This document provides an analysis of the breakfast cereal industry in the United States. It discusses the industry structure, key factors such as high concentration and barriers to entry. It also analyzes advertising strategies used by major companies like Kellogg, General Mills, and Ralcorp. These include television, print, and online advertising with a focus on segmentation, promotions, and celebrity endorsements. The document concludes with recommendations on investment in this mature but still profitable industry.

1. The Breakfast
Cereal Industry
Li Li
Jennifer Wang
Xin Yiran
AEM 4550
April 20,2011

2. Outline
 Introduction
 Industry Analysis
 Advertising Strategies
 Investment & Recommendation

3. Why the Breakfast Cereal
Industry?
• “Breakfast is the most important meal of the day” –
Metamorphosis, Franz Kafka, 1915
 Body fasts for 6-9 hours the night prior – “break-
fast”- breaks the fasting
• 93% of respondents reported household use of cold
cereal, 68% - hot cereal (Experian Simmons NCS data)
• “Americans buy 2.7 billion packages of breakfast cereal
each year. If laid end to end, the empty cereal boxes
from one year's consumption would stretch to the moon
and back. “ – Cerealizing America: The Unsweetened Story
of American Breakfast Cereal

4. Industry Analysis

5. Industry Definition
 US Cereal Production industry takes raw materials like corn,
wheat, flour, and sugar from different sources and turns
these ingredients into ready-to-eat cereals, hot cereals, and
cereal bars
 Main activities involve manufacturing:
- cold and hot breakfast cereal
- breakfast and snack bars

6. Industry Structure

7. Industry Structure
 HHI = 1822.86
 C4 = 76%
 Mergers will be challenged since HHI >1800
 Industry is an oligopoly with four main firms

8. Industry Structure
Kellogg
Company
34%
General Mills
Inc.
20%
Ralhorp
Holdings Inc.
14%
PepsiCo Inc.
8%
Other
24%
Major Companies

9. Industry Analysis
Life Cycle Stage Mature Barriers to Entry High
Capital Intensity High Technology Change High
Competition Level High Regulation Level Heavy

10. Key Success Factors
Product
Differentiation
EOS
Supply
Contract
Adaptability
Cost
Control

11. Industry Trend
 Expected Slower Growth
-High price of wheat
-Increasing price of coarse grains
 Attitude change towards health consciousness
e.g. Lower sugar and cholesterol, more fiber
 More convenient product to accommodate busy lifestyle
e.g. Breakfast bars

12. Employment
2006 2007 2008 2009 2010
Average Wage ($) 64183.4 60770.7 61061.9 62173.3 63730

13. Distribution

14. Imports & Exports
 Insignificant as major
companies own
facilities internationally
 Major trading
countries: Canada &
Mexico
 Imports are growing
while exports are
declining

15. Primary Advertising Methods
 Persuasive Advertising
 Informative Advertising
 Memory Jamming
 Celebrities
 Humor
 Emotional Appeal
 Promotions & Giveaways
 Segmentation

16. Persuasive Advertising
 Persuasive advertising is effective for experience
goods
 Honey Bunches of Oats – “There’s a box here with
your name on it!”

17. Honey Bunches of Oats
Commercial

18. Informative Advertising
 Direct Signaling
 Educational. Tells the consumer the health benefits
 Cheerios:

19. Informative Advertising
 Indirect Signaling
 Match product to buyers effect
 Saturday morning cartoons
 Measurable change in consumer preference and
market share of advertised products
 E.g. Kellogg’s high fiber cereal

20. Memory Jamming
 Repeated commercial plays
 Signaling efficiency effect
 Recognizable Mascots
 Catchy slogans and Jingles:
 “They’re Gr-r-r-eat!” –
Kellogg’s Frosted Flakes
 “Silly Rabbit, Trix are for
kids!” – Trix

21. Memory Jamming

22. Celebrity Endorsement
 Celebrities can increase brand
equity
 Wheaties: “The Breakfast of
Champions”
 Need to be careful of impact
on brand
 Michael Phelps

23. Humor
 Keeps audience attentive
 Difficult to appeal to everyone because people have
different preferences
 Cocoa Puffs:

24. Emotional
Appeal
• Form stronger
connection to consumer
• General Mills used
special promotion boxes
with retro designs
• Seeks to motivate
parents, by using
nostalgia

25. Cheerios Commercial

26. Promotions and
Giveaways
 Incentive for the
consumers to buy the
cereal
 Draws attention
 Include a toy or
opportunity to win
 Kashi Kick-Off Event at
Cornell

27. Segmentation
 Many commercials targeted children with highly
animated commercials
 Saturday morning cartoons is perfect time to target
the young audience
 Cap’n Crunch:

28. Segmentation
 After FTC’s warnings, cereal companies have
shifted toward targeting the adult audience
 More health-conscious
 Multi-Grain Cheerios:

29. Segmentation
 General Mills increased Hispanic-targeted media
spending in 2009 and 2010
 Cinnamon Toast Crunch particularly appeals to
Hispanics
 Baby Boomers- another key market
 Highest per capita cereal consumption by people over
55
 Seek to add fiber to diets (Fiber One, Multi-Grain
Cheerios)

30. Cheerios Targeted Toward
Both Children and Adults

31. Advertising Mediums
 TV
 Product Placement
 Print
 Online

32. Television Advertising
 Advertised mostly on Mon, Tues, Fri
 Mostly Advertised during 7-8 PM, 9 AM
 Dollars spent most on Cheerios, Fiber One, Mini-
Wheats
 Largest Ads Spending during July, Aug
 Spent most on cold cereals especially the healthy
category such as Honey Nut Cheerios, Fiber One,
Multi-Grain Cheerios, but highest average dollar
spent per advertisement on hot cereals

