerios.

The emphasis on oats is also expanding. A new line called Cheerios Oat Crunch features “visible whole grain oats added to the Os for additional texture and a great crunch,” according to the company.

Of course, not everyone eats healthy all the time. One of the industry’s dirty secrets is that a lot of so-called kids cereal is consumed by adults as an indulgence. The single biggest market share gainer since 2019 has actually been Post’s Pebbles, which appears to have benefited from declines in Kellogg’s sweet cereals, rising from 2.9% in 2019 to 4.5% in the first half of 2023, according to Numerator.

Health-oriented cereals in particular, it seems, need constant investment to keep up with changing perceptions of just what is good for you. Two of Kellogg’s brands, Special K and Kashi, stand out as having failed to keep up. More recently, Kellogg has launched new Special K products with zero sugar, higher protein and even an “oat crunch” line of its own–all hopeful signs.

But sustaining that effort will require constant iterations in product and messaging. The investment that requires could conflict with what WK Kellogg’s managers describe as their overriding objective of boosting profit margins. And one problem with a declining market is that it sets off a zero-sum arms race between players: Constant market-share gains are needed just to keep sales steady.

Getting through this marathon will require more than just fortification with vitamins and minerals.


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