What Happens When an Entire Consumer Segment Suddenly Loses Interest in a Brand or Product Category?
Ugly results happen, that’s what. Just take a look at Abercrombie & Fitch, the retailer of upscale apparel to teens. Over the space of a year or so, teens have been abandoning A&F in droves as the retailer lost its design edge and cash-strapped teens found cheaper and more fashion-forward alternatives at other retailers. Maybe also, teens now self define status more by the mobiles they carry than the jeans they wear.
That’s powered sharp declines in A&F’s same-store sales, its net sales volume, and the fortunes of Michael Jeffries, its autocratic and gaff-prone chairman and chief executive — or to be more precise, its former chairman who is now chief executive only.
What that retailer experienced in a comparatively short period of time has been happening in slow motion in the food industry for a long time. For a decade or more, a huge consumer segment shifted away from a core supermarket category: breakfast. And the component of the breakfast category that’s taking the biggest hit is its former champion, cold cereal.
Let’s take a look at what’s going on.
Cereal’s Long Decline
Sales of branded cold cereal have been flat or slightly down every year for at least the past 10. Meanwhile, sales of private-label cereal have grown by about 2% a year during that period. By comparison, sales of all consumer-packaged goods grew by about 3% per year.
To be sure, it’s important not to overstate the case against cold cereal. It remains the top breakfast choice, winning US sales of $10 billion annually. All is not lost. Yet.
But there are emerging indications that cold-cereal sales are now in a sharp and rapidly accelerating decline.
The explanations for the decline range from the obvious to the subtle. Most obvious is that many consumers, probably in excess of 30% of them, simply don’t eat breakfast at all, a big change from the days when breakfast was seen as the must-have meal. Feeding that trend is the fact that households have fewer children and have them later in life than has historically been the case. Children are big cereal consumers.
Secondly, many of those who do eat breakfast do so on the fly by means of hand-held or dashboard-top alternatives, further undermining breakfast as a sit-down meal occasion. For many, breakfast is sourced at the drive-through on the way to work; traditional cereal with milk is challenging in that situation.
Finally, cold-cereal manufacturers have done themselves no favors by allowing the perception to fester that their product is about as nutritious as the box it comes in. Worse yet, manufacturers have taken prodigious price increases in the form of the miniaturization of packaging and outright price increases of about 2.3%, compounded annually.
A large percentage of the price increases is driven by costly mass advertising, intended to beat back incursions of new entrants as well as private label. Ironically, traditional advertising grows and less effective as mass media fragments into multimedia, online and off.
Manufacturers often cite the price increase as a factor of component commodity prices. Fair enough, but commodity prices affect branded and private label manufacturers alike. High-quality private brands remain priced at least a quarter below those of national brands. This cost disparity further feeds consumers’ suspicions that something has gone seriously wrong with pricing.
And manufacturers have been jolted into the realization that something is badly amiss by the recent sales declines of branded cold cereal.
Kellogg, the maker of brands includ-ing Corn Flakes, Frosted Flakes and Fruit Loops, along with numerous convenience and snack items, has announced a startling 4% annual sales decrease for its breakfast unit. This marks an extremely rapid sales decline that bodes ill for the entire breakfast category, not just for Kellogg.
In explaining the sales decline, Kellogg chief executive, John Bryant, asserted that consumers are making an “unconscious migration” from cold cereal to alternatives such as eggs, toast, peanut butter and yogurt. “We’re not losing to any one category in particular.”
Well, the migration is far from “unconscious” and is much deeper than simply selecting some alternatives, as Bryant asserts. Consumers are moving away from traditional breakfast entirely. Meanwhile, manufacturer General Mills has made an unprecedented bow to consumer preference by announcing that it intends to discontinue use of genetically modified organisms (GMOs) in its original Cheerios brand cereal. GM will continue use of GMOs in other cereal brands, including Cheerios line extensions, citing the unavailability of sufficient raw material to make the switch.
General Mills’ Sea Change
The GMO decision represents a profound change for GM, which has spent millions in successful efforts to beat back ballot initiatives in California and Washington State that would have mandated GMO labeling. GM has long maintained that there’s no difference between GMO and non-GMO ingredients. Be that as it may, if consumers think there is a difference and refuse to purchase product that contains GMOs, it doesn’t take too much brainpower for a manufacturer to find a solution.
It’s not inconceivable that GM is also demonstrating to Federal regulators that it can be trusted to do the right thing so that there’s no need for mandated labeling.
Beyond going non-GMO in a limited way, GM has another change in store for cereal. It intends to switch some of its advertising funds away from cereal to its yogurt brands; Yoplait is its best-known brand. This is scarcely a vote of confidence in cereal.
So far, these moves by Kellogg and GM look a bit weak. Is there anything more substantial that can be done apart from the PR posturing?
A couple of new strategies have just emerged: Kellogg intends to take a step back to the future by initiating an advertising campaign later this year that aims to convince consumers to eat breakfast. Traditionally, cereal manufacturers’ advertising touts a single brand, not the bigger idea of breakfast as an important meal occasion. Kellogg will also roll out a drinkable cereal this year, a step already taken by GM. Kellogg has also acknowledged that it will rectify the damage it did to its acquired Kashi brand by forcing it too quickly into the mainstream, stripping it of its healthy-eating luster.
A Salvageable Situation?
Are any of these moves sufficient to salvage the cold-cereal category, let alone breakfast itself? For cereal manufacturers, these are early days in terms of their recognition that their product has been sinking far more quickly than they thought possible, so one hopes that more and better solutions will emerge.
While they mull that over, however, it’s critical to fold in an important player that seems to have been overlooked by manufacturers: retailers. The most powerful advertising medium of all is what consumers see inside the walls of the retail store.
Retailers could be enlisted in the fight to salvage breakfast by setting up dedicated breakfast sections that cross-merchandise various meal components, including cold cereal. More important, retailers should be on the forefront of helping manufacturers understand that they’re way out of line when it comes to competitive price points. When consumers see that a box of cereal costs two or three times the price of a dozen eggs, the eggs start to look pretty good. So does private label cereal.
Regrettably, the best of cures may do no more than stave off the inevitable. Lard was a ubiquitous pantry staple in homes a couple of generations ago. But as the realization started to dawn on consumers that adding pig fat to the diet might not be the best idea, its use faded away. Advertising campaigns failed to stem the tide. Now, lard remains readily available and it has some specialty uses, but its heyday is long gone.