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The top three segments in the cereal product category are ready-to-eat cold cereals, hot cereals, and cereal bars. The first segment, ready-to-eat cold cereals, is the largest category. Retail dollar sales for ready-to-eat cereals totaled $740 million for the year 2000 however, from 1999 to 2000 the retail dollar sales for this area has decreased 3%. The second area, hot cereals, is the second largest with retail dollar sales for this category totaling $75 million and is also one of the fastest growing segments within the category, along with toaster pastries and wheat germ. The third area, breakfast cereal bars had retail dollar sales of $57 million. From 1999 to 2000, sales for hot cereals and cereal bars have increased 5% and 3% respectively.
The demand for cereal products is driven by the ever changing consumer and their lifestyle. A few general consumer trends that contribute to the growth of the breakfast cereals and related products include an increasing importance of nutrition in diets, a need for convenience in eating and cooking patterns, and the fragmentation of traditional eating habits in favor of snacking or eating on the move.
The majority of cereal products are sold at supermarkets and grocery stores. Other retailers include convenience stores, warehouse clubs, and health food (specialty) stores. The foodservice and hospitality industry also provides significant market opportunities for cereal products.
Cereal Product Manufacturer
A prospective cereal product manufacturer who is contemplating entering the market should consider the following issues:
Competition
The breakfast cereal and related products market is extremely competitive. The big four multi-national manufacturers, Kellogg, General Mills, Post, and Quaker, dominate this industry because they have developed brand equity. These four companies do not compete on price; they compete for market share because no one company has complete dominance over any of the others. Therefore, the key to finding a distinct competitive advantage will be the ability to price a product lower (maintaining quality and taste) in comparison to these multinational manufacturers. Competition in this market also exists because more and more people are foregoing breakfast altogether, while for others, the drive-through provides the breakfast option of choice. In this industry, the introduction of a ready-to-eat cereal should be followed by a product line extension consisting of a convenience breakfast food, such as cereal bars, to accommodate those consumers who have little time to eat in the morning.
Consumer Demands
It is very important for the manufacturer to understand the needs and wants of the consumer in order to create a marketable product. There are various product attributes consumers consider before purchasing cereal products.
Convenience
Lately, it seems that fewer people are sitting down at home to have breakfast. Instead, they are eating their morning meals in their cars or purchasing them away from home. In some instances, people do not even eat the most important meal of the day. Consumers are looking for that tasty, quick and nutritious meal solution. Breakfast products like cereal bars are perfect for the consumer who is strapped for time.
Nutrition
There is an increasing trend towards healthy lifestyles, and this has heightened the awareness of the nutritional value of the food we consume. Today's perception of health has a great focus on nutrition and less emphasis on fat and calories. Functional and nutritionally enhanced foods are products that shoppers believe can be used to reduce their use of some drugs and medical therapy and even for specific medical purposes. It is a broadly defined category and some examples of products include vitamin-enhanced cereal and breakfast bars. Therefore, providing the consumer with clear nutritional information can be used as a selling point.
Quality and Taste
Unfortunately for many years, anything that was said to be good for you usually was associated with poor taste. The cereal product industry has come along way, and revamped the products of yesterday to meet the quality and taste standards of today. Products such as Honey Bunches of Oats, Oatmeal Crisp, and Mueslix are examples of the trend toward products that offer both high nutritional value and taste. As a manufacturer it is important for your product to uphold the high quality and good taste demanded by the consumer.
Value
Consumers will not purchase your cereal product if they perceive they are not getting value for their dollar. It is also important that your product be priced to compete with some of the larger multinational competitors.
Be sure to take a look at the cereal products available in the various retail outlets. Identify your competition, determine your consumer and their needs, and differentiate your product.
Foodservice Industry
As a manufacturer, you must also take into consideration the needs of the foodservice industry (i.e. restaurants and hotels). The sizes and portions of these commercial and institutional establishments will vary. It is important to be flexible and accommodating in order to gain their business.
Marketing Trends
One significant trend is the importance of targeting the children's market. This group of young consumers has the largest buying power of any generation, either by what they purchase directly or in the purchases they influence (Progressive Grocer, May 2000). In order for them to want your product, you have to give them food that is fun and tastes good.
Food Brokers of Cereal Products
Food brokers provide various services by acting as the sales force of the manufacturer. Food brokers provide the marketing link between food manufacturers and distributors/wholesalers, retail outlets and foodservice clients.
The types of food brokers that represent cereal products consist of both retail and foodservice brokers. These food brokers represent various products, however they will not carry products or product lines that compete with current ones. Food brokers who handle cereal products generally charge a commission of between 3% - 5%.
