For the maker of "Frosted Flakes" and "Rice Krispies," snap, crackle, pop has been replaced by trip, stumble, flop. Sales for Kellogg Company, Battle Creek, MI, have been less than grrreeat during the past couple of years as Americans have eschewed sitting down to breakfast with Tony the Tiger in favor of grabbing a granola bar or bagel on their way to school or work.
Changing breakfast habits in America have been eating away at Kellogg's market share for years. The company has seen its share of the ready-to-eat cereal market dip from 40% to 32% in recent years. Kellogg remains the No. 1 player in the category but its dominance has been eroded by a combination of consumer preference to eat their meals on the go and private label brands that offer copycat products at much lower prices. In fact, industry sources report that private label brands now hold 20% of the market, up from 12% four years ago. Kellogg's position is even more precarious than that of General Mills and other players, contend industry experts, because about 60% of Kellogg's volume comes from six different cereal varieties such as corn flakes and raisin bran, all of which are easily copied by low cost producers.
A Nutraceutical Solution?
To grow in this competitive atmosphere, Kellogg is fighting back through a combination of initiatives that includes cutting its workforce, spending more to promote existing products and introducing new product lines. In December the company announced it will raise cereal prices an average of 2.7% and will use the extra money for new products and more advertising and marketing. One new cereal will be called "Country Inn Specialties," a premium cereal featuring pictures of inns. Kellogg also said it will add calcium and other vitamins for many cereals under a new "K-Sentials" fortification program.
But for the functional food industry, it was Kellogg's November launch of "Ensemble" that raised the most eyebrows. The cereal maker is promoting the new line as the first family of foods that actively works to lower cholesterol. By March, Ensemble will be on store shelves in a five-state region including major cities such as Lexington and Louisville, KY; Cincinnati, Dayton, Columbus and Toledo, OH; Indianapolis and Fort Wayne, IN; Detroit and Grand Rapids, MI; and Chicago, Springfield and Peoria, IL. A national rollout will take place late this year.
Kellogg will introduce seven categories of Ensemble products including frozen entrees, bread, dry pasta, ready-to-eat cereal, baked potato crisps, frozen breakfast/dessert mini-loaves and cookies.
"People have been struggling to control their cholesterol by avoiding food they love," said Bill Mayer, president of Kellogg Ensemble Functional Food Company. "Our new family of foods provides a variety of great tasting choices based on the presence of positive attributes."
Prices in the line range from $1.99 for a quarter pound loaf of bread to $3.49 for a 15.6 ounce box of cereal.
A Tough Plan to Follow
The active ingredient in the Ensemble line is psyllium-a well-known soluble fiber that's been proven to reduce cholesterol. But psyllium's proven track record is also its weakness-the ingredient is an old story in a category that is always on the lookout for something new. Furthermore, industry observers say another problem with psyllium is that a person must eat a lot of it to enjoy its cholesterol-lowering effects. Consumers must eat three servings a day over three weeks before low-density lipoprotein falls by about 9%, according to reports.
"Putting these product lines together and making them work won't be easy," according to Prudential Securities analyst John McMillin. "The $64,000 question is how many of these 96 million adults with high cholesterol care enough to try these products?"
Still, company executives remain optimistic. "The introduction of our functional foods is a logical step for Kellogg's into a new generation of foods that positively impact health and well-being," said Arnold Langbo, chairman and chief executive officer.
"Food choices and lifestyle changes are difficult to achieve. One of the keys to Ensemble's success is that we will work with healthcare professionals and consumers to make that change easier," said Dr. Mayer. "Ensemble foods are just the beginning of our commitment to helping consumers reduce the risk of disease."
Obviously, with one new line nearly on store shelves, another in development and the strength of an entire functional foods division behind it, Kellogg is committed to building a major presence in the nutraceutical industry. As Nomi Ghez, a Goldman Sachs food industry analyst commented recently, "Clearly this company is now actively and aggressively trying to turn the ship around."
