Ibisworld Industry Report: Cereal Production in The Us

IBISWorld Industry Report
January 28 2010
Cereal Production in the US: 31123
DISCLAIMER
This product has been supplied by IBISWorld Inc. ('IBISWorld') solely for use by its authorized licenses strictly in accordance with
their license agreements with IBISWorld. IBISWorld makes no representation to any person with regard to the completeness or
accuracy of the data or information contained herein, and it accepts no responsibility and disclaims all liability (save for liability
which cannot be lawfully disclaimed) for loss or damage whatsoever suffered or incurred by any other person resulting from the
MARKET CHARACTERISTICS
Cereal Production in the US
January 28 2010
use of, or reliance upon, the data or information contained herein. Copyright in this publication is owned by IBISWorld Inc. The
publication is sold on the basis that the purchaser agrees not to copy the material contained within it for other than the
purchasers own purposes. In the event that the purchaser uses or quotes from the material in this publication - in papers, reports,
or opinions prepared for any other person - it is agreed that it will be sourced to: IBISWorld Inc.
© Copyright 2011, IBISWorld Inc. 2

Contents
Industry Definition................................................................................................4
ACTIVITIES (PRODUCTS AND SERVICES)....................................................................................4
SIMILAR INDUSTRIES.................................................................................................................4
DEMAND & SUPPLY INDUSTRIES................................................................................................5
Key Statistics........................................................................................................6
INFLATION ADJUSTED (CONSTANT) PRICES................................................................................6
REAL GROWTH...........................................................................................................................6
RATIO TABLE.............................................................................................................................6
GRAPHS.....................................................................................................................................7
Segmentation.......................................................................................................8
PRODUCTS AND SERVICE SEGMENTATION................................................................................8
MAJOR MARKET SEGMENTS.....................................................................................................10
INDUSTRY CONCENTRATION....................................................................................................11
GEOGRAPHIC SPREAD.............................................................................................................11
Market Characteristics........................................................................................14
MARKET SIZE...........................................................................................................................14
LINKAGES................................................................................................................................14
DEMAND DETERMINANTS........................................................................................................15
DOMESTIC AND INTERNATIONAL MARKETS.............................................................................16
BASIS OF COMPETITION...........................................................................................................18
LIFE CYCLE...............................................................................................................................19
Industry Conditions.............................................................................................21
BARRIERS TO ENTRY................................................................................................................21
TAXATION................................................................................................................................21
INDUSTRY ASSISTANCE...........................................................................................................21
REGULATION AND DEREGULATION..........................................................................................22
COST STRUCTURE....................................................................................................................24
CAPITAL AND LABOR INTENSITY..............................................................................................27
TECHNOLOGY AND SYSTEMS...................................................................................................27
INDUSTRY VOLATILITY.............................................................................................................29
GLOBALIZATION......................................................................................................................29
Key Factors.........................................................................................................30
KEY SENSITIVITIES...................................................................................................................30
KEY SUCCESS FACTORS...........................................................................................................30
Key Competitors.................................................................................................32
MAJOR PLAYERS.......................................................................................................................32
PLAYER PERFORMANCE...........................................................................................................32
OTHER PLAYERS......................................................................................................................40
Industry Performance.........................................................................................43
CURRENT PERFORMANCE........................................................................................................43
HISTORICAL PERFORMANCE....................................................................................................46
Outlook...............................................................................................................53
January 28 2010
Industry Definition
The US Cereal Production industry acquires raw materials such as corn, wheat, flour,
sugar, malt extract, rice and salt from various sources and processes these ingredients
into ready-to-eat cereals, hot cereals and cereal bars. It also purchases raw materials
such as plastic and paperboard containers from other manufacturers for various
packaging purposes. The finished breakfast cereals are subsequently sold to grocery
wholesalers and retailers, as well as the foodservice industry.
ACTIVITIES (PRODUCTS AND SERVICES)

The primary activities of this industry are:
• Breakfast bars
• Breakfast cereal
The major products and services in this industry are:

• Ready-to-eat cereals
• Hot cereals
• Cereal bars
SIMILAR INDUSTRIES
Industry: 11114 - Wheat Farming in the US
Description: Establishments primarily engaged in growing wheat.
Industry: 11115 - Corn Farming in the US

Description: Establishments that grow corn.
Industry: 31121 - Flour Milling in the US

Description: Establishments that mill flour or meal from grains or vegetables.
Industry: 31131 - Sugar Processing in the US

Description: Establishments that manufacture raw sugar, liquid sugar, and refined
sugar from sugarcane, raw cane.
Industry: 31142 - Canned Fruit & Vegetable Processing in the US

Description: Establishments that manufacture canned, pickled, and dried fruits,
vegetables, and specialty foods.
Industry: 31199 - Other Food Manufacturing in the US

Description: Establishments that manufacture food, including mixing purchased dried
and dehydrated ingredients.
Industry: 42241 - Grocery Wholesaling in the US

Description: Establishments that wholesale a general line (wide range) of groceries.
Industry: 44511 - Supermarkets & Grocery Stores in the US

January 28 2010
Description: Establishments known as supermarkets and grocery stores that retail a

general line of foods and goods to consumers.
DEMAND & SUPPLY INDUSTRIES

11114 - Wheat Farming in the US
11115 - Corn Farming in the US
31121 - Flour Milling in the US
31131 - Sugar Processing in the US
31142 - Canned Fruit & Vegetable Processing in the US
31194 - Mayonnaise & Salad Dressing Production in the US
31199 - Other Food Manufacturing in the US
42241 - Grocery Wholesaling in the US
42251 - Corn, Wheat & Soybean Wholesaling in the US
44511 - Supermarkets & Grocery Stores in the US
44512 - Convenience Stores in the US
72231 - Food Service Contractors in the US

January 28 2010
Key Statistics
INFLATION ADJUSTED (CONSTANT) PRICES
2006 2007 2008 2009 2010
Industry Revenue *10,070.7 *10,651.8 *10,800 *11,125.1 *11,400.1 $Mil
Industry Gross Product *7,065.8 *7,948.9 *8,070.7 *8,255.7 *8,395.1 $Mil
Number of Establishments *66 *67 *68 *69 *70 Units
Number of Enterprises *45 *45 *43 *43 *43 Units
Employment *14,020 *14,626 *15,100 *15,250 *15,412 Units
Exports *819.3 *891.8 *415.2 *425.1 *452.1 $Mil
Imports *339.4 *410.4 *457.7 *496.1 *522.4 $Mil
Total Wages *850.8 *868.7 *888.5 *908.4 *920.1 $Mil
Domestic Demand *9,590.8 *10,170.4 *10,842.5 *11,196.1 *11,470.4 $Mil
*1,470,023, *1,452,245, *1,466,768, *1,482,902,
Production Volume n/a Kilograms
923 861 320 772
REAL GROWTH
2006 2007 2008 2009 2010
Industry Revenue *-9.8 *5.8 *1.4 *3.0 *2.5 %
Industry Gross Product *-15.0 *12.5 *1.5 *2.3 *1.7 %
Number of Establishments *1.5 *1.5 *1.5 *1.5 *1.4 %
Number of Enterprises *2.3 *0.0 *-4.4 *0.0 *0.0 %
Employment *7.1 *4.3 *3.2 *1.0 *1.1 %
Exports *16.2 *8.8 *-53.4 *2.4 *6.4 %
Imports *17.7 *20.9 *11.5 *8.4 *5.3 %
Total Wages *-1.9 *2.1 *2.3 *2.2 *1.3 %
Domestic Demand *-10.7 *6.0 *6.6 *3.3 *2.5 %
RATIO TABLE
2006 2007 2008 2009 2010
Imports share of Domestic Demand *3.54 *4.04 *4.22 *4.43 *4.55 %
Exports Share of Revenue *8.14 *8.37 *3.84 *3.82 *3.97 %
Average Revenue per Employee *0.72 *0.73 *0.72 *0.73 *0.74 $Mil
Wages and Salaries Share of
*8.45 *8.16 *8.23 *8.17 *8.07 %
Revenue

January 28 2010
GRAPHS
Revenue Revenue Growth Rate
Employment Imports and Exports
Note: Unless specified, an asterisk (*) associated with a number in a table indicates an IBISWorld estimate and
references to dollars are to US dollars.

