The Cereal Wars
Mary is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Food may be a necessity. However, brand names are not. As budgets become tighter, families start looking for ways to cut costs. They trade in their brand names for generics as the main focus becomes pricing, which becomes a problem for those companies that rely on their branding for market position. This is clearly evident when it comes to cereal companies.
Cereal giants such as General Mills (NYSE: GIS), Kellogg (NYSE: K), and Post (NYSE: POST) have been losing market share to cereal knock-off specialist MOM Brands, formerly Malt-O-Meal. The privately-owned company has similar products to its rivals in name and substance, but at an average cost per ounce 20-25% lower. This is due in large part to the fact that MOM Brands’ advertising budget is only a fraction of what the big boys spend. The lower pricing may reel in consumers during a recession, but will these consumers return to the big names once the economy goes back to normal?
One of General Mills’ top brands is Cheerios cereal. For fiscal year 2011, the company’s global net sales were $14.9 billion. Almost 70% of the company’s sales come from U.S. retail products. Their international business, with products in more than 100 markets, makes up for a small percentage of their overall annual sales. Kellogg just recently added to its catalog of brands with its purchase of Proctor & Gamble’s Pringles brand. Still, the company’s top brands remain its cereal products. They sell their products in more than 180 countries around the world. Kellogg’s fiscal year 2011 sales were more than $13 billion. Unlike General Mills and Kellogg, Post focuses on cereal products. Post’s products are manufactured in four primary facilities through a flexible platform and sold through a variety of channels, such as grocery stores, mass merchandisers, club stores, and drug stores.
Though different, General Mills, Kellogg, and Post do share some similarities. They are heavily reliant on brand positioning and reputation. Knock-off brands such as Malt-O-Meal, however, rely more on competitive pricing. Pricing versus branding is a struggle that plays out often in most industries. More like a tug-of-war, the results depend on the economy for the most part.
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