Bringing the heat
January 12, 2010
by Eric Schroeder
As temperatures outside plummet, several grain-based foods companies are trying their best to convince consumers to warm up with a bowl of hot cereal. To succeed, it will require a reversal of trends that, at least through the end of November, did not appear particularly favorable.
In the 52 weeks ended Nov. 29, 2009, dollar sales of the hot cereal/oatmeal category totaled $874,476,600, down 2% from a year ago, according to Information Resources, Inc., a Chicago-based market research firm. Perhaps more concerning was the 3% drop in unit sales during the period, to 311,892,400.
Of the top 10 vendors in the category, I.R.I. data showed 6 sustained unit sales declines from the previous 52-week period, including a 9% drop at No. 1 player Quaker Oats Co., Chicago, and a 14% drop at No. 3 Malt-O-Meal Co., Minneapolis.
For Quaker, the decline may be directly linked to the growth of private label. With a nearly 59% share of the hot cereal/oatmeal market, Quaker is the undisputed category leader with sales approaching $514 million. But over the past 52 weeks, the company lost more than 3 percentage points of market share. That share primarily has shifted to private label, which makes up nearly 26% of the market, and which gained 2.5% in the 52 weeks ended Nov. 29, according to I.R.I.
In an early March presentation at the Thomson Reuters Food and
Agriculture Summit, Mark Schiller, president of Quaker Oats, acknowledged the growth of private label, but downplayed the impact on Quaker.
“I don’t know that we’re having great difficulty keeping our products on the shelf,” he said. “I think the challenge for us — as retailers get more sophisticated and come up with products that taste better and package graphics that look better and prices that are very attractive in this environment — is to continue to provide consumers with a terrific value. And value is both a function of price and the products and services and reputation that you wrap your brand with. And as long as we continue to have a strong brand, lead our categories in terms of innovation that consumers want and provide it to them at a reasonable price, they’ll continue to stay loyal to us.”
Mr. Schiller stressed that Quaker does not want to become embroiled in a long-term competition exclusively on price.
“That’s potentially a good short-term tactic, but long term, you really want to build your brand and what it stands for in consumers’ minds,” he said. “So having a message that’s more about the efficacy of the oat and the incredible nutritious properties and what it does for your body and wrapping it in a hopeful and optimistic message we think will have more long-term impact in terms of benefit.”
That said, though, he noted that Quaker does have marketing efforts focused on value, and he pointed out that a container of Quaker’s standard oatmeal contains about 30 servings for a value of 15c per serving. By comparison, instant oatmeal equates to about 40c per bowl, he said.
Broader picture, Mr. Schiller said oatmeal appears to be gaining favor in the restaurant industry, as evidenced by the success of menu additions at Starbucks and Jamba Juice.
“There are a lot of people interested in oatmeal; it’s becoming the new black,” he said. “Oatmeal is in, and that’s great for our business because ultimately people end up going and buying it in the grocery store.”
Big things for B&G
Although a distant No. 2 in terms of branded hot cereal/oatmeal vendors with sales of nearly $60 million, B&G Foods, Inc., Parsippany, N.J., was able to grow dollar sales 3% with only a narrow unit sales decline during the 52 weeks ended Nov. 29, according to I.R.I. B&G Foods’ calling card is Cream of Wheat, the third largest hot cereal brand.
In a third-quarter conference call, David Wenner, chief executive officer of B&G Foods, said Cream of Wheat has benefited from new products, including new Healthy Grain products, a SpongeBob SquarePants variety, and the inclusion of fiber in a number of instant products. The company also recently began shipping a new three-pack variation of the Cream of Wheat instant products to dollar stores.
“I’m very optimistic about how those products are going to do,” Mr. Wenner said of the Cream of Wheat three-packs. “That’s a great economical solution to a breakfast that’s convenient. It’s something if you have access to hot water at work, you could have that at your desk at work for 99c.”
Whereas companies such as Quaker and Malt-O-Meal have felt the impact of private label, particularly at supercenters such as Wal-Mart Stores, Inc., Mr. Wenner said B&G Foods has been able to thrive.
“We actually think we’re underdeveloped at Wal-Mart,” Mr. Wenner said. “And I don’t think we have very much risk in terms of losing any distribution.”
He continued, “Cream of Wheat has been very insulated for two reasons. One, we’re not the big guy so we’re not the one getting the space taken away from us on existing products. And two, we’ve been pretty vigorous about new products, and new products have driven some growth for us in that category. So we’ve been very insulated on that particular category.”
Fight for third position in full swing
While Quaker — and to a lesser extent B&G Foods — stand head and shoulders above the rest of the segment in terms of sales, the No. 3 position is becoming more hotly contested as four companies generated between $9.5 million and $12 million in sales in the 52 weeks ended Nov. 29, according to I.R.I.
In the case of Malt-O-Meal, which currently stands as the No. 3 player, unit sales fell 14% and dollar sales eased 3% during the period. The No. 4 manufacturer, Dublin, Ireland-based Origin Enterprise P.L.C., experienced a 1% drop in unit sales, though dollar sales rose 4%.
Gaining ground were Bob’s Red Mill Natural Foods, Milwaukie, Ore., and The Kellogg Co., Battle Creek, Mich. At $11,104,960, dollar sales for Bob’s Red Mill were up 16% in the 52 weeks ended Nov. 29 on a 5% gain in unit sales. The company’s success may be traced to a growing selection of natural hot cereal options as well as mounting interest in gluten-free products.
Among the company’s offerings are Gluten Free Rolled Oats, Gluten Free Steel Cut Oats and Mighty Tasty GF Hot Cereal.
For Kellogg, the hot cereal business may best be characterized over the past year as treading water. While the company’s dollar sales rose a shade less than 1% on unit sales growth of more than 1%, a closer look at the company’s top two brands paints a different picture.
Introduced in November 2004, Kellogg’s Kashi Heart to Heart instant oatmeal slipped in popularity during the past year as dollar and unit sales each fell 13% in the 52 weeks ended Nov. 29, according to I.R.I. But making up for the slippage of Heart to Heart was Kashi GoLean, which posted a 16% gain in dollar sales and a 17% gain in unit sales during the period.
New player comes on board
While the branded companies look to recover lost sales, a familiar name is joining the private label fray. TreeHouse Foods, Westchester, Ill., in mid-December signed an agreement to acquire Sturm Foods from HM Capital Partners L.L.C. and other shareholders for approximately $660 million. Founded in 1905, Sturm Foods primarily makes hot cereals, powdered soft drink mixes and other dry mix products for the private label market. HM Capitals has owned Sturm Foods since May 2005.
“In the hot cereals what Sturm has is a very fine position in both branded and private label products that includes very high quality items that are not normally found in the mix,” said Sam K. Reed, chairman and chief executive officer of TreeHouse, in a Dec. 21 conference call. “And that is what attracted us to the category.” He said Sturm has the leading share of the 26% market share of the hot cereal private label market.
In addition to private label products, the company offers several branded products, including McCann’s Irish Oatmeal.
Sturm made an innovative move in the hot cereal category back in October 2008 when it partnered with Ocean Spray Cranberries, Inc., Lakeville-Middleboro, Mass., to launch Ocean Spray Instant Oatmeal in four flavors: cranberry; cranberry pomegranate; cranberry orange muffin; and cranberry honey multigrain.