Sector Insight: Breakfast cereals - Hot prospects

ingredients, labelling formats and marketing techniques they use.

Manufacturers have responded quickly to the changing demands of
consumers and government alike, increasing their focus on healthy
ingredients and offering more detailed on-pack nutritional
information.

Although it has suffered downturns over the years, the breakfast cereal
market is adept at changing to meet consumer demand. As a consequence,
value growth has been greater than volume growth, with sales of £1.2bn in 2005, according to Mintel.

The twin drivers of convenience and health are influencing most areas of
the food industry, and the cereal sector has reacted decisively. Already
scoring well for convenience, manufacturers have focused on health,
reducing the salt and sugar content of many brands, and have generally
lessened their promotion of gimmicky products aimed at children.

Cereal manufacturers have also been on the front foot in responding to
consumers' growing interest in the ingredients that go into prepared
foods, In February, they joined forces to ensure that their
front-of-pack nutrition labelling, using a guideline daily amount (GDA)
model, was consistent.

The sector is split into two segments: ready-to-eat (RTE) and hot
cereals.

RTE cereals account for most of the market, although their share slipped
1% to 93% from 2003 to 2005. The success of healthier adult ranges has
seen muesli achieve a notable sales increase with the introduction of
more exotic variants and organic brands.

The RTE segment is fairly consolidated. Kellogg is the leading
manufacturer, with a 42% share by value in 2005, although Weetabix is
the biggest brand, with an 8% share. Own-label's share has fallen
slightly to 14%.

Oat revolution

Hot cereals have performed extremely well in recent years, with sales
rising by 60% between 2001 and 2005 and volume up 39%. With many diets,
including the GI diet, promoting its healthy credentials, porridge has a
new lease of life.

NPD in microwaveable products has spurred growth in the segment. Here,
Quaker is the leading manufacturer: its Oatso Simple brand has grown its
share by 62.5% between 2003 and 2005.

In 2005 Kellogg was the first manufacturer to put GDAs on its packs as
part of its consumer information. In the same year it began a
salt-reduction programme, cutting the salt content of its Corn Flakes,
Frosties and Crunchy Nut Corn Flakes brands by 25%. The company's other
brands include All Bran, Coco-Pops, Rice Krispies and Special K.

Kellogg's fastest-growing brands are its healthier ones, such as Special
K, which is running its 'Drop a jeans size' promotion for the fourth
consecutive year. In May 2005 it introduced the £106m Kashi health
food cereal brand to the UK. However, it also extended its Coco Pops
brand with a chocolate straw, which it controversially promoted as a way
of getting children to drink milk.

Its ads for the product prompted a complaint from consumer rights body
Which? to the Advertising Standards Authority, claiming that they were
'misleading and irresponsible' for 'sending a confusing message with the
implication that the straw is wholesome if consumed in this way'
(Marketing, 22 February).

In line with consumers' changing attitudes, Cereal Partners, the joint
venture between Nestle and General Mills, has been positioning its
brands, including Shreddies, Shredded Wheat and Cheerios, as healthier
choices.

As well as making the products from wholegrain, it tied up with the
British Heart Foundation in an initiative to raise awareness and money
for the charity.

Format development

Weetabix counts Alpen and Ready Brek in its portfolio, alongside the
original Weetabix product. Despite the inherent convenience of cereals,
Weetabix went one step further in 2005 by introducing packs of
individual 30g sachets of Ready Brek to make portion control easier.

Last year Jordans added Multigrain Porridge to its range. Made from
oats, wheat, barley and rice, it is higher in fibre and lower in fat
than conventional porridge brands. Several smaller brands are also
active in this segment, with many, including Doves Farm, producing
organic options.

Cereals are in a strong position with 86% penetration among adults,
although it is fighting a decline in consumption frequency.

Consumption of cold cereal peaks among 24- to 34-year-olds, while hot
cereals peak with 55- to 64-year olds, according to BMRB's Target Group
Index (TGI) data. Women (62%) are more likely to eat breakfast than men
(54%) and families are the most likely to eat cereals at breakfast
(64%). Families are also more likely to eat cereals at other times of
the day. One-fifth of consumers eat them as a snack, suggesting that
manufacturers' efforts to broaden the eating occasions of their brands
is having an effect.

