The cereal category has seen so many changes over the past couple of years what with the impact of the ban on advertising to kids, the resurgence of porridge and the growth seemingly from nowhere of premium offerings that it's hard to believe further transformation was possible. But metamorphosise once more it has.
A raft of innovative product development (such as Weetabix Chocolate and Coco Pops Choc 'n' Roll) and some serious promotional activity and advertising have helped the brands claw back the market share lost to own label last year.
Now worth £1.17bn [Kantar Worldpanel 52w/e 3 October 2010], they account for 77.2% of the market, up from 76.8% with instant porridge going from strength to strength thanks to its affordability compared with ready-to-eat cereals. The brands' promotional push has come at the expense of own label, however (see right), and kids' cereals are struggling too, despite the recent NPD. So 2011 looks set to be another crunch year for the category.
And one of the key challenges faced is its high household penetration. Although the increased volume of deals 42% of brands were sold on promotion versus 35% in 2009, according to IRI has driven the frequency of brand purchases, it has arguably hindered the category's value growth. Value growth will remain at best modest as long as promotional activity remains at such high levels, warn experts.
"This suggests the path to growth will lie not in a further increase in deals or other tactics, but in understanding and responding to changing consumer preferences," says SymphonyIRI senior insights manager Katherine Roe.
Jordans head of category Jodie Soussan agrees. "Convenience is clearly a big driver in this market, but a lot has been sold on promotion. We need to question what consumer needs are in order to drive value growth."
With sales of Coco Pops down, but those of the new raft of Ofcom-friendly chocolate cereals understood to be doing well, the jury is out on demand for sweet chocolate cereals for kids.
There are no such doubts when it comes to instant porridge. While the chilly start and end to 2010 were boom times for hot cereals, the growth in popularity of instant 'desk-dining' variants helped boost porridge sales throughout the year. The hot cereals category continued to demonstrate strong year-on-year growth, with sales rising 10.3% during the summer months, according to Nielsen.
Growing consumer interest in instant porridge has helped boost sales of Quaker's sachet Oats So Simple porridge and its kids' brand Paw Ridge, launched in August 2009. According to Kantar, "three-quarters of the hot cereal value growth is from Quaker, with the Oats So Simple brand growing year after year since its launch. Paw Ridge has also helped, to a lesser extent."
The overall Oats So brand has enjoyed a huge leap in value, with sales up 25.7% to £52.6m, on the back of a 28% volume sales hike. Meanwhile, Dorset Cereals reports a massive 38% year-on-year uplift in value sales of its porridge, helped by the October 2009 launch of instant sachets.
But there's instant and there's instant. "One of the trends that may have affected the instant porridge market is the rise in sales of porridge in foodservice outlets," notes IRI's Roe.
These require no preparation, except possibly reheating, whereas most retail instant porridge sachets require the addition of hot milk which is not straightforward for office workers, a key target market. To remedy this, Quaker has just launched a pot version of the Oats So brand that requires only hot water (see box, right), joining a select club that includes Marks & Spencer and niche brands such as Grace.
Convenience looks set to continue driving instant porridge growth. But while quick options have done well, their success has not been to the detriment of traditional porridge, which has increased in value by 6.8% to £56m and has seen volume sales rise by 2.7% after a 1.1% slump in 2009 [Kantar].
More consumers are waking up to the health benefits of oats, says Rude Health co-founder and managing director Nick Barnard. Rude Health's porridge lines have enjoyed a 45% value sales hike in the past year, he says, adding that Daily Oats is a bestseller in independent stores, while Fruity Date porridge is its number one in Waitrose.
"An ever-increasing number of consumers are looking for a sustaining breakfast and understand porridge is the best choice for this," he says. "Combined with their cholesterol-lowering properties and a consumer desire to avoid wheat, oats are on a winning run. During the nationwide cold snap in early 2010, our porridge sales increased by 250%."
Porridge oats are also relatively cheap, which makes them even more appealing to today's price-conscious shoppers. Mornflake retail sales director Alan Cullom attributes its strong growth in traditional porridge sales last year partly to the fact they offer good value for money, while Nestlé claims low porridge prices are to blame for consumers moving away from ready to eat cereals (see p30).
Muesli and granola
The popularity of oats is spilling into other areas of the cereal market, with value sales of muesli hitting £100m for the first time following a 6% rise in sales [Kantar].
"There's a lot of growth left in muesli but the challenge is to bring out something really different," says Cullom, who adds that one of the brand's bestsellers last year was its Five Fruit Nut & Seed muesli.
Dorset Cereals also reports strong muesli sales. "The company has grown faster in muesli and crunch than the market," says category manager David Evans. "This success suggests that people are still prepared to pay a premium for good-quality, healthy products."
'Wholesome' options are performing well, adds Sousson. "Sales of our mueslis are up by 10% and our granola is also doing well, particularly Superberry Granola, which is up 34%."
Granola, although a small segment of the market, is an area to watch, believe producers. "It has long been the breakfast of choice in the US and now it is making waves in the UK," says Barnard.
Following the success of its existing granola products, Rude Health plans to launch Berry Granola which combines organic strawberries and raspberries with multigrains in March.