January 28 2010
Segmentation
PRODUCTS AND SERVICE SEGMENTATION
Product/Services Share
Cereal bars 27.0%
Hot cereals 28.0%
Ready-to-eat cereals 45.0%
The cereal products manufactured in the United States are categorized into the
following segments:
Ready-to-eat Cereals
This segment comprises the largest portion of the market and includes cold cereals,
which are mostly corn or wheat based. These are traditional cereals that are combined
with milk for consumption. This segment's total share of the market has been
decreasing in recent years as a result of new product introductions and changing
consumer patterns. However, it remains a highly lucrative segment for the major
players, which has provided the necessary profits to re-invest in other growth food
manufacturing areas, like breakfast cereal bars.
Hot Cereals
Hot cereals include oatmeal and porridge, which are also traditionally consumed in
American households during breakfast. They too, have lost some market share to
cereal bars, muffins, and croissants, reflecting the growth of the increasingly time-poor
consumer.
Cereal Bars
With growing interest in nutritious eating habits, the cereal bars segment has recently
emerged as the industry's beacon of growth. Cereal bars include similar ingredients as
ready-to-eat cereals but have the advantage of being portable, convenient and easy to
consume. This has been received favorably by consumers, particularly as the
proportion of Americans who consume breakfast at home has historically been
declining. However, given the current economic climate and the 1.3% increase in home

January 28 2010
food consumption compared to 2007, it is expected that the growth of this segment will
be limited in the immediate future. Further growth in this segment is expected from
increases in penetration and frequency of use, driven by aggressive product
development to improve and broaden flavor and variety options.

January 28 2010
MAJOR MARKET SEGMENTS
Market Segment Share

Grocery wholesalers 66.3%
Supermarkets and convenience stores 19.7%
Export 8.9%
Food service providers 5.1%
The U.S. Cereal Production industry supplies its products to the following markets:
Grocery wholesalers
The majority of industry sales are derived directly from grocery wholesalers, who are
expected to account for 67% of the market in 2009. They in turn supply supermarkets,
convenience stores and other businesses with bulk, packaged breakfast cereals. This
market is essentially the most important link in the supply chain because relationships
with wholesalers affect the products that are eventually stocked by retailers. However,
this segment's share the market is reducing as online ordering systems used by large
supermarket chains have enabled some of them to buy direct from manufacturers. This
will prove particularly beneficial to retailers such as supermarkets due to the cost
savings that arise from bypassing wholesaler profit margins. The ability to purchase
directly from a manufacturer also allows for more favorable terms of trading, as
retailers maybe able to negotiate certain conditions that were not possible with
wholesalers. This should effectively translate into lower retail prices, thereby increasing
sales volume.
Supermarkets and convenience stores
Large supermarket chains and convenience stores are forecast to account for 19.7% of
the cereal market, and serve as the single most important point of purchase for
consumers. For instance, Kellogg's largest customer, Walmart stores, accounted for
approximately 19% of its consolidated net sales during 2008. Given the importance of
this channel, it is imperative that manufacturers maintain cordial relationships with
them.
Exports

January 28 2010
The contribution of industry exports has been highly volatile, in conjunction with
fluctuations in the U.S. dollar. For example, in 2004 exports accounted for 4.9% of
revenue, and then grew strongly to 8.4% by 2007, before falling dramatically to an
estimated 3.8% in 2009. Mexico and Canada have historically been the largest
recipients of U.S. exports primarily due to the NAFTA and their geographical proximity.
Recently however, Taiwan, Korea and Hong Kong have emerged as important export
markets, reflecting the economic rise of countries in the Asia-Pacific region.
Food-service providers
The food-service industry, including caterers for hotels, business, government and
conference organizations, remain a small but substantial revenue source for producers.
In 2009, food-service providers will account for an estimated 5.1% of sales, with the
expectation that this will increase as hotel bookings regain greater stability.
INDUSTRY CONCENTRATION
This industry is highly concentrated
The U.S. Cereal Production industry has a high level of market concentration, as the top
four players account for 86% of overall market share. This concentration of ownership
is primarily a result of an increase in acquisitions, along with organic growth for a
majority of major players engendered by continued product innovation, strong and
increasing brand loyalty and aggressive marketing.
The product lines of the major players such as Kellogg and General Mills typically
comprise mid to low value, high volume, branded products. Given the high brand value
of these products, these players have the ability to pass on cost increases to their
consumers during years of high commodity and energy prices. Smaller players tend to
focus on niche markets, supplying specialty products that are of high value but have
shorter production runs and hence lower volumes. In 2009, IBISWorld estimates that
there were approximately 40 such niche producers around the United States.
GEOGRAPHIC SPREAD
Year: 2009
Number of Establishments by Region

January 28 2010
Region Units
Great Lakes 16.0
Plains 15.0
West 13.0
Mid-Atlantic 6.0
New England 6.0
Southeast 5.0
Southwest 4.0
Rocky Mountains 1.0
Note: "Far West" and "Mid East" have been changed to "West" and "Mid-Atlantic,"
respectively, in some parts of this report
The geographic spread of cereal manufacturing establishments around the U.S. are
strategically located in close proximity to sources of key inputs such as grain and flour
mills, while remaining within serviceable distance to large city markets.
The Great Lakes region of the country houses the majority of cereal production
facilities, comprising 24% of total establishments within the industry in 2008. Illinois,
Ohio and Michigan together account for 21% of total industry establishments, primarily
due to their proximity to grain and flour mills and major consumer markets like
Chicago, Detroit, Cleveland and Milwaukee. Further, the industry's biggest player
Kellogg is also headquartered in Michigan.
The Plains region accounts for 23% of all industry establishments. Lying to the
immediate northwest of the Great Lakes, it affords all of the same geographical
advantages, in addition to having the largest corn farming areas in the U.S. Iowa,
Minnesota and Nebraska together, account for 15% of all establishments. The world
headquarters of General Mills is located in Minneapolis, Minnesota and the company
has a number of manufacturing facilities in and around Missouri, Iowa and Kansas.
The West region of the United States represents 20% of all establishments across the
country. California is home to more cereal manufacturing facilities than any other state
in the country, with 12% of all industry establishments being located here. Enormous
cropping areas, combined with a large, affluent population make it ideal for cereal
producers to base themselves in this region.
The New England and Mid-Atlantic regions respectively account for 9% of total industry
establishments. This is primarily due to ease of access to wealthy, big population
centers around New York, Boston, and Philadelphia.

January 28 2010
The Southeast region also has several breakfast cereal processing facilities, and
accounts for 8% of total establishments. These are mainly located in Tennessee and
Georgia as the region also has easy access to key raw materials such as sugar, while
large markets, such as Miami and Atlanta, can be serviced by these producers. Further,
access to abundant and relatively inexpensive Hispanic and African American labor has
also facilitated the presence of manufacturing plants in this region.
The Southwest and Rocky Mountains together constitute 8% of U.S. cereal producing
establishments. Texas alone accounts for 6%, chiefly owing to its area and population
size. Further, Arizona and New Mexico have high proportions of Hispanic populations,
which are a cheap source of labor.

January 28 2010
Market Characteristics
MARKET SIZE
High profit margins, volatile commodity prices, and a saturated market are the salient
characteristics of the US Cereal Production industry. Although the industry has shown
flakes of promise in the five years leading up to 2009, volatile commodity prices,
turbulent economic conditions and changing consumer trends have dampened its true
potential. However, the industry has remained resilient during the current spate of
economic duress and has tended to outperform the economy during recessionary years
despite waning consumer spending. In 2009, total industry revenue is expected to
reach $11.1 billion, representing an increase of 3.0% from the previous year.
The high level of value addition during the production process has enabled the
industry's major players to realize high profit margins and consistently perform well in
spite of recessive economic conditions. Changing consumer tastes and lifestyles have
warranted clever innovation and new product introductions to survive in a market that
is mature and stagnant. Access to large capital investment budgets has resulted in
product innovation and the introduction of new products that aim to address the trends
of health and convenience.
The future prospects of the industry, modest as they may be, do present some niche
growth opportunities. The cereal bars segment presents an opportunity for growth for
the industry as consumers become increasingly time-poor and health-conscious. Strong
brand loyalty combined with new product innovations and aggressive marketing
strategies will see the industry ride through the current economic storm relatively
unscathed. IBISWorld predicts that the industry will grow at an annualized rate of 2.1%
over the five years to 2014.
LINKAGES
Demand Linkages
42241 - Grocery Wholesaling in the US
This is a major source of immediate sales for breakfast cereal manufacturers.
44511 - Supermarkets & Grocery Stores in the US

Supermarkets with sufficient purchasing power can buy direct from the manufacturer.
44512 - Convenience Stores in the US

Manufacturers are expanding their traditional distribution networks to include
convenience stores.
72231 - Food Service Contractors in the US

This is a reasonably small but significant source of demand for cereal products.
Supply Linkages

