Cereal Doesn't Look as Tasty
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Cereal makers in the United States lack the pricing power to push through higher grain costs, and diners are switching to other breakfast meals, reports Barbara White-Sax at Drug Store News. An article by Larisa Brown at the Daily Mail and an article by John Henley at the Guardian explain some of the reasons why diners might not be so interested in cereal right now. The Daily Mail article focuses on convenience, while the Guardian article focuses on health concerns.
A trip to the local Kroger (NYSE: KR) this morning suggested that grocers might be having trouble selling cereal right now. When I arrived at the cereal aisle, many of the standard cereals were selling for around $1.50 a box after the store discount. Without the store discount, many of these cereals cost around $5, so this was a sizable markdown. Some of the store brand cereals were even cheaper, as store brand corn flakes were going for just 99 cents a box. The other products I saw at the Kroger typically had smaller discounts, if a discount was even available, which suggested that shoppers did have the cash to buy other food at the supermarket.
Pouring cereal into a bowl is still quicker than frying or cooking up a breakfast meal, but commuters no longer need to do their own breakfast cooking in the morning. Many fast food chains now offer breakfast menus, and it's easy to pick up conveniently packaged food at the drive through on the way to work, even if this isn't always the cheapest or healthiest option. Some Starbucks (NASDAQ: SBUX) locations open very early now. I remember visiting a Starbucks at 5 AM once in Sonoma, when grocery stores and most other restaurants were closed. Many Jack in the Box (NASDAQ: JACK) restaurants serve breakfast all day and all night long as well. A commuter has choices now, even when work starts at 6 AM.
Health concerns do seem like they might be affecting cereal sales. The Kroger store brand frosted mini wheats package stated that the mini wheats were made with real sugar, not high fructose corn syrup. This was somewhat surprising because it seemed like high fructose corn syrup wouldn't be as much of a concern for cereal buyers as the store brand discount, and it made me wonder whether Kroger planned to roll out healthier store brands. Kroger might decide to expand its store brand lineup by adding a cereal like Kellogg's (NYSE: K) higher end Kashi label, which might help Kroger improve its margins a bit.
Weaker cereal sales will hurt Kellogg, but Kellogg has introduced a lot of new food products in 2012, and its non-cereal stalwarts seem like they're performing well. Kellogg's did provide some reassurance to investors in its 2Q earnings report, where the company explained that its Pop-Tarts were in high demand and its 2Q 2012 cereal sales did beat its 1Q 2012 cereal sales. The Pringles acquisition also reduces Kellogg's reliance on cereal sales going forward.
Although Jack in the Box has some cheap breakfast items on its menu, a 99 cent box of cornflakes may still cost less per serving even after the cost of the milk. A blended coffee and a pastry from Starbucks could cost more than a box of cereal and a small container of milk. It seems like Kellogg's is handling the challenge from other breakfast providers the right way, by adding products that offer health and convenience benefits even if they cost more than its original cereals. Kroger sells frozen foods, Pop Tarts, and other products that could help it keep breakfast shoppers around even if they don't buy cereal. The companies that have the most to fear from this news are smaller cereal makers that don't have a wide variety of products like Pop-Tarts and Pringles to make up for weaker cereal sales.
enovinson has no positions in the stocks mentioned above. The Motley Fool owns shares of Starbucks. Motley Fool newsletter services recommend Jack in the Box and Starbucks. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.