Breakfast cereals are an integral part of the British diet and a key sector of the grocery market. Indeed, breakfast cereals are found in around 90% of the UK's homes. Since the end of the Second World War, the market has experienced consistent growth and annual sales now amount to over £1bn. However, in recent years, consumption has begun to slip, largely due to increasing demand for convenient snack products from time-pressured consumers. The ready-to-eat (RTE) sector, composed of a wide variety of products from cornflakes to muesli and accounting for around 95% of sales by value, has been the worst affected area. By contrast, sales of hot cereals, such as porridge, have taken off. The launch of instant microwaveable products, which exploit the trend towards snacking and the demand for easily prepared foods, has driven this growth.
However, parts of the RTE sector continue to flourish as a result of the other major phenomenon affecting the market - growing consumer interest in foods which are healthy as well as flavoursome. Sales of products marketed as being organic or healthy are growing strongly, while the adult indulgence sector is also performing robustly. These areas are dominated by variants of existing well-known brands rather than entirely new products. However, the staples sector, consisting of iconic brands such as Kellogg's Corn Flakes and Weetabix, has been hit by the rise of alternative products. In particular, sales of cereal bars are growing at a phenomenal rate as a host of new products lure consumers away from traditional cereals. Consumption of cereals is also being adversely affected by the trend towards skipping breakfast entirely. Yet the growth of the cereal bar sector is not entirely bad news for the industry, as many of the best-selling brands in this area have been launched by cereal firms such as Weetabix, W. Jordan and Kellogg's.
In terms of corporate activity, the most striking development of the past 2 years was the takeover of Weetabix, the last UK-owned major cereal manufacturer, by US venture capitalists Hicks, Muse, Tate & Furst in November 2003. Although Weetabix had been performing well, with its core band overtaking Kellogg's Corn Flakes as the bestselling cereal in the UK in 2002, the increasing costs of developing and marketing new products suggested that it might struggle to compete with the giants of the market - Kellogg's and Cereal Partners, which is jointly owned by Nestlé and General Mills - in the future. Indeed, the vast amounts spent on marketing and advertising are likely to continue to deter new entrants into the main sectors of the market.
Key Note expects that the demand for convenience products and the growing awareness of the connection between diet and health will continue to affect the market over the next 5 years, with sales showing little growth. However, the expansion of premium-priced and organic products and continued strong sales in the children's sector should help offset the increasing drift away from staples towards cereal bars and other convenience breakfast foods. It is also difficult to believe that the cereal bar market can continue to grow at the rapid pace seen in recent years. In addition, the overall cereals market has the potential to grow at more robust rates than Key Note is forecasting if the manufacturers step up new product activity and exploit the market's natural advantages of convenience, versatility and potentially healthy attributes.
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