January 28 2010
11114 - Wheat Farming in the US

An important raw material for manufacturing products made by this industry, such as
wheat bran.
11115 - Corn Farming in the US

A major raw material for manufacturing products made by this industry, such as corn
flakes.
31121 - Flour Milling in the US

Malt extract is another raw material used in almost all breakfast cereals.
31131 - Sugar Processing in the US

This is a very important ingredient required for making cereal bars and breakfast
products.
31142 - Canned Fruit & Vegetable Processing in the US

Dried fruit is also a key ingredient in some cereal products.
31194 - Mayonnaise & Salad Dressing Production in the US

Salt is required for most products made by cereal producers.
31199 - Other Food Manufacturing in the US

Other key ingredients, such as gluten, vitamins, preservatives, emulsifiers and honey
are purchased from manufacturers in this industry.
42251 - Corn, Wheat & Soybean Wholesaling in the US

Rice, wheat, oats and rye are the most common ingredients required for this industry.
DEMAND DETERMINANTS
The major factors driving demand for breakfast cereals and affecting per capita
consumption are detailed below:
Changing Consumer Lifestyles
The past ten years have seen a change in the lifestyles and attitudes of consumers and
consumption patters. Changes in population demographics and ethnicity have given
rise to new tastes and preferences, necessitating manufacturers to adapt their product
lines to meet these needs. As discussed earlier, one such trend is that, consumers are
increasingly more health conscious and time-poor, thereby demanding more
convenient, healthy yet tasty products. This, in turn, has prompted an increase in the
demand for prepared, single-serve portions such as cereal bars and yogurt bars that
can easily be consumed while on the move.
Product Innovation

January 28 2010
Changing consumption trends and patterns require cereal producers to be able to

continuously innovate and adapt their product lines to maintain market/category share.
The past five years has seen a myriad of new products being introduced, with the
majority of them focusing on nutritional and dietary benefits. General Mills for example,
introduced a range of Oatmeal Crisp Fruit 'n Cereal Bars, further expanding on their
success from Nature Valley and Milk 'n Cereal bar products.
Pricing and the Presence of Substitutes
Classical economic theory holds that a rise in the price of breakfast cereal will
adversely affect demand as consumers will choose to consume cheaper, substitute
products. These may include muffins, bagels, bread, cakes etc., the prices of which can
influence the demand for cereals. This is especially significant for high-end, branded,
premium products, where even a moderate price increase can affect volumes
substantially.
Household Disposable Income
Typically, a rise in disposable income is directly proportionate to increased

consumption expenditure. In some cases however, an increase in income will
encourage consumers to simply switch to more expensive, branded cereals or eating
out rather than an increase in the volume of cereals purchased. Given this, a long-term
rise in income should see production shift from lower margin to higher margin products
(such as cereal bars). However, the current economic climate will slow down this
transition due to lower consumer spending and an increase in the consumption of foods
inside the home. In the five years to 2009, American household disposable incomes
rose by approximately 2.1% per annum.
DOMESTIC AND INTERNATIONAL MARKETS

Domestic and International Markets Exports
Exports in this industry are medium
Exports in this industry are increasing
Domestic and International Markets Imports

Imports in this industry are low
Imports in this industry are increasing
Domestic and International Markets Analysis
Domestic market
The U.S. domestic market accounts for the majority of cereal demand and
consumption, and is estimated to account for around 96% in 2009. In the past five
years, domestic demand has been declining at an annualized rate of 3.1%, indicating a
saturated local market with limited growth opportunities. Total imports for 2009 are
expected to increase by 8.4% and total $496.1 million, accounting for 4.4% of domestic

January 28 2010
demand. In 2004, imports constituted only a 1.7% share of domestic demand,

indicating that American consumers have become more accepting of foreign made food
products.
In 2009, Canada is expected to account for 73.2% of all imports, followed by Mexico
(15.3%), Ireland (1.9%), Dominican Republic (1.7%), Germany (0.9%) and Switzerland
(0.6%). The share of imports originating from countries in the Asia-Pacific specifically,
China, Korea, and India, has been steadily increasing in the past few years. Further,
American consumers have increasingly become more accepting of foreign made
cereals, evidenced by the steady increase in imports from Argentina, Colombia, and
Dominican Republic.
International market
The total value of U.S. exports in 2009 is expected to grow by 2.4% and amount to
$425.1 million, accounting for 3.8% share of industry revenue. In the five years to
2009, industry exports fell by an annualized rate of 7.3%, largely due to the dramatic
appreciation of the U.S. dollar over the current period that is expected to increase by
11.3%.
In terms of export markets, Canada is expected to account for the majority of American
cereals with 58.4%, followed by Mexico (20.2%), Korea (2.0%), Israel (1.4%),
Guatemala (1.1%) and Taiwan (1.1%). There has been a substantial decrease in the
volume of exports to Mexico compared to previous years, which has historically been
the main destination for U.S. cereals. Taiwan has been steadily increasing its share of
American exports, while other export destinations have remained mostly constant in
their consumption of U.S. cereals.

January 28 2010
BASIS OF COMPETITION
Competition in this industry is high
Competition in this industry is steady
The US Cereal Production industry is extremely competitive, with the major players
fiercely competing for market share. This is mainly because of a mature market whose
per capita consumption is estimated to be stagnant, and will eventually begin to fall in
future years. Furthermore, high barriers to entry have the effect of limiting the ability of
firms to enter and compete effectively. Competition within this industry is principally
based upon the following:
Price
The price sensitivity of consumers in the breakfast cereal market varies between
product segments. Although the market is dominated by well established brand names,
consumers are still price sensitive and can easily switch their preferences to a lower-
priced substitute. Further, the growing segment of low priced, private label brands has
made price-based competition more intense, especially given the current economic
climate.
Quality
The perceived quality of a particular product or brand will determine the price
consumers are willing to pay for it. Brand loyal customers are not very sensitive to
changes to price because of the associated perceptions of quality. Cereals such as
Special K, Cheerios, Fruit Loops, Cap' n Crunch etc., command a premium price
primarily due to their image and reputation as high quality products.
Relationship with key suppliers
Developing and maintaining strong relationships with downstream suppliers is also a

critical area of competition. The ability to secure coveted grocery store and
supermarket shelf space has conventionally set market leaders apart from their
competitors. Brands with the most recognizable products or packaging placed visibly at
strategic locations, have the best chances of maximizing sales at the retail level. As
competition intensifies, more manufacturers are expanding their traditional distribution
networks to include convenience stores, drug and discount stores, shopping mall kiosks
and other venues with high pedestrian traffic.
Innovation and differentiation
The ability to be innovative and differentiate a product/brand forms one of the key
bases of competition within the industry. Considering the limited opportunities for
growth within the industry, it is imperative for manufacturers to distinguish themselves
in order to maintain market share. Changing consumer tastes and dietary trends have

January 28 2010
further compelled producers to be innovative with packaging, marketing and labeling.

The $40 million expansion of the W.K. Kellogg Institute for Food and Nutrition Research
in 2007 reflects the importance of innovation as a key driver of growth.
LIFE CYCLE
Life Cycle Stage
The life cycle stage is mature
Life Cycle Reasons

• While volume and prices have increased modestly in recent years, a mature market
has provided limited growth opportunities
• The number of firms and establishments has remained stagnant, principally due to
high barriers to entry
• Competition is fierce amongst industry players, with emphasis on innovation and
new product introductions
• Demand is relatively unresponsive to price, making branding and advertising an
important source of differentiation
• Competition from substitute products is intensifying
Life Cycle Analysis
The U.S. Cereal Production industry is in its mature lifecycle stage, characterized by a
saturated domestic market and a range of well established products and
manufacturers. High barriers to entry have restricted the number of industry
participants to a few, large producers who fiercely compete for market share. In the
five years leading up to 2009, there were two less industry enterprises in the country.
Due to a saturated domestic market, it is imperative for manufacturers to constantly
introduce new products in the marketplace, so as to differentiate themselves from their
competitors.
Industry value added declined at an average annualized rate of 3.4% between 2004
and 2009. During the same period, real GDP grew by 1.5% and household disposable
income increased by 2.1%. Therefore as the United States economy is growing, the
contribution of the Cereal Production industry is successively decreasing. Further,
Americans spend approximately 49% of their total food expenditure on out-of-home
purchases, thus reducing the volume of consumption of meals such as breakfast
cereals at home. While prices have increased modestly in recent years, the mature
market has provided limited growth opportunities. This trend suggests that the industry
is nearing the end of the mature stage of its lifecycle and may enter the decline stage
by the end of the outlook period.
The increasing capital investment in technology and equipment has effectively reduced
the need for additional labor, thereby restricting employment opportunities and
industry wage levels but improving overall profitability. Producers also typically rely on
the same market segments for their sales, that is, mainly grocery wholesalers and
retail supermarket chains. While exports have been growing steadily, their share of

January 28 2010
industry revenue remains small. The industry is characterized by a few major players
continually sparring for market share which ebbs and flows each year, one that is a
sure sign of a stagnant and mature industry.