"Wholesome cereals are in growth," says Barnard. "These are cereals that are generally healthy but without making any specific diet or digestive promises."
According to Soussan, consumers are also expanding their use of granola to use it in baking and as a dessert topping.
But it hasn't all been plain sailing for UK granola producers. Lovedean, set up in 2005 as a producer of premium granola, announced in November 2010 that it would temporarily cease production while founder Lucy O'Donnell sources a new manufacturer. O'Donnell is to relaunch the brand early this year.
Mainstream healthy cereals are suffering too, with one brand synonymous with slimming losing favour.
Sales of Kellogg's Special K fell 0.4% to £121.9m last year, as a result of heavy promotional activity although, according to IRI, it remains the UK's biggest cereal brand [52w/e 9 October 2010].
Wheat-based brands have also struggled, partly because of the success of their oat-based counterparts. Nestlé's Shreddies and Shredded Wheat recorded sales declines of 7% and 10.3% to £46.2m and £43m [IRI].
Despite some sub-sectors struggling, and consumers' ongoing inclination to buy cereal products on promotion, there is still a market for those prepared to pay a higher price for premium-quality 'nutritious' products.
"The focus is now on a combination of great taste and health," says Soussan. "The manufacturers currently in growth are the ones offering great-tasting and wholesome cereal."
Across the category as a whole, however, price remains key and the heavy promotional activity is narrowing the gap between the brands and own labels to the detriment of the latter.
Some retailers are fighting back by trying to add extra value to their offers by improving their health credentials, for instance, or making sure they have a presence in hot cereals.
Tesco, for example, has included cereal in its recent healthy-eating labelling strategy, while Waitrose has launched a muesli containing spelt as part of its Waitrose Wholesome range.
Asda and Sainsbury's, meanwhile, are both offering own label alternatives to Oats So Simple.
The need for balance between health and taste is particularly important in children's cereals, and this is one area where wheat-based brand Weetabix has managed to turn around its fortunes following a 5.5% decline in volume sales in 2009.
The company's most recent offering, Weetabix Chocolate (launched in July), made waves because it was the first chocolate breakfast cereal to pass the Ofcom test, meaning it could be advertised during children's TV programmes. With half the sugar of the average chocolate-flavoured breakfast cereal, the brand was expected to appeal to mums. And early results are positive. Sales of Weetabix, the second bestselling cereal brand, are up albeit by just 0.6% to £121.9m [IRI], with volume sales also growing.
"Weetabix has been trying to break the tension between healthy and tasty and it looks like it might have succeeded," says Tom Ellis, strategy and research director at brand agency 1HQ.
Kellogg's followed suit shortly after with its Ofcom-friendly offering Coco Pops Choc 'n' Roll, launched in July.
But although the high-fibre, wholegrain and lower-salt and sugar variant has added nearly £3m in sales, the parent Coco Pops brand is still in decline, down 1.8% in value [SymphonyIRI].
In a bid to restore it to growth, Kellogg's is in the process of revamping the brand, and started in August 2010 by adding vitamin D and reducing the sugar content. "We're building on this by announcing changes to the Coco Pops Moons & Stars recipe. From January they'll be high in fibre and wholegrain, and contain 9% of the GDA of sugar they'll also be compliant with the FSA guidelines for advertising to children," says Coco Pops senior brand manager Paul Humphries.
North American brand Nature's Path has also been busy on the children's cereals front. Next month sees the arrival in Waitrose and 300 Sainsbury's branches of the brand's first UK children's cereal, Munch. The Coeliac UK-approved cereal, a combination of corn meal, raw sugar and sea salt, is known as Gorilla Munch in the US and Canada. But the original branding was deemed too scary for UK children. Nature's Path will launch two further children's lines this year, using UK-tailored recipes with less sugar.
Cullom, meanwhile, says Mornflake's children's product, Chocolate Squares, has been growing well in the past three years. "Parents are realising the value of a balanced diet for their children," he says. "Even chocolate-flavoured cereals have the goodness of milk added to them and they provide energy. They are a much better alternative to snacks like chocolate bars."
At the other end of the health spectrum, early 2010 saw Kellogg's bring out a brand targeting the teenage and student market. Krave cereal shells with a chocolate hazelnut centre is all about taste and enjoyment, says Kellogg's, claiming the brand is the first aimed at 16 to 25-year-olds.
Despite this, the overall market for children's ready-to-eat cereals (not including hot cereals) is in decline. Value sales have fallen 4.1% to £95m, and volume is down 1.8% [IRI] and it's unlikely to improve in the short term. Kantar says this decline mirrors that in the adult cereal category, with children, too, choosing hot cereals.
Manufacturers remain bullish, however, and are confident that with recent launches and the greater leeway they've been given when it comes to advertising to children (Ofcom has recently partially lifted the ban on product placement), kids' cereals will return to growth.
"We firmly believe there's huge potential in the children's market, given that one in six children still leaves home without eating breakfast," says Kellogg's Humphries.
As for the wider market, with cereals already purchased by 96.7% of UK households, manufacturers will need to heed the changing requirements of their consumers, push harder on the advertising front and cut back on promotional activity if they are to drive category growth.
Focus On Cereals