Shifting consumer preferences accelerated by the Covid-19 pandemic has created new market dynamics, pushing nutritional credentials to the forefront
By Michéal Mac Curtain
If I were to give the breakfast cereal category a performance review for the past year, it would be: “must try harder”. After years of declining sales, the segment is still forecast to reach global sales of $49.7 billion in 2027, so the massive opportunity within the category is obvious, but what has been stopping this category from fulfilling its market potential?
Around 2015 and after decades of getting consumers ‘hooked’ on sugary bowls of cereal, leading manufacturers began to face bigger problems. With a change in both consumer habits and taste buds, it was clear that relying on sugar had backfired.
Against a consumer backlash resulting in declining sales and plummeting share price, major cereal manufacturers faced an uphill struggle. To stay relevant and win back consumers, manufacturers made flailing attempts at product reformulation. By December last year, however, there were reasons to be optimistic.
In the UK, the breakfast cereal category reported a marginal retail value growth of 2%, notching up sales of £1.96 billion in 2018 – the ready-to-eat cereals accounted for £1.6 billion.
The British consumer munches through an average of 8.5 kg of cereal a year, leading to positive forecast growth in the ready-to-eat cereal market of £2.1 billion by 2023. Only eight weeks after reporting the marginal increase in what was hopefully a turning point for the industry, along came a coronavirus pandemic.
The initial effect of Covid-19 on the cereal category was terrific. Research and Markets reported an increase in sales of 214%. Post’s Weetabix recruited extra staff to meet demand. Profits surged at Kellogg’s despite the increased costs associated with the pandemic. People were finding solace in their favourite childhood cereals along with the additional benefit of being able to work from home in their pyjamas. Lifestyle changes of many consumers, however, created another problem.
Up until Covid-19, cereal manufacturers were focusing their growth strategies around an out-of-home market, a strategy that was reflected in Kellogg’s acquisition of RX Bar and followed by product launches such as JoyBol and Porridge To Go by Quaker.
In August, cereal giant Post reported a 7.1% drop in net sales in the third quarter of its fiscal year 2020, which the US-based corporation attributed to declining sales in foodservice.
With no near-term recovery in sight for this subcategory, it’s still unclear if the lockdown sales surge can make up for the sustained loss.
Since 2015, the US has led innovation within the category, and brands like Love Grown, Back to the Roots, and Kashi Cereals – acquired by Kellogg’s – are some examples. Still, none of them seemed to have succeeded in reaching the European market.
In a category led by conventional brands, Bear was one of the first cereal brands to stand out when it launched its children’s cereal in the UK in 2013.
Granola proved to be a popular entry point into the category for many incumbent brands owing to its simplified production compared with puffed cereals. Two incumbent brands that standout are The Paleo Foods and Troo, which looked at the future of the cereal aisle and took advantage of the lack of innovation from major manufacturers.
Championing the growing trend of grain-free and gut health – and seeing the effect of the ‘premiumisation’ in the breakfast category – The Paleo Foods and Troo tended to that niche. The strategy enabled these brands to secure a nation-wide listing with Sainsbury’s last summer – success hard-won in such a competitive market as the breakfast cereal category.
Spoon Cereals has been unable to expand its listing beyond Waitrose and faced a down funding round last year while Rainforest Food’s Bambeanies lasted just over a year in Sainsbury’s.
The breakfast cereal is a tough category for big players, too. Look at Jordans Granola, the big cereal brand with multimillion-pound budgets lasted less than a year on the supermarket shelf.
There is one clear trend that Covid-19 has pushed to the forefront of the consumer mindset and which leading manufacturers have wasted no time latching onto – brands are adopting an immune benefit strategy.
Kellogg’s focuses on gut health, extending it to immune health. Troo has just launched a new Boost variant, and Rude Health, hot on the heels of a £70 million equity investment from PepsiCo, launched a revamped range with a functional food focus.
It can be hard to understand the consumer mindset when it comes to cereal. GoodBelly by Nestlé, for example, received a muted response in the market last year with only two SKUs in Waitrose while Bio&Me secured four SKUs with the retailer. Both brands are fighting it out in the gut health space and while GoodBelly’s follower base on social media tops 750, Bio&Me is followed by 11,000 people.
Sugar reduction has been at the forefront of reformulation by major brands though for now, there’s no clear winner.
Food foundation The Broken Plate reported that “the proportion of children’s cereals with a high sugar content decreased by 12% between 2019 and 2020”, but added there was no significant change in the overall nutrition of the cereals.
In the UK, a major barrier to creating healthier, no-added-sugar cereals is the slow governmental approach to approving novel natural sweeteners, such as monk fruit and allulose – both of which are widely used in the US with a generally recognised as safe (GRAS) status. The founders of Magic Spoon Cereal, for example, raised $5.5 million in seed investment last year for its allulose-based cereal.
Protein content continues to be a popular call-out in packaging, with one-in-five consumers claiming it is a factor in their purchase choice. Fuel10k is leading the category in the UK.
New market dynamics
What are the long-term implications that Covid-19 could have on the industry? The battle of retail versus direct-to-consumer is well and truly under way. For example, Magic Spoon Cereal launched in the US as a direct-to-consumer brand just over 18 months ago – it would seem to have been a resounding success. The brand raised $5.5 million in seed funding and its traction on social media is far ahead of its competitors. It is, however, followed closely by competitor brands such as School Yard Snacks. Still, today’s sales strategy is evolving to become a direct-to-screen battle.
With no end in sight to the pandemic, consumers have quickly adapted to online-first shopping. In an increasingly competitive category, it will be interesting to see how incumbent and challenger brands adapt to this new reality.
Incumbent brands will have to survive without the crutch of point-of-purchase promotional messaging and brand-blocking on shelves that they enjoy in physical supermarkets.
Perhaps Kellogg’s and Nestlé are looking at global brands like Nike for inspiration on pivoting successfully to online sales. Challenger brands may have to go down the Shopify route – Bio&Me seems to be a good model it.
Breakfast Cereals UK, which represents the majority of major manufacturers in the country, sought to take advantage of the current uplift in the category by launching nothing short of a power grab – a policy document comprising a five-point plan with a further five requests for the government to act upon.
Without giving any voice to smaller manufacturers, the lobbyists are seemingly looking to shape the future of the category by locking in what are already low benchmarks. ‘No added sugar’ can be easily achieved with added sweeteners, and the benchmark for claims relating to a source of, or high in fibre, is already meagre and can easily mislead confused consumers.
December 2020 will cap a tumultuous year for the breakfast cereal category. As of yet, there are no clear winners or losers. What is clear is that there still is massive untapped potential. Let the battle begin.
About the author
Michéal Mac Curtain is the founder of Humble Acre where he is setting out to rid the cereal industry of sugar. He is focused on improving people’s nutrition and wellbeing by creating a leading healthy breakfast brand.
“Gogo Roos is the high protein, low carb healthy grown-up cereal for your inner child,” he says. The new brand will launch exclusively online in January 2021.
Date published: 30 November 2020