January 28 2010
Industry Conditions
BARRIERS TO ENTRY
Barriers to entry in this industry are high
These barriers are increasing
The barriers to entry in the US Cereal Production are very high. The biggest threat
facing potential new entrants is the extremely well entrenched position of the
industry's major players. These companies enjoy high brand and customer loyalty and
have considerable resources to invest in advertising and promotions to protect and
grow their market share. Further, the major players enjoy favorable contracts with key
suppliers such as grocery stores and supermarkets that maybe difficult for new
entrants to secure.
All of the industry's major players have very strong product portfolios with most of the
world's best known cereal brands being owned between them. Enormous advertising
budgets allow them to aggressively promote their products through a range of media
outlets that are simply inaccessible to new entrants.
Incumbent firms also enjoy efficiencies created by economies of scale and scope.
Lower per unit costs of production and varied product lines combined with high levels
of investment in technology and equipment make competition very difficult.
Nevertheless, new entrants have established themselves within the industry, with the
majority in the low-priced, non-branded segment, while some smaller players have
managed to carve out regional market niches.
TAXATION
There are no industry specific taxes imposed on the manufacture of breakfast cereal
products in the United States. However, industry players are subject to corporate
income tax, which varies between 15% and 35% depending on company net revenue.
INDUSTRY ASSISTANCE
The level of Industry Assistance is low
The trend of Industry Assistance is steady

January 28 2010
Key Tariffs
Low High
Goods
Rate* Rate*
Tariff rate
1.1 14.9
(percent)
*Percentage of value unless otherwise specified
Tariffs
The level of industry assistance in the cereal manufacturing industry is low. Imports are
however, subject to certain tariffs as imposed by the United States International Trade
Commission (USITC) and vary depending on the stage of production.
Prepared foods obtained by the swelling or roasting of cereals or cereal products

attract a tariff rate of 1.1% per kilogram imported. There is a 5.6% tariff per kilogram
on prepared foods obtained from un-roasted cereal flakes or from mixtures of un-
roasted and roasted cereal flakes or swelled cereals in airtight containers, not
containing apricots, citrus fruits, peaches or pears. Other prepared foods obtained from
un-roasted cereal flakes or from mixtures of un-roasted cereal flakes and roasted
cereal flakes or swelled cereals attract a rate of 14.9% per kilogram imported.
Research and development
The American Association of Cereal Chemists (AACC) is an international non-profit

organization of nearly 4,000 members who are specialists in the use of cereal grains in
foods. Based in St. Paul, Minnesota, the AACC disseminates scientific and technical
information to members in the grain-based foods industry and also hold short courses.
Further, they offer product sample checks and certifications for those manufacturers
who wish to enter the food industry but are unsure about the quality of their produce.
REGULATION AND DEREGULATION

The level of Regulation is heavy
The trend of Regulation is increasing
Public health and Product labeling
Production and labeling standards within the breakfast cereal processing industry is
primarily governed by the Food and Drug Administration (FDA), mandated by the
Federal Food, Drug, and Cosmetic Act (FD&C Act) and the Fair Packaging and Labeling
Act. The FDA's mission is to promote and protect the public health by helping safe and
effective products reach the market in a timely way and monitoring products for
continued safety after they are in use.
The Nutrition Lab

January 28 2010
eling and Education Act, which amended the FD&C Act requires most foods to bear
nutrition labeling and requires labels that bear nutrient content claims and certain
health messages to comply with specific requirements. It is the responsibility of the
manufacturers to remain current with the legal requirements for food labeling. Further,
the FDA has also instituted the Food Ingredient Safety Program that governs and
evaluates claims about ingredients, nutritional content and other such claims made by
food producers.
The United States, and indeed its consumers are demanding more stringent rules
relating to food labeling, advertising, packaging and other nutritional claims made by
manufacturers. Failure to abide by them can seriously impair a producer's credibility,
result in expensive product recalls, and be liable to civil or criminal penalties. Pending
enforcement of new FDA regulations has created new opportunities for food
manufacturers to differentiate themselves from the competition. Those who can
respond proactively rather than reactively to safety requirements can eclipse the
competition in terms of efficiency, quality and brand integrity.
Environmental Regulation
The Environmental Protection Agency (EPA) and state governments enforce

environmental issues pertaining to the food processing industry. Various federal
environmental regulations and statutes, such as the Clean Water Act (CWA), Clean Air
Act (CAA), Pollution Prevention Act (PPA), and Resource Conservation and Recovery Act
(RCRA), have changed the way processing facilities handle their products and dispose
of their waste. The CWA's increasingly rigorous regulations for discharging wastewater
are the primary regulatory drivers for the food processing industry. RCRA regulations
typically apply only to solid waste disposal issues.
Most federal and state regulations and statutes are typically met with resistance from
private industry. However, the federal pollution prevention principles and the
subsequent development of clean technologies have been viewed as ways to provide
cost savings and improve product quality. Further, adherence to these regulations can
improve public sentiment towards companies or industries that pursue their
implementation. Pollution prevention has also proven to be an effective means of
reducing compliance and treatment costs for food manufacturers.
Pollution prevention and clean technologies are meant to focus on a multimedia (i.e.,
air, water, and land) approach to reducing waste. Solid waste and wastewater
discharges tend to dominate activity for implementing pollution prevention advances.
Unless located in remote areas, most food processing facilities pre-treat and discharge
wastewater directly to a publicly owned treatment plant. When a facility discharges any
waste to the environment, they are required to have a National Pollutant Discharge
Elimination System (NPDES) permit as mandated in the CWA.

January 28 2010
The EPA is looking for several ways to promote voluntary pollution prevention. The PPA
lacks the regulatory powers needed to force companies to implement prevention
practices into their production processes. Agencies are exploring ways to write more
flexible permits to allow companies to make process changes without having to be
subjected to lengthy bureaucratic formalities. Environmental agencies are encouraging
pollution prevention by reducing the cost of a permit and extending the compliance
schedules for companies that are proactive in their commitment.
COST STRUCTURE
Year: 2009
Item Cost %
Purchases 53.9%*
Wages 8.2%*
SG&A 7.1%*
Taxes 4.4%*
Depreciation 3.1%*
Rent 1.1%*
Utilities 1.1%*
Other 9.8%*
Profit 11.3%*
Cost structures can vary widely among industry players, depending on their size and
scale of production, ease of access to production inputs, level of technology and capital
investments. The larger the manufacturer, the lower per unit cost of production tends
to be as they benefit from economies of scale. For example, in 2008 the gross profit
margin for Kellogg's was 44.0%, 35.7% for General Mills, 28.2% for PepsiCo and 18.5%
for Ralcorp Holdings.
There is a definite trend towards industry consolidation that is increasing the average
size of each of the manufacturers, especially so for major players such as Kellogg and
General Mills who have multiple establishments around the country. This further
suggests that per unit cost of production of cereal is decreasing as the benefits of
economies of scale result in cost savings. A further examination of the main
components of the industry cost structure is detailed below.
Profits

January 28 2010
In 2009, IBISWorld estimates that net profits will account for 11.3% of overall industry
revenue. The Cereal Production industry is characterized by high profit margins
primarily due to the high level of value addition during the production process. That is,
cereal manufacturers employ considerable resources and costs in terms of capital,
technology and branding that translate into high retail prices that are passed on to
consumers. The difference between production costs and prices received for final
products is therefore very high which is reflected in higher profit margins.
Purchases
IBISWorld estimates for 2009 reveal that purchases will constitute the largest
percentage of industry costs, at approximately 53.9% of overall revenue. Prices of key
production inputs such as corn, wheat, flour, sugar, oils and fats are the primary drivers
of overall purchase costs. Historically, prices of these commodities have been very
unpredictable and have subsequently impacted overall purchase costs. In 2009, it is
estimated that sugar and wheat prices will decrease substantially, thereby decreasing
the ratio of purchases to revenue. This should consequently, translate into increased
profitability as overall costs are lower.
However, purchases comprise a much smaller percentage of revenue compared to

most other food processing industries. The level of brand equity and added value
during production is very high in relation to the cost of commodity inputs. Other raw
materials required include paperboard containers and plastic packaging and additional
ingredients, such as oats, dried fruit, fats, oils, starch, malt, salt, gluten, vitamins,
preservatives, colorings, flavorings, emulsifiers and honey.
Selling, general and administrative costs (SG&A)
Expenses relating to selling, marketing, promotions and administration comprise the

second largest component of industry costs. Considering the importance of branding in
driving sales revenue, manufacturers invest heavily in aggressive advertising,
marketing and promotional activities. As a result, manufacturers have designed
sophisticated marketing and advertising strategies that aim to harness the power of
their brands to increase customer loyalty and retention rates. These include expensive
media advertisements, point-of-purchase tasting and displays, and related promotional
costs. In 2009, these costs are estimated to account for 7.1% of revenue.
Wages and Salaries
Wages and salaries are estimated to account for 8.2% of overall revenue in 2009. On
average, wages have comprised around 7.8% of industry revenue over the past five
years, and have generally exhibited a downward trend. This outcome is consistent with
the rising level of capital investment in technology, plant and equipment that aims to
increase productivity without the need for additional labor costs.
Other costs

