Declining volumes in the $9.51bn US cereals market can be blamed on “cyclical not structural” issues, and do not mean the category has peaked and will carry on going backwards, says Cheerios-maker General Mills.
Speaking at the Barclays Back to School conference in Boston, executive vice president, US Retail, Ian Friendly, said he could understand why some analysts had started to worry about the category as pound volumes had dropped for two years running.
But lackluster volumes were largely due to “below-par” innovation from branded competitors and price hikes prompted by cost inflation, he argued, pointing out that in dollar terms, the cereals category still grew by 2% in fiscal 2012.
‘Below par’ innovation from branded competitors
He added: “First and foremost, we believe that any food category’s growth is the result of the collective innovation and marketing that branded players bring to the category, and the fact is that cumulative news and innovation from our branded cereal competitors has been below par for the last couple of years.
“The second factor behind the recent volume decline is price increases, a sharp increase in input costs last year led to a significant in cereal pricing and some of that was achieved through package size reduction, which contributed to the pound volume decline.
“We see both of these issues as cyclical, not structural… Remember that category dollar volume grew in 2012 and we expect category pound volume will resume its historical growth trend.”
Cereal is a key traffic driver for our customers
But what makes him so confident things will improve?
First, the cereal category is very important to retailers, with over 90% household penetration and a purchase frequency of more than 24 times a year, noted Friendly.
“So cereal is a key traffic driver for our customers. Cereal was also the most heavily advertised category in dry grocery in 2012… and cereal generates higher retail profit per square foot than the average center of the store category.”
Second, from a cost, nutritional and demographic perspective, cereal has a lot of things going for it, he stressed.
“Cereal delivers the key attributes of taste, health and convenience and beats most other breakfast options on price. It’s just 50 cents per serving, including milk and at 150 calories per serving it’s one of the lowest calorie options as well, a good source of nutrients and a great way to increase a child’s dairy intake.”
Meanwhile, research showed that “fewer people are skipping breakfast than before the recession hit”, he claimed, which was good news for cereal. “Breakfast at home is thriving. And demographic trends, particularly the ageing population, bode well for at home breakfasts and the cereal category in the years ahead.”
General Mills is bucking the trend
Meanwhile, General Mills was growing market share, he added: “Our US cereals business has delivered strong growth through the recession. Since 2006 our net sales have increased at a 4% compound rate and we’ve gained market share.”
Sales of its Chex cereals had been “terrific”, good growth was expected for the new frosted toast crunch cereal (launched in January) and the Cascadian Farm line of organic cereals (recently boosted by an ancient grains variant) continued to show double digit sales growth, he added.
“As 2013 unfolds, we expect the category’s pricing and volume dynamics to improve. And beyond 2013 growth prospects for US cereal remain excellent.”
Friendly is targeting a low single digit increase in net sales in the US retail market in fiscal 2013 and is armed with a “robust line up of new products”, he said.
“Our net sales growth will be driven by brand-building and innovation. We’ve launched more than 70 new products in the first quarter of 2013, a significant increase versus the year ago period. And we’ve got more to come.”
He added: “On a few products, where needed, we’re investing to sharpen our merchandised price points.”