GOLDEN GRAINS

Primed by a constant stream of new products, ready-to-eat cereal has remained a leading grocery category despite the changing breakfast habits of many Americans and their resistance to paying high prices.Although retailers contacted by SN cited the health-conscious shopper as a driver of this category, there are signs that adding vitamins and minerals aren't enough. Kellogg's has discontinued its

Primed by a constant stream of new products, ready-to-eat cereal has remained a leading grocery category despite the changing breakfast habits of many Americans and their resistance to paying high prices.

Although retailers contacted by SN cited the health-conscious shopper as a driver of this category, there are signs that adding vitamins and minerals aren't enough. Kellogg's has discontinued its K-sentials banner, while leaving the fortification, and is phasing out Special K Plus, which had twice the calories of regular Special K. More important than vitamins and minerals are nutritional components such as soy, flax and omega-3, buyers said.

With more and more options, retailers are juggling shelf configurations to try to make it all fit.

Wendy Melton, a spokeswoman for Food Lion, Salisbury, N.C., said cereals targeted toward specific groups, such as Harmony from General Mills, which is aimed at women, and Kellogg's acquisition, Kashi, geared toward people who are dieting, are the big trends now.

"This [cereal] is still a pretty big ring category. Many customers perceive cereals to be expensive, and some of the large boxes are over $4, but on a cost per serving basis, cereal is a better value than many other breakfast alternatives," she said.

"All cereal companies are continuously coming up with special packages, flavors and gimmicks, trying to sell more," said Melton. "There is a lot of effort and expense doing this, and not all are successful. They would be better off concentrating on their core brands where they make their biggest profit."

For example, she said Special K Plus, fortified with extra calcium, was packaged in a box that looked like a milk carton, but did not do well. "The design made it look smaller, and we think customers believed it contained less, so they didn't buy it."

Information Resources Inc., Chicago, reported a 1.8% drop in dollar sales in the category for the year ended Jan. 28, 2001, and a 2.4% decline in units for all three major channels, while sales totaled $7.6 billion and the average price per unit was $2.89.

In the United States' food store channel, sales totaled $6.7 billion, a drop of 4.4%, while units went down 4.5% to 2.3 billion. Average price per unit was a little higher in the supermarket channel, $2.98. The drug and mass channels showed growth of 35% and 23% in dollars, respectively, on a much smaller total, and posted lower average unit prices, $2.36 in the drug channel and $2.32 in the mass.

At wholesaler Unified Western Grocers, Commerce, Calif., cereal sales are down 6.4% in dollars, according to Debbie Esparza, senior buyer, grocery procurement. However, Tom Wolfis, the cereal buyer for D&W Food Centers, Grand Rapids, Mich., said the category's overall performance has been pretty stable.

"To promote it, we almost exclusively do multiples," Wolfis said. "We reserve single price points for attention-getting, such as one box for $1.49 or whatever it is. As a rule, it's 2 for $4, 2 for $5."

Unified Western Grocers' new merchandising program, called MerPro, has been very successful, Esparza said. General Mills and Kellogg's are represented in that program, she said, which involves negotiating a corporate price for any commodity. It runs for three weeks each month and, so far, member retailers have voted to include a cereal in four of the seven events that will be held through July. "That tells you how strong the category is," Esparza said.

Specialized, health-focused cereals carry a higher price point. Jaine Mehring, a Denver-based analyst with Salomon Smith Barney, said, "There will always be a segment of the population that will have the flexibility and desire to pay the premium price. But, mainstream supermarket players need to learn how to do some price promotion on natural products. It's more expensive to shop for organic foods in my King Sooper than in Whole Foods. I can buy organic cereal now cheaper than I can buy conventional in Whole Foods," she said.

Unified's Los Angeles division enjoys a large Hispanic base, and sells more presweetened cereals due to the Hispanic taste preference for sweeter foods. For example, Esparza said, frosted flakes in Hispanic L.A. has a 4.6% share vs. 2.4% in non-Hispanic stores.

Cinco de Mayo, May 5, and Mexican Independence Day, Sept. 16, are the two main Hispanic events in UWG's sales year, Esparza said. "Kellogg's, General Mills, Quaker and Kraft (Post cereals) are all participating in events which cater strictly to the Hispanic population," she said.

The southern California division's top-selling cereal item, in dollars, is the 18-ounce Kix, she added.

This year, gender marketing has gone beyond advertising Special K to women, even though Kellogg's said females represent 70% of the brand's consumers. Harmony brand, from General Mills, is marketed as "a cereal just for women," with calcium, antioxidants, soy, iron and folic acid, and Zoe Foods Flax & Soy Granola contains ingredients said to help reduce menopausal symptoms, Esparza pointed out.

New Special K with Red Berries became available nationwide this month with a suggested retail price of $3.49 per 12-ounce box. The berries will attract new, younger users, Meghan Parkhurst, senior manager of marketing communications for Kellogg Co., Battle Creek, Mich., said.

John Corcoran, the grocery category manager who handles the buying of cereals for Big Y, Springfield, Mass., noted that General Mills and Kellogg's have been coming out with new in-and-out items to tie in with movies that have been released this year.

For kids, Kellogg's launched a limited-edition Powerpuff Girls cereal in February, Pokemon 3 The Movie cereal this month, and will debut "Atlantis-Lost Empire" cereal next month to tie in with the new Disney movie due out June 15.

Big Y is now devoting more room to the adult sector of the category, Corcoran said, because the health factor has become very important to people in purchasing their cereals. For fat, no-fat, and the like, Corcoran said there are special items that have carved a small niche in the market, and people are still looking for them.

About three years ago, he said, Big Y went to a four-shelf set, which has made it easier for customers to shop. "And we also block our sets by manufacturer," he said, to make cereal easier to find.

"Our other sets have more shelves, but in cereal there is bigger spacing, for stacking and visibility," he said.

The shelf space that Food Lion allots to cereal has remained the same over the last four years, at about 38 to 44 feet, Melton said. Customers typically spend 30 to 90 seconds moving across this space, looking for their choices.

IRI statistics place General Mills as the top vendor, with $2.4 billion in sales for the year ended Jan. 28. Kellogg's is close behind with sales of $2.3 billion. Kraft Foods is next, with $1.2 billion, followed by Quaker Oats Co. with $670 million, then private label, with $545.6 million. All of these on IRI's list showed declines in dollar sales for the year, but the next, bagged cereal by Malt-O-Meal, registered a gain of 6.5% in dollar sales and 4% in unit sales. Dollar sales were $225.7 million. Next was the smaller total but giant gain of Kashi, showing sales of $37 million but an increase of 126.4%, and an increase in units of 117%. "Again, the health sector is the reason that Kashi sales have increased quite a bit," said Big Y's Corcoran.

Kashi does well for Food Lion, too, Melton said. "In the last year we have added four varieties in all of our Food Lion and Kash 'n' Karry stores [a larger format, only in Florida]. Kashi is targeted to the health-conscious or dieting shopper. They have aggressive promotional support for their cereals, which has given them an advantage over much of their competition," she said. Customer demand has not warranted carrying other health-conscious brands, she added.

For the future, Big Y's Corcoran predicted "business as usual, with displays and advertising the key to increased sales."

"The challenge is providing people with all of the options that they are looking for, and making it fit. That is the biggest issue that's out there right now. There is a lot of interest and growth in the natural and organic segments right now, which is putting pressure on the overall space," Wolfis said. Instead of cutting out stockkeeping units, D&W Food Centers went to a higher profile, adding a shelf across the entire set, to try to accommodate all the cereals.

"We had three before. Now we have four, and we may need to go to five."