January 28 2010
Other costs that can significantly affect the industry include overhead expenses such
as logistics and distribution, depreciation, taxes, interest rates, research and
development costs, and utility costs. Collectively, IBISWorld estimates that in 2009,
these costs represent approximately 19.5% of total industry expenses.
Distribution costs also form an important part of the cost structure as producers
directly supply retail outlets like supermarkets and grocery stores, and attempt to
cover as much of the domestic market as possible. The sharp fall in the price of crude
oil over the 2009 period, which is expected to be 48.3% lower than the previous year,
should translate into significant savings. Despite efficiencies in supply chain
management, players servicing overseas export markets would have been most
severely affected, especially given the sharp appreciation of the US Dollar.

January 28 2010
CAPITAL AND LABOR INTENSITY

The level of Capital Intensity is high
• Major players have access to large capital investment budgets

• Adoption of most efficient technologies and large scale automation equipment
• Rising productivity of employees, combined with falling average wages
Cereal Production requires substantial amounts of capital investment, which leads to a

high capital/labor intensity. IBISWorld estimates that the capital to labor ratio in this
industry is approximately 2.6:1. This means that cereal producers require only $2.60
worth of labor for every $1 worth of capital invested.
Modern manufacturing plants require high levels of capital expenditure on

sophisticated technology and equipment that aim to increase productivity without the
need for additional labor. This is reflected in all of the industry's major players, who
have undertaken a significant amount of capital expenditures in the past five years. For
example, General Mills incurred total capital expenditure of $522 million relating to
land, buildings and equipment as at May 2008. Similarly, Kraft Foods spent $1.2 billion
in capital expenditures in fiscal 2007 which were primarily to modernize production
facilities and implement productivity initiatives.
However, it is important to note that the level of capital intensity varies considerably
with the size of the manufacturer. Small to medium sized facilities will have a higher
capital to labor ratio, as they lack the resources to invest in expensive technology and
equipment and have to employ additional labor in order to increase production
volumes.
TECHNOLOGY AND SYSTEMS

The level of Technology Change is high
The major technological change in recent years within this industry has been the
automation of the traditional mixing/baking process. Hulling and separating equipment
for oil seed products have been engineered to improve production efficiency and
control protein. Separators use mechanical and pneumatic operations to efficiently
remove hulls from cotton seed, sunflower seed, and various other oil bearing seeds and
nuts. Design of the cylinder, cylinder knives, breast bars and breast knives have been
used by snack food producers to make the hull removal clean and sharp, thus
minimizing losses from absorption. The result is less environmental discharge and cost
savings since waste disposal is expensive and minimizing product and by-product loss
reduces the quantity of raw materials required.

January 28 2010
Other major developments relate to computerization of processes and stocks, and

improved packaging. Packaging efficiency has improved with a variety of packaging
equipment including collators, conveyors, spiral chutes, carton drops and automated
case packers.
Technological change has also come in the form of labor-saving machinery as the
industry's investment in new plant and equipment has increased, especially since the
early 1990s. The result has been reduced labor costs and falls in employment levels
and wages over the past decade. This has enabled producers to increase profits,
thereby creating higher investment levels in production.

January 28 2010
INDUSTRY VOLATILITY
The level of volatility is high
Industry volatility in cereal manufacturing is a function of fluctuations in the cost of raw

materials, energy and oil prices, weather conditions, household incomes and changes
in downstream demand. Commodities like flour, corn, sugar and oils represent primary
inputs in the production process and any changes in their price impacts industry
supply. In the five years to 2009, prices of these commodities have been subject to
dramatic fluctuations, which has resulted in volatile industry performance (please refer
Current Performance).
Breakfast cereals maybe classified as a staple purchase, implying that demand is

relatively less sensitive to changes in price. Consumers purchase cereals frequently
and for a large number of American households, it forms an integral part of their
breakfast routine. However, due to the presence of a large number of substitute
products in the cereal segment, demand for a particular brand will still be affected by
price increases. The current economic climate has seen an increase in the popularity of
private label and in-house products which have adversely affected company profit
margins but still continue to drive overall industry sales.
GLOBALIZATION
The level of Globalization is medium
The trend of Globalization is increasing
The level of globalization in the U.S. cereal manufacturing industry is relatively low.
There is little foreign investment in the domestic industry although all of the major
players have an extensive presence in overseas markets. Kellogg's for example,
services over 180 countries, with manufacturing facilities located in 19 countries across
four continents. General Mills operates a joint venture partnership with the world's
largest food and beverage company, Nestle SA, which gives it access to over a 100
countries worldwide.
Similarly, Kraft Inc. conducts its global business through its subsidiary Kraft
International, which has operations in over 70 countries and sells its products in more
than 145 countries. PepsiCo's cereal division, Quaker Foods North America (QFNA)
operates solely within the United States and Canada, with four manufacturing facilities
across the country.
Industry players are also exposed to the effects of globalization through their
participation in international trade. The volume of industry exports decreased at an
annualized rate of 7.3% between 2004 and 2009. The total value of exports in 2009 is
estimated to total $425.1 million, accounting for 3.8% of domestic revenue. Imports
have performed much better, increasing at an annualized rate of 14.0% over the same
period, and are forecast to comprise 4.4% of domestic demand.

January 28 2010
Key Factors
KEY SENSITIVITIES
The key sensitivities affecting the performance of the Cereal Production industry
include:
Domestic Price - Crops - Coarse Grains

Description: The cost of raw material inputs such as grains.
The price of grains is impacted by its availability, which in turn, is a function of weather
conditions. The impact is that profitability is eroded by higher purchasing costs. Over
the past five years, grain prices have been extremely volatile, which has affected
industry supply and costs.
Domestic Price - Crops - Sugar Cane

Description: The price of sugar cane.
The price of sugar is also an important determinant of profitability as it is a key raw

material needed to make breakfast cereals.
Downstream Demand - Soft Drink, Baked Goods & Other Grocery Wholesaling
in the US
Description: Downstream demand for the industry's products.
This industry is a critical link to a wide range of retailers as they negotiate terms such
as shelf space and price margins. It is therefore necessary to have a good working
relationship such distributors. Hence, their demand for breakfast cereal is paramount to
industry success.
Downstream Demand - Supermarkets & Grocery Stores in the US

Description: Downstream demand for the industry's products.
The vast majority of purchases occur at the retail level, in particular through
supermarkets and grocery stores, which in turn affect demand at the wholesale level.
Supermarkets are therefore, a key barometer of industry demand.
KEY SUCCESS FACTORS

The key success factors in the Cereal Production industry are:
• Ability to adapt to change

A key factor to industry success is the ability to anticipate, and respond to changes
in consumer preferences through constant innovation and new product
introductions.

January 28 2010
• Ability to pass on cost increases

Given the volatility of commodity and energy prices, the ability of producers to pass
on unexpected cost increases down the supply chain is vital to maintaining
profitability
• Product Differentiation
In an industry that is stagnant and mature, product differentiation is one of the most
important factors in maintaining market share and increasing sales revenue. The
primary goal here is to attempt to reduce the directness of competition.
• Supply contracts for key inputs

Reliable contracts with suppliers of key raw materials such as flour, corn, wheat,
and sugar, considerably reduce supply volatility. Guaranteed supplies at fixed prices
minimize supply costs and aid production planning.
• Economies of scale and scope

The scale and breadth of production largely determines marginal costs while also
impacting on the volume which a producer is able to supply - a key determinant of
market share success.