Nutritional values

The ongoing obesity debate has sparked calls for clearer labelling for
many food products. Cereals have traditionally carried detailed
ingredient labelling, but now many brands are going further to highlight
the healthier nature of their product.

Innovation in the market will mean cereals continue to appeal to a broad
range of consumers. While manufacturers will have to be careful with
labelling as the focus on healthy eating - especially among children -
continues, their products are in a good position compared with many
foods.

The recent renaissance of the cereal market is predicted to continue,
with Mintel forecasting that the market will grow to £1.36bn by
2010, an increase of 17% on 2005. Sales of hot cereals are predicted to
rise three times faster than cold cereals in terms of volume (23% versus
7%) over the forecast period.

BREAKFAST CEREAL MANUFACTURERS BY VALUE AND MARKET SHARE
2005 (est) 2003 03-05
pounds m % pounds m % % change
1 Kellogg 459 39 443 40 3.6
2 Cereal Partners (Nestle) 194 17 180 16 7.8
3 Weetabix 170 15 165 15 3.0
4 Jordans 80 7 62 6 29.0
5 Quaker 51 4 49 4 4.1
Others 51 4 50 4 2.0
Own-label 164 14 168 15 -2.4
Total 1169 100 1117 100 4.5
Source: Mintel.

BREAKFAST CEREAL BRANDS BY SALES VALUE AND MARKET SHARE
2005 (est) 2003 03-05
pounds m % pounds m % % change
1 Weetabix 83 8 73 7 13.7
2 Kellogg's Corn Flakes 70 7 69 7 1.4
3 Kellogg's Crunchy Nut
Corn Flakes 60 6 43 4 39.5
4 Kellogg's Special K 56 5 31 3 80.6
5 Shredded Wheat 40 4 26 3 53.8
6 Kellogg's Frosties 35 3 39 4 -10.3
7= Kellogg's Rice Krispies 33 3 34 3 -2.9
7= Kellogg's Coco Pops 33 3 34 3 -2.9
7= Shreddies 33 3 28 3 17.9
10= Sugar Puffs 26 2 27 3 -3.7
10= Cheerios 26 2 22 2 18.2
12 Alpen 18 2 14 1 28.6
13 Bitesize Shredded Wheat 15 1 13 1 11.3
Others 556 51 609 56 20.0
Total 1084 100 1049 100 3.3
Source: Mintel.

UK RETAIL DISTRIBUTION OF BREAKFAST CEREALS BY VALUE AND MARKET SHARE
2005 (est) 2003 03-05
pounds m % pounds m % % change
1 Grocery multiples 1094 94 972 91 12.6
2 Convenience 39 3 53 5 -26.4
3 Independent/other 36 3 43 4 -16.3
Total 1169 100 1068 100 9.5
Source: Mintel.

ANALYST COMMENT - Sandy Livingstone Director, Enlightenment

The changes in consumer attitudes over the past few years to healthier
diets and the source and content of foods have been dramatic. The
tracking of these changes by the TGI survey would indicate that we may
have arrived at a significant tipping-point in consumer behaviour, and
this is as evident at breakfast time as at any other time of the
day.

Breakfast cereals find themselves subject to ever greater scrutiny and
brands are trying to reinvent them as health food, reformulating and
remarketing as purely wholegrain.

But there is an even greater shift occurring in the porridge bowl. TGI
shows that, from an admittedly low base, hot oat cereals are benefiting
significantly from the health trend, supported by the wide referral to
oats in low-carb and GI diets.

The push behind instant oats negates the idea of time-consuming, lumpy
porridge, while traditional producers are also benefiting from the
awareness of the microwave option. The ability to make organic claims,
more obviously package in an ecologically sound way, and sell through
health-food stores as well as multiples, all contribute to the products'
appeal. As, of course, is its image of being almost as far from
'processed' food as you can get.

Such advantages have also contributed to the strengthening of porridge's
foothold with the young. TGI shows that the number of porridge eaters
among 15- to 19-year-olds has risen by 60% over the past three years,
going some way toward cancelling the established decline in consumption
as kids age.

Keeping breakfast relevant as a meal occasion will continue to be a
battle, but as the population ages and the obsession with dietary fibre
continues, healthy cereals should continue to benefit.