Brokers will prove to be most useful if you wish to distribute your product into chain supermarkets, other food stores and to foodservice operators. Representation by a broker is important in the cereal products industry due to the intense competition and dominance of large multinational companies. Foodservice brokers tend to go straight to the foodservice operators to get the business and then follow through to a distributor with the orders.
In Canada, approximately 31% of the products moved through food distributors/wholesalers are sold by food brokers on a commission basis. (The Food Marketing and Distribution Sector in Canada). In the United States over 50% of all the food products sold in supermarkets are brokered (How to get your product into Supermarkets 1996). In the United States acquiring the services of a broker is essential in the marketing and distributing into the foodservice industry (Overview of the Institutional Foodservice Market in the Pacific Northwest United States) Food brokers in the United States differ from those in Canada in terms of structure. In Canada, the structure of food brokerages have a national structure (due to consolidation). In the United States, brokers tend to represent major metro grocery markets.
Distributors/Wholesalers
Food wholesale sales in the United States are a $589 billion business. The main functions of a distributor/wholesaler are purchasing, transportating, assembling orders, warehousing and distributing. There are three basic types of wholesalers. The first type is a merchant wholesaler who is primarily engaged in buying groceries and grocery products from processors or manufacturers and reselling them to retailers. Manufacturers' sales branches and offices is the second type. They are wholesale operations maintained by grocery manufacturers or processors to market their own products. Third, brokers and agents who are wholesale operators that buy or sell as representatives of others for a commission and typically do not physically handle the products. Merchant wholesalers' sales account for the largest percentage (56 percent) of food wholesale sales.
Retail
Since cereal products are not considered a direct store delivery product, they are generally moved through distributor's/wholesaler's warehouses into various retail outlets. However, it is the responsibility of the manufacturer's sales force or broker to convince the distributors/wholesalers and retailers to carry their product. Major grocery chains in Canada and the United States tend to operate both distribution/wholesale and foodservice divisions.
Foodservice
In the foodservice industry, new products tend to be pushed through the supply chain. The brokers or manufacturers sales force tends to market food products to the foodservice operators and then follow through to the distributors with the orders. In both Canada and the United States there has been a significant amount of consolidation among foodservice distributors. Emphasis has moved from regional distribution to national distribution.
When expanding your market or entering unfamiliar territory it is important to contact distributors. They will be able to provide insight about market opportunities and related issues. Distributors develop relationships with the retailers and outlets they serve and understand their needs and concerns.
Retailers
The majority of cereal products are sold in grocery stores and to the foodservice industry. Other retailers of cereal products include specialty stores, convenience stores, drug stores, mass merchandisers, and warehouse clubs.
Grocery Stores/Supermarkets
Since grocery stores remain the preferred location for food shopping, this is where the majority of cereal products are sold. However, there is one problem with wanting to sell a product through supermarkets that no one has control over and that is the shortage of space. The slotting fees and marketing costs for a cereal product vary, depending on the size of the retail chain, but are usually quite significant since large multinational manufacturers dominate the competition.
Specialty Stores
Specialty stores serve niche markets and therefore carry a wide variety of products not found in conventional grocery stores. Their interest in cereal products generally consists of unique products and the higher end products. Specialty stores do not usually charge listing fees, however, their shelf space tends to be quite limited.
Convenience Stores/Drug Stores/Mass Merchandisers
Convenience stores, drug stores and mass merchandisers now provide consumers with the convenience of a one-stop shopping experience. It is for this reason that breakfast cereals and related products are now available in these types of retail outlets.
Warehouse Clubs
Warehouse clubs offer their members low prices on a wide range of food and non-food items including cereal products. The products carried by these retail outlets are mostly national brands and private label merchandise, and are sold in large quantities (i.e. multi-unit packages, institutional sizes). Warehouse club members include both individuals and businesses, and therefore serve a broad customer base. There is generally no slotting fee and products sold change on a regular basis. In terms of food products, promotional demonstrations are often part of the marketing mix.
Foodservice/Hospitality
The foodservice/hospitality industry consists of restaurants, institutions and hotels. This industry increasingly relies on breakfast products in their everyday operations. Breakfast cereals and related products are used in this industry because of the reduced labour costs associated with food preparation, product consistency, portion control, quality, and food safety issues. The main factors that influence a foodservice operator's decision to purchase a cereal product is price, other influential factors include product quality and service.
Additional information is available at: Services for Agri-Processors
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