Cereal giants diversify their portfolios

by Pinar Hosafci, food analyst at Euromonitor International
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Per capita consumption of breakfast cereals is plateauing globally and declining in most of the largest markets in North America and Western Europe. This doesn’t bode well for the cereal giants like US-based Kellogg Company, General Mills and Post Holdings all of which saw declining cereal sales in 2013, with further stagnation or decline expected in 2014 and beyond. To offset declining cereal sales, the majority of cereal manufacturers have been trying to switch away from low growth countries (developed markets) and/or low growth categories (cereals). General Mills’s acquisition of US organic snack food maker Annie’s and Kellogg’s attempt to acquire United Biscuits and successful acquisition of Egyptian biscuit producer Biscomisr are examples of these recent efforts. Abraaj Capital’s move to pull out from the Biscomisr bidding war therefore represents a good opportunity for Kellogg, enabling the company to move into a high growth category (biscuits) in a high growth country (Egypt).

 

Taking steps to a balanced portfolio

The move would not only enable Kellogg to diversify its product portfolio, which is at the moment too reliant on a mature category in a mature market, it will also enable the company to make its debut in Middle East and Africa which globally is one of the fastest growing regions for biscuits. Kellogg will use Biscomisr as a vehicle to introduce its brands in Egypt, which with its 90 million consumer base and 12% value CAGR over 2009-14 is one of the most attractive countries in the Middle East. The Egyptian government’s recent initiatives to attract foreign investment to restore political and economic stability should further help Kellogg to improve its declining margins.

Kellogg will also benefit from the distribution network and brand image of Biscomisr and could potentially leverage its brands to gain a foothold in the rest of the Middle East, particularly nearby Saudi Arabia, where biscuits and breakfast cereals is forecast to grow at a value CAGR of 11% and 10%, respectively, by 2019.  In addition, the company could use its cereal brands to grow the small but nascent breakfast cereal sales of Biscomisr.

Biscomisr could need a revamp

While biscuits is one of the fastest growing categories in Egypt, Biscomisr latest performance has been lagging behind multinationals like US-based Mondelez International, Egypt’s Ocean Foods and Turkey’s Yildiz Holding. The local biscuit manufacturer has grown by 10% over 2009-2014, in contrast to Ocean Foods and Yildiz Holding at a CAGR of 26% and 67%, respectively. Most of the international brands in Egypt are now produced locally which makes them cheaper and more attractive to cash-strapped consumers. In 2013, Mars invested US$83 million to manufacture Twix for the Middle East while in 2014 Nestlé inaugurated its first-ever confectionery plant in Egypt to produce Crunch. In this increasingly competitive environment, Biscomisr’s products remain relatively expensive without offering an apparent added value.

 

Instead of purely relying on the brand equity of Biscomisr, Kellogg should therefore consider tailoring the existing brands in a way that would increase their appeal. Given that the biscuits category in Egypt is set to grow faster in volume terms than in value terms over the next five years, investing in value-for-money products holds better potential for Kellogg. In addition to segmenting the products according to price and age platforms, Kellogg might also consider investing in filled biscuits (wafers) and savory biscuits, two of the fastest growing biscuit categories in Egypt. 

There is a clear need for Kellogg to shift away from breakfast cereals, a category which is set to decline by 2% CAGR over 2014-2019 in the US, Kellogg’s largest market. The company’s recent successive moves to buy United Biscuits and Biscomisr, as well as its purchase of Pringles in 2012, are clear indications of its efforts to do so. If Kellogg wants to be successful in the long run, it should not only leverage Biscomisr’s brands in the rest of Middle East and Africa but also introduce its own cereal brands to grow the promising breakfast cereal category in Egypt and potentially beyond.

For further insight, please contact Pinar Hosafci, food analyst at Euromonitor International, at pinar.hosafci@euromonitor.com.

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