Milling & Baking News - September 7, 2004 - 20

CEREAL

industry

perspective

CEREAL

industry

perspective

Two industry giants increasingly dominate the U.S.
breakfast cereal market. But that's not necessarily a
bad thing - for the industry or for consumers.

ichard Schmalensee, a former member of President George H.W. Bush's
council of economic advisers and
current head of the Sloan School of Management at the Massachusetts Institute of
Technology, had yet to advance beyond
associate professor at M.I.T. when he presented a prescient analysis of the ready-toeat breakfast cereal industry in an academic
journal in late 1978.
Mr. Schmalensee's article, "Entry Deterrence in the Ready-to-Eat Breakfast Cereal Industry," appeared in the Bell Journal
of Economics. It argued that, in general, the
industry focused rivalry on brand and
product introductions, a process that discouraged entry into the market and protected proﬁts.
Of course, concentration in ready-to-eat
breakfast cereal was nothing new when Mr.
Schmalensee wrote his article. Data compiled by the U.S. Census Bureau shows that
four or fewer ﬁrms have dominated 80% or

more of the U.S. cereal industry since World
War II ended.
Moreover, few changes have occurred on
the production side of the industry since
1940, when 30 to 35 plants produced almost
all R.-T.-E. cereal in the United States. That
number remains essentially the same.
Still, Mr. Schmalensee's article crystalized the way the U.S. cereal market wages
its battles, and it remains applicable today.
The impact of private label marketers aside,
substantial advertising and product formulation by the industry's heavyweights
- not to mention the shelf space they
dominate in grocery stores - makes it virtually impossible for new entrants to gain a
market foothold.
In fact, the intense competition virtually
has whittled the playing ﬁeld down to two
primary combatants, Kellogg Co., Battle
Creek, Mich., and General Mills, Inc., Minneapolis.
Combined, those two R.-T.-E. leaders

Ready-To-Eat Cereal - Top 10 Vendors
Dollar sales
Ready-to-eat cereal
Kellogg Co.
General Mills Inc.
Kraft Foods Inc.
Private label
Quaker Oats Co.
Malt-o-Meal Co.
Nature's Path Foods
McKee Foods Corp.
Barbara's Bakery
Atkins Nutritionals, Inc.

$6,091,511,808
$2,041,502,464
$1,920,402,432
$873,663,680
$499,301,344
$402,316,384
$215,792,816
$18,466,028
$16,810,844
$15,134,503
$13,274,880

Source: Information Resources, Inc.
Total U.S. - Excluding Wal-Mart and supercenters
52 weeks ended July 11, 2004

bakingbusiness.com / world-grain.com

Dollar sales
% change from
year ago
-2.4
0.5
-3.7
-7.7
-2.0
-8.1
0.6
28.4
-1.8
14.4
NA

Dollar share

Unit sales

Unit sales
% change from
year ago

100.0
33.5
31.5
14.3
8.2
6.6
3.5
0.3
0.3
0.2
0.2

2,143,480,960
716,293,376
614,173,248
311,274,752
235,681,984
141,852,928
79,788,000
5,263,406
8,050,848
4,337,747
2,590,878

-3.5
0.8
-3.2
-8.9
-2.4
-11.5
-16.5
29.2
-2.1
15.0
NA

account for two-thirds of the U.S. cereal
market and increasingly threaten to shove
aside the industry's No. 3 and No. 4 brand
players, the Post unit of Northﬁeld, Ill.based Kraft Foods Inc. and the Quaker Oats
division of PepsiCo, Inc., Purchase, N.Y.
Not surprisingly, Kellogg and General
Mills also have produced the lion's share
of new products in the industry in the past
several years, products that only have reinforced their dominance.
Meanwhile, analysts increasingly question the long-term prospects for Post and
Quaker in the U.S. cereal wars.
Leonard Teitelbaum, a food industry
analyst with Merrill Lynch, said both Kraft
and PepsiCo at some point may wonder
whether holding onto their cereal businesses makes sense, particularly if their cost
of capital rises.
Dollar sales of Post and Quaker cereals,
as measured by Information Resources, Inc.,
fell 7.7% and 8.1%, respectively, in the 52
weeks ended July 11, with unit sales falling
even more dramatically for each. That erosion occurred on top of dollar sales declines
of 3.6% and 6.4%, respectively, in calendar
year 2003 and 4.1% and 6.1% in 2002.
"I think when you take a look at them
in the context of what they are," Mr. Teitelbaum said, referencing the position of both
Post and Quaker as operating subsidiaries
of larger food companies, "in each case, it's
hard to see how (cereal) products can move
the earnings needle for either of these owners."
Meanwhile, he said it's evident that for
Kellogg and General Mills, cereal industry
strength breeds even more dominance.
"They are the ones that come out with the
new products," he said. "They are the ones
that drive new products into marketplace,
and therefore, they are allocated more shelf
space, as they should be."
So what does a cereal industry driven by

Milling & Baking News, September 7, 2004 / 21

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Milling & Baking News - September 7, 2004

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