January 28 2010
Key Competitors
MAJOR PLAYERS
Market Share
Market
Major Player Share
Range
34.2%
Kellogg Company
(2009)
31.2%
General Mills, Incorporated
(2009)
14.2%
Kraft Foods, Incorporated Class A
(2009)
8.0%
PepsiCo, Incorporated
(2009)
12.4%
Other
(2009)
PLAYER PERFORMANCE
Kellogg Company
Brand/Trading Name(s): Kellogg's Corn Flakes, Frosted Flakes, All-Bran, Apple Jacks,
Cinnamon Crunch Crispix, Cocoa Rice Krispies, Disney's, Fruit Loops, Mini-Wheats,
Nutri-Grain etc
Market Share: 34.2%
The Kellogg Company, founded in 1906 and incorporated in Delaware in 1922, is the
world's largest producer of breakfast cereals and one of the largest producer's of
convenience food products. Kellogg's services over 180 countries, with manufacturing
facilities located in 19 countries across four continents. The company's brand portfolio
includes some of the world's most iconic and recognizable names including; Keebler,
Pop-Tarts, Rice Krispies, Special K, Apple Jacks, Fruit Loops and Nutri-Grain.
Today, in spite of facing extremely difficult operating conditions Kellogg's has managed
to consistently post increases in sales revenue and net profits since 2003. Revenue
grew at an annualized average rate of 7.5%, while net profits increased at an average
annual rate of 8.8%, over the same time period. This was amidst an industry
confronting rapidly rising prices in several of its key inputs including flour, wheat, corn
and sugar. For instance, the average domestic price of flour in the United States rose
by an average of 13.3% between 2003 and 2008. This was further complemented with
a 1.9% increase in domestic sugar prices and a staggering 16.6% increase in the price
of corn, over the same time period. The recent financial performance of the company is
detailed below.

January 28 2010
For the 9 months ending 3 October 2009, segment revenue increased by a modest
2.2% to $6.6 billion, driven by higher pricing, partially offset by lower volumes. The
retail cereal product group grew by 2%, largely due to increased investment in the
company's core brands. Consequently, Special K, Raisin Bran and Kashi performed
strongly, responding to increased advertising and successful promotions. The company
discontinued some on-the-go cereal products that became less attractive to consumer
in the recessive economic climate due to their higher prices. Operating profit increased
by 7.0%, primarily driven by higher pricing and cost savings from the cost reduction
and productivity initiatives and media deflation.
In 2008, segment revenue increased by 8.6% to $8.5 billion, driven by input-cost

related higher pricing and increases in volume. Retail cereal sales grew 3%, while the
retail snacks segment posted growth of 6% and the frozen and specialty channels
increased revenue by a strong 9%. Retail cereal sales were also stimulated by
innovation and new product introductions such as Townhouse and Cheez-It Duoz.
Kellogg experienced net sales growth across all its product categories in a year that
saw unprecedented increases in commodity prices, testament to the power of its
brands. Reflective of the revenue growth, operating profit increased 7.6% primarily due
to higher pricing and lower exit costs that were partially offset by higher advertising
and commodity costs.
During 2007, the company's overall net sales increased 8.0% on the back of strong
internal growth across cereal sales in all major operating segments. The North
American segment reported a net increase of 5.9%, with a 3.0% gain in retail cereal
sales, while its international segments (comprising Latin America, Europe and Asia
Pacific) collectively achieved a net growth of 12%. Despite a strong sales performance,
operating profit in the North American segment was dampened by continued
commodity cost pressures and significantly higher up-front costs associated with cost
reduction initiatives.
In the 2006 financial year, Kelloggs' total revenue increased by 7.2% with a marginal
increase in net profits of 2.4%. North American retail cereal sales grew by 3.1%, in
spite of a 20.0% increase in the price of sugar combined with a 25.9% increase in the
price of corn. The comparatively moderate increase in total profits maybe attributed to
increased expenditure in cost reduction and brand building initiatives, such as
marketing, selling and promotions, particularly in the company's European operations.
However, favorable movements in domestic key demand drivers such as household
disposable income (which rose by 3.1%) and clever product innovations helped
Kellogg's sustain growth in its North American segments. For example, the company
introduced organic versions of their popular "Rice Krispies" and "Raisin Bran" product
lines, in response to an increasingly health conscious marketplace. This translated into
a segment operating profits increasing by 7.1% to total $1.3 billion.
The 2005 period saw the company once again, post strong financial and operating
results with total revenue of $10.2 billion. Overall sales revenue across all segments
increased by 5.9%, with an 6.9% increase in the North American cereal segment on the
back of a strong performance in the United States and Canada. Company net profits
during the year increased by 10.1%, as overall operating costs were reduced in the

January 28 2010
light of continued investments in cost-saving initiatives. Further, modest increases in

the prices of flour and sugar were offset by a 22.2% decrease in corn prices, to
favorably influence overall industry demand and revenue.
During 2004, Kellogg's posted total net revenue of $9.6 billion representing an annual
increase of 9.1%. The North American retail cereal segment posted growth of 2.0%,
combined with strong performances in all of the company's international segments
most notably, a 16.1% increase in overall European net sales. The North American
segment overall, grew by 7.0% while operating profits increased by 9.4%, totaling $1.2
billion. Sustained company initiatives in improving production efficiencies and
consequent cost reductions have primarily contributed to solid growth in profit margins.
Some of these initiatives include consolidation of plant operations in Australia,
manufacturing capacity rationalization in Latin America and a plant workforce reduction
in the United Kingdom. Additionally, the company also undertook similar efficiency
initiatives in its North American segments combined with the 2003 disposal of an
unsustainable manufacturing facility in China.
Kellogg Company (North American segment) - financial performance

Million Dollars % change Million Dollars % change
Year Sales Growth Operating Income Growth
2004 6369.3 N/C 1240.4 N/C
2005 6807.8 6.9 1251.5 0.9
2006 7349.8 8.0 1340.5 7.1
2007 7786.0 5.9 1345.0 0.3
2008 8457.0 8.6 1447.0 7.6
03/10/2008 6431.0 N/C 1163.0 N/C
03/10/2009 6574.0 2.2 1244 7.0
Source: Annual Report
General Mills, Incorporated

Brand/Trading Name(s): Big-G cereals
Market Share: 31.2%
General Mills is the world's sixth largest food manufacturer, and the second largest
producer of breakfast cereal in the United States. The company owns a range of
household brand names including; Cheerios, Pillsbury, Haagen-Dazs, Chex, Wheaties,
Trix, and Lucky Charms, that service most food categories across the industry. The
cereal segment of its business, dubbed "Big G Cereals" is the most significant source of
revenue, representing 22% of North American retail sales in 2008. The company also
enjoys a strong and pervasive international presence, with its products being sold in
over 100 countries accounting for approximately 19% of total sales. General Mills has
also undertaken several key joint venture partnerships, most notably, with French food
giant Nestle SA.
In 2008, like many of its competitors in the food and beverage industry, General Mills
faced tough operating conditions marked by increasing commodity prices and
recessive macro-economic conditions. Despite these inhibitors, the company has

January 28 2010
continued to increase sales and profitability, and has managed to boost margins from
35.2% in 2005, to 36.1% in 2007. Increasing penetration into new channels such as
super-centers, drug and discount stores, and convenience stores combined with
innovative product lines have helped General Mills retain its market share while
increasing profits. Following is brief discussion of the company's recent financial
performance:
In 2009, net segment sales increased 10.8% to $10.1 billion, largely driven by higher
pricing and a favorable product mix that added 7 percentage points of growth and
volume on a tonnage basis contributed 4 percentage points of growth. Big G cereals
sales increased 11%, driven by growth across the portfolio, including gains on
Multigrain Cheerios, Honey Nit Cheerios, Cinnamon Toast Crunch and Fiber One
cereals. Segment operating profit increased 12.0%, driven by net price realization and
volume growth. These were partially offset by increased supply chain input costs of
$338 million, a 19% rise in consumer marketing expenses and higher administrative
costs.
For the fiscal year ended May 25, 2008, overall company net sales grew 9.7%, totaling
$13.7 billion. Strong performance in the company's North American and International
retail segments spearheaded the growth, which was driven by high volumes, cost
savings initiatives and net price realization (i.e. the ability to pass on price increases to
consumers). The "Big G" cereals segment grew by 4.9%, driven by strong performance
in core brands such as 'Cheerios', and 'Fiber One'. Favorable movements in key macro-
economic variables such as household disposable income (increase of 1.7%) and
interest rates (decreased 50 basis points) further alleviated otherwise difficult industry
conditions. This is further evidenced by the 13.2% increase in overall net income, which
amounted to $1.3 billion.
During 2007, overall company revenue grew 6.2%, with the "Big G" cereal segment
reporting a 1.6% increase in net sales. This was driven by the launch of new product
lines such as 'Fruity Cheerios' and 'Nature Valley' cereals, combined with strong
performances in the company's Snack Foods and Baking Products divisions. Overall net
operating profits increased by 5.0%, a moderate increase in comparison to 2008,
primarily because of unduly high input prices. The price of wheat rose by a staggering
39.0%, while the price of corn shot up 48.1% over the same period. The ability of the
company to command a premium price and leverage its high value brand portfolio is
critical to its sustained economic performance in highly hostile operating conditions. To
this end, there was an 8.2% increase in media and brand building expenditure in
attempt to maintain and defend market share against cheaper imports.
In the 2006 fiscal year, company sales revenue grew by 3.6%, driven mainly by volume
growth and production efficiencies in the North American and International retail
segments. In contrast however, the "Big G" cereal segment net sales decreased by
0.9% and company net income decreased by 12.1%, due to a disproportionate increase
in overall costs of production and delivery. Once again, selling and promotional
expenses accounted for the bulk of operational costs, comprising nearly 19.0% of
overall net sales. Further, the company undertook major restructuring initiatives during