33. Television Advertising
 Uses segmentation to target different audience
- More colorful, energetic, and animated commercials
for young children
- Use character mascots to connect to kids such as
Tony the Tiger, General Mill’s Trix Rabbit
- Focuses on nutritional content to target adults

34. Average Advertising Cost
per Day of Week

35. Top 10 Brands with the Highest
Total Advertising Expenditures

36. Top Program Types to
Advertise On

37. Healthy vs. Unhealthy
Cereal
Popular Program Types to Advertise Healthy Cereal
Popular Program Types to Advertise Unhealthy Cereal
Program Type Number of Ads
NEWSCAST (LOCAL ONLY) 138348
SITUATION COMEDY 93336
TALK 59858
SLICE-OF-LIFE 37354
Program Type Number of Ads
ANIMATION(LOCAL ONLY) 18347
CHILDRENS/FAMILY ENTERTAINMENT 4047
SITUATION COMEDY 3976
FEATURE FILM 2956

38. 10 Most Popular Shows to
Advertise On

39. Most Expensive Ad Spots
for Cereal Ads
Show Ad Cost
AMERICAN IDOL $ 823,700
GREY'S ANATOMY $ 577,800
AMERICAN MUSIC AWARDS $ 361,100
NCAA Basketball Playoff Game 22 $ 281,100
NCAA Basketball Playoff Game 21 $ 281,100

40. Product Placement
 More common with the advent of Internet and TiVo
 Popular shows feature consumption of certain
cereal brands e.g. Frosted Flakes on “Friends”
 Audience are “forced” to watch the ads
 Careful not to ‘overdo’ it
 Effective if it is natural and integrated

41. Product Placement in Days
of Our Lives

42. Ad Spending of Top 4 Firms

43. Ad-to- Sales Ratio
Comparison

44. Ad-to-Sales Ratio
 1.2 times higher than the food sector
 3.5 times higher than the average value for all other
industries
 High profit margin

45. Kellogg Co
 Corn Flakes, Frosted Flakes, All-Bran, Apple Jacks,
Crispix, Rice Krispies, Froot Loops, Nutri-Grain
 Highest Advertising Expenditure
 Highest Ad-Sales Ratio
 Focuses on eight top sellers and Kashi cereal
 Kashi highlights healthy lifestyle, including
consuming natural foods and staying active
 Boston, Portland, LA

46. General Mills
 Brand Names: Cheerios, Fiber One, Kix, Wheaties,
Lucky Charms, Total
 Invested heavily in R&D and product innovation
 Target Large Cities e.g. New York, San Francisco,
Boston

47. Ralcorp Holdings, Inc.
 Brand Names: Honey Bunches of Oats, Pebbles,
Shredded Wheat, Post Raisin Bran, Grape-Nuts,
Honeycomb
 Acquired Post
 Both private label and branded cereals
 New Orleans, Cincinnati, Green Bay

48. PepsiCo Inc.
 Brand Names: Quaker Foods North America
(QFNA), Quaker Oatmeal, Life , Cap'n Crunch
 Richmond, Jacksonville, Norfolk

49. Perceptual Map

50. Print Advertising
 More informative (direct)
but still persuasive
 More targeted than TV ads
 Less common nowadays
1926
2008

51. Online Advertising
 Social media becoming a
more popular marketing
tool
 Kellogg’s uses this for
Special K and Frosted
Mini-Wheats
 Special K – strong brand
– pioneer for new media
advertising – weight-
loss management
(support from peers
important so social
media is a great way to
do that)

52. Social Media

53. Brand Equity
 Crucial in order to stand out among hundreds of
brands
 Makes demand less elastic to price
 Emotional branding

54. Regulation
 Regulation level is high and increasing
 2007 – Self-regulation of marketing to youth
 Children's Food and Beverage Advertising Initiative
 Kellogg said would not promote foods in TV, radio, print or Web
site ads that reach audiences at least half of whom are under age 12
unless a serving of the product follows specific guidelines
 2008 – Federal Trade Commission published study on food
marketing to children and recommended that companies “adopt
and adhere to meaningful, nutrition-based standards for
marketing their products to children under 12”

55. False Health Claims
 Kellogg Co. came under scrutiny in 2009 and 2010
because of false health claims in advertisements
 Frosted Mini-Wheats: “clinically shown to improve kids’
attentiveness by nearly 20%”
 Rice Krispies: “now helps support your child’s immunity,”
with “25 percent Daily Value of Antioxidants and Nutrients
– Vitamins A, B, C, and E”
 FTC delivered strong message – won’t tolerate false
health claims
 Kellogg prohibited from making claims about any health
benefit unless backed by scientific evidence and not
misleading

56. Recommendation for
Management
 Local newscast is among the cheapest
 Sports events such as baseball and basketball are
expensive
 Talk show or soap opera as they target more
towards women and they control more than 80% of
spending
 Follow FTC regulation, otherwise would be heavily
penalized

57. Recommendation for
Investment
 High profit margin
 Branded revenue likely to increase
as the US economy recovers
 Breakfast bar has great growth
potential

59. Videos
 Honey Bunches of Oats:
http://www.youtube.com/watch?v=em9thvkiS7I
 Cocoa Puffs:
http://www.youtube.com/watch?v=xBGpRLjNnzM
 Cheerios 1:b. http://www.youtube.com/watch?v=pDNgbQ-
bQpA
 Cheerios 2: http://www.youtube.com/watch?v=aARf-XwDGFg
 Multigrain Cheerios: http://www.youtube.com/watch?v=-
IZ9CL4phPk
 Product placement:
http://www.youtube.com/watch?v=oGtig5DiTxc