Is Big Cereal going the way of Big Pharma?

I ask because there seems to be some evidence of sagging innovation in the all-important breakfast cereal market.

Consider this article in Fortune that extols the relentless efforts by General Mills, the maker of Cheerios, Wheaties and Lucky Charms, to fatten its margins by cutting costs. It cites General Mills’ elimination of letter shapes in its Hot’n'Spicy Chex Mix, which has provoked this online protest petition.

Then consider this chart of branded cereal innovation in the 20th century produced by Geek Out New York. It shows a burst of cereal creativity in the mid-century that brought us such great names as Rice Krispies (1928), Cheerios (1941) and Special K (1956). There is a history of Cheerios here.

Then consider this article in the Wall Street Journal reporting that supermarket customers in the US are increasingly turning to white label substitutes for famous brands, a trend that affects companies such as General Mills and Procter and Gamble.

Finally, consider the Gapper family’s kitchen cupboard. OK, you cannot so I will give you a clue. Taking a look this morning, I noted packets of both Cheerios and Honey Nut Cheerios but also their white label equivalents from Trader Joe’s. There was also some Bob’s Red Mill Old Country Style Muesli.

In pharmaceutical terms, branded cereals such as Cheerios are the blockbusters of the cereal industry, while the white label versions are the generics. I would call Bob’s Red Mill Old Country Style Muesli, which is pricey stuff, the equivalent of a biotech drug.

The Big Cereal innovation pipeline seems to be running dry just as it has done in the pharma industry, leaving companies such as General Mills to cut costs in an effort to see off generics. Meanwhile, small producers such as Bob’s Red Mill are taking the high end of the market.

If I were a shareholder of General Mills, I would be worried. The industry is bifurcating between low-cost generics and high-priced speciality items, with the established mass products coming under strain in the middle. The cereal brands do not even have patent protection on their side.

It is definitely something to chew over.

November 11, 2008 4:52am in Food and Drink | Comment