January 28 2010
the year including the closure of its Swedesboro, New Jersey plant and termination of a
product line at its Montreal facility.
The 2005 year saw General Mills record a modest increase in overall revenue of 1.7%,
amounting to $11.3 billion. However, the "Big G" cereal segment declined by 5.0%,
despite only moderate fluctuations in the prices of key inputs such as flour, corn and
sugar. This was due to decreased shipments as a result of pricing and promotional
shifts in the ready-to-eat cereal segment that adversely impacted overall volume
levels. Reductions in selling and promotional costs by $25 million, combined with falling
debt levels and a subsequent 10% decrease in interest expenses were the factors
chiefly responsible for the 17.5% increase in overall net income.
Overall company net sales grew by 5.1% in the 2004 fiscal year, with a 2.2% growth in
the "Big G" cereal segment. New product lines such as 'Berry Burst Cheerios' and
volume gains by other key brands such as 'Honey Nut Cheerios' have positively
contributed to segment growth. Selling, general and administrative costs decreased
substantially, primarily driven by lower merger-related costs in integrating the
'Pillsbury' brand into the company. Lowered interest rates combined with relatively
stable commodity prices helped achieve a net income of $1.1 billion, representing an
increase of 14.9%.
General Mills, Inc. (cereals segment) - financial performance

Million Dollars % change
Year Revenue Growth
2004 2020.0 N/C
2005 1919.0 -5.0
2006 1902.3 -0.9
2007 1932.9 1.6
2008 2028.0 4.9
General Mills, Inc. (U.S. retail segment) - financial performance
Year Revenue Growth Operating Income Growth
2007 8491.3 N/C 1896.6 N/C
2008 9072.0 6.8 1971.2 3.9
2009 10052.1 10.8 2208.5 12
Kraft Foods, Incorporated Class A

Market Share: 14.2%
Incorporated in 1903, Kraft Foods Inc. is the largest food and beverage company in
North America, and the second largest in the world. The company boasts over 103,000
employees, spanning 70 countries worldwide with overall revenue of $37.2 billion in
2007. Its business spans five main consumer segments; snacks, beverages, cheese,
grocery and convenient meals. Kraft Foods owns some of the country's best known

January 28 2010
brands such as Oreo, Nabisco, Raisin Bran, Planters Nuts, Ritz, Honey Maid Grahams
etc.
Headquartered in Northfield, Illinois, the company conducts its global business through
its subsidiaries; Kraft Foods North America Inc. and Kraft Foods International Inc. The
company has manufacturing operations in 68 countries and sells its products in more
than 145 countries. Kraft Foods North America operates in the United States, Canada
and Mexico, and manages its operations by product category, while Kraft Foods
International manages its operations by geographic region. Kraft Foods North America's
reportable segments are Beverages; Cheese, Canada and North American Foodservice;
Convenient Meals; Grocery; and Snacks and Cereals. International's reportable
segments are Europe, Middle East and Africa; and Latin America and Asia Pacific. In
2008, the North American Snacks segment accounted for approximately 12.2% of
company net sales.
Effective August 2008, Kraft completed the disposal of its 'Post' cereals business, which
were reflected as discontinued operations on the statement of earnings and the 2007
results were accordingly adjusted to reflect the same.
The 2008 financial year saw segment revenue increase by 3.0% to $5.0 billion, driven
primarily by higher average selling prices and the impact of the LU Biscuit acquisition.
Biscuit revenue grew due to input-cost driven higher pricing, but partially offset by an
unfavorable product mix and lower volume. Flagship brand Oreo performed strongly,
aided by new product introductions such as Kraft macaroni and cheese crackers and
Nilla Cakesters. Snack bars net revenue declined, driven by volume declines in
breakfast bars due primarily to product pruning initiatives. Segment operating income
decline 12.7% due to higher input costs, lower volumes, and higher restructuring and
promotional costs.
The 2007 fiscal year saw overall net revenue increase by 8.4%, with the North
American Snacks & Cereals segment reporting a 2.6% increase in sales revenue. This
was primarily due to higher shipments and favorable movements in most of the key
demand drivers. New product introductions in the snack and cereal bar categories
combined with continued volume growth across its established brands, contributed to a
22.8% increase in segment operating income, totaling $1.02 billion. However, company
net operating income declined by 15.4%, largely due to higher manufacturing, selling
and promotional costs combined with dramatic increases in the prices of key inputs
such as wheat and corn.
Overall net sales in the 2006 period moderately increased by 0.7%, with a 1.7%
increase in revenue within the Snacks & Cereals segment. Operating income within the
cereals segment declined by 10.9%, principally due to higher commodity prices,
restructuring costs and increased marketing, selling and administrative costs. In
contrast, total company net operating income increased by 16.3%, as proceeds from
the 2005 sale of Kraft's sugar confectionary business was reflected in the current year
financial statements.

January 28 2010
The North American Snacks and Cereals segment in 2005 posted an increase in net
revenue by 7.0%. The industry was helped by a sharp, 22.2% decline in corn prices
along with an 8.9% fall in domestic wheat prices. The ability of Kraft to exploit its brand
value allows it to continue to charge a price premium thereby substantially increasing
profit margins. New product introductions and sustained advertising and promotional
activities, further helped increase segment volumes and revenue. Operating profit for
the cereals and snacks segment increased by 18.5%, totaling $930.0 million.
In 2004, net revenue in the U.S. Snacks and Cereals segment increased by 9.4% as
volume growth was strong along with increased pricing in cereals and nuts. Changes in
consumer nutrition trends resulted in higher sales of health-based snack foods such as
savory biscuits and snack bars. Cereal production volumes also increased, mainly due
to new product introductions and expanded distribution in the ready-to-eat cereal
market. Segment operating income declined by 24.9%, once again, due to
unsustainably high operating costs especially in the areas of marketing, promotions
and research and development costs.
In 2003, the U.S. Snacks and Cereals segment experienced growth in net revenue of
5.2%, totaling $5.3 billion. This was a result of higher cereals prices, partially offset by
higher promotional spending. Cereals volume was flat as the contribution from new
products mitigated the impacts of competitive new product entries and low
carbohydrate diets. Operating income totaled $1.05 billion million due to higher
marketing spending and increased commodity and post-employment benefit costs,
partially offset by the contribution from volume growth.
Kraft Foods, Inc. (North America Snacks & Cereals segment) - financial performance
2003 5342 N/C 1046 N/C
2004 5843 9.4 785 -25.0
2005 6250 7.0 930 18.5
2006 6358 1.7 829 -10.9
2007 6526 2.6 1018 22.8
Kraft Foods, Inc. (U.S. snacks segment) - financial performance
2007 4879.0 N/C 607.0 N/C
2008 5025.0 3.0 530.0 -12.7
30/09/08 3736.0 N/C 532.0 N/C
30/09/09 3717 -0.5 530.0 -0.4
PepsiCo, Incorporated
Brand/Trading Name(s): Quaker Foods North America (QFNA), Quaker Oatmeal, Life
cereal, Cap'n Crunch
Market Share: 8.0%

January 28 2010
PepsiCo Inc. is a leading global manufacturer, distributor and marketer of food and
beverages. PepsiCo is a conglomerate comprised of four divisions; PepsiCo Beverages
North America, PepsiCo International, Frito-Lay North America (FLNA) and Quaker Foods
North America (QFNA). In 2008, the company's revenue totaled over $43 billion, with
net profits of $6.9 billion. PepsiCo also owns some of the world's most recognizable
food and beverage brands including; Pepsi-Cola, Mountain Dew, Diet Pepsi, Lay's,
Doritos, Tropicana, Gatorade and Quaker.
In 2001, the company merged with The Quaker Oats Company to form QFNA, in order
to remain competitive in the breakfast cereals segment. As a result, PepsiCo acquired
household brand names such as Quaker Oats, Cap 'N' Crunch, Chewy Granola Bars,
Mother's Natural Foods. QFNA operates four manufacturing plants in the United States,
and sells rice, pasta, and various syrups in addition to cereals. Recent financial
performance of the QFNA division is outlined below:
For the 9 months ending September 5, 2009, QFNA revenue increased by 0.5% to total
$1.3 billion. This increase reflects volume growth of 1.0%, driven by double digit growth
in ready-to-eat cereals, largely offset by a low single digit decline in Oatmeal and a
double digit decline in Roni. Favorable net pricing, driven by price increases taken last
year was partially offset by an unfavorable product mix. Further, unfavorable foreign
currency reduced net revenue growth by almost 2.0%. Operating profit grew 3.8%,
primarily reflecting the net revenue growth. The impact of the final insurance
settlement gain in the first quarter of 2009 related to the Cedar Rapids flood was offset
by the related business disruption insurance recoveries recorded in the prior year.
In fiscal 2008, net segment revenue increased 2.3% to $1.9 billion, whilst volumes fell
1.5% due to the negative impact of the Cedar Rapids, Iowa flood that occurred at the
end of the second quarter. The volume decrease reflects a low single digit decline in
Quaker Oatmeal and ready-to-eat cereals. The revenue growth reflects higher pricing
actions initiated to offset input cost pressures, while foreign currency movements had
only a nominal impact on revenue growth. Operating profits increased by 2.5%,
reflecting the modest revenue growth and lower advertising and marketing costs,
partially offset by higher commodity prices. Further, the negative impact of the flood
was mitigated by related business disruption insurance recoveries, which contributed
5% to operating profit.
Segment net revenue increased by 5.1% over 2007, with a 2.0% increase in actual
volumes. This reflected the moderate growth in 'Oatmeal', 'Life', and 'Cap 'N' Crunch'
cereal brands, partially offset by a sharp decline in the rice and pasta brand, 'Rice-A-
Roni'. Operating profits also increased by 2.5%, primarily reflecting the net revenue
growth across the segment.
QFNA's net revenue for 2006 grew by 3.0%, with volumes increasing by 1.1%. This was
essentially driven by volume growth across the segment, most specifically in the 'Life'
cereal brand. Compensating for this growth was the modest decline in 'Aunt Jemima'
syrups and mix category. High commodity and energy prices were largely offset by
lower advertising and marketing costs, which effectively increased operating profit by
3.2%, totaling $554 million.

January 28 2010
The QFNA segment posted a strong performance in the 2005 fiscal year. Net revenue
increased 12.6%, with an 8.9% growth in volume, primarily driven by solid results from
the Oatmeal, Aunt Jemima, and Pasta Roni product lines. Correspondingly, operating
profits also increased by 13.1% aided by falling commodity prices and a depreciating
American dollar, which increased industry exports by 13.8%.
QFNA net revenue increased by 4.0% to $1.5 billion during 2004 as volume growth of
3.2% was once again driven by strong performance in Oatmeal and Life cereal brands.
Life cereal benefited from the introduction of its 'Honey Graham Life' line in the first
quarter. Operating profits however, grew by only 1.1%, as favorable sales and volume
growth were offset by volatile commodity prices and increased spending on advertising
and promotions.
PepsiCo (Quaker Foods North American segment) - financial performance

2004 1526 N/C 475 N/C
2005 1718 12.6 537 13.1
2006 1769 3.0 554 3.2
2007 1860 5.1 568 2.5
2008 1902 2.3 582 2.5
05/09/08 1292.0 N/C 422.0 N/C
05/09/09 1299.0 0.5 438.0 3.8
OTHER PLAYERS
Malt-O-Meal Company
Estimated Market Share: 5.3%
Beginning as the Campbell Cereal Company in Minnesota during 1919, this cereal
producer became the Malt-O-Meal Company in 1953. The company manufactures well-
known hot wheat cereals and instant oatmeal, as well as discount cold cereals that
imitate better-known brands. Its cereals are sold under the Malt-O-Meal brand and
private-label store brands. Some of the better known products include Coco-Roos,
Crispy Rice, Honey Buzzers, Toasty O's, and Tootie Fruities. Recently introduced
products include Toasted Cinnamon Twists, Cinnamon Toast Crunch, Honey Graham
Squares, Golden Grahams and Big Bowl Instant Oatmeal. In 2002, Malt-O-Meal
purchased Quaker's bagged cereal business from PepsiCo. Limited company financial
data indicates that for 2003, company sales totaled about $500 million, up from $400
million the previous year. By 2005, the ready-to-eat breakfast food segment increased
by 19% in volume largely because of the flexible choice it gave consumers of
purchasing its cereals in either boxes or bags. IBISWorld estimates that revenue has
continued to increase, totaling around $654.3 million in 2006.

January 28 2010
Ralcorp Holdings Inc.
Incorporated in 1996 in St. Louis, Missouri, Ralcorp Holdings are primarily engaged in
the manufacturing of private label ready-to-eat and hot cereal products. As of 2007, the
company was the country's largest producer of store-brand ready-to-eat and hot cereal
products with this segment comprising 61% of their overall net sales. Ralcorp has,
since its inception, acquired a number of complementary businesses such as Cottage
Bakery and Bloomsfield (2007), Western Waffles Ltd. (2006), Medallion Foods (2005),
and Bakery Chef (2004), in order to expand its production line and achieve economies
of scope.
Ralston Foods, a subsidiary, produces the company's flagship cereal brands; "Ralston
100% Wheat" hot cereal and "3-Minute Brand Oats". The company has managed to
perform consistently well in the past five years despite fierce competition, rising
commodity prices and waning consumer spending. In 2007, overall net sales amounted
to $2.2 billion, recording an increase of 20.7% compared to 2006.
During the 2007 fiscal year, Ralcorp's Cereal segment recorded an increase in net sales
of $157.4 million compared to 2006. This growth is primarily attributable to higher
average selling prices raised in an effort to offset rising raw material costs. The ready-
to-eat cereal segment was characterized by several new product introductions which
accounted for sales of $8.5 million during the year. The acquisition of Bloomsfield in the
previous year is estimated to have added an additional $10.2 million to the segment's
profit contribution, totaling $87.8 million.
For the year ended 2006, net sales in the Cereals, Crackers & Cookies segment grew by
8.4%, to $777.4 million. Cereal volumes alone grew by 5.8% compared to the previous
year, once again due to the result of higher average prices. The acquisition of Medallion
Foods in 2005 is expected to have increased segment operating profits by 12.3%,
totaling $77.6 million.
Net sales decreased by 9.2% in 2005, with segment subsidiaries Ralston Foods and
Bremner contributing $41.2 million and $13.8 million respectively. The ready-to-eat
cereal segment showed minimal growth during the year, in spite of new product
introductions and continued expansion with existing customers. Higher costs of freight,
raw materials, energy and warehousing costs impacted profit margins during the year,
which fell by $8.5 million.
During 2004, net sales for the Cereals, Crackers & Cookies segment grew by 10.6%,
mainly driven by the 13.1% growth in the ready-to-eat cereal category. Profits rose
11.4%, as higher costs for rice, corn, wheat, freight and energy were offset by
production efficiencies, favorable sales mix, and lower information systems expense.
For the year ended 2003, net sales for the cereals segment increased by 8.9%
compared to the previous year. This was primarily driven by hot cereals, where volume

January 28 2010
grew by 4.9% due to cold winter conditions. The segment's profit contribution was 9.7%
higher as fourth quarter profit benefited from the increased sales, reduced promotional
activity, lower expenses related to capital projects, lower freight costs, and a favorable
product mix.
Gilster-Mary Lee Corporation
Gilster-Mary Lee is a leading private label food manufacturer, headquartered in

Chester, Illinois. Gilster produces over 8,000 products in over 500 different private label
brands, including breakfast cereal, cake, baking mixes, cocoa, pasta, drink mixes and a
hospitality brand. In the cereal category, the company produces a number of variations
of popular brands such as Corn Flakes, Honey Frosted Flakes, Toasted Oats, Fruit
Whirls, Cinnamon Oats, Krispy Krunch etc. Approximately 4,000 employees work in 14
different manufacturing facilities across four states. The company-owned truck fleet
delivers products daily throughout the U.S. and Canada, as well as shipments destined
for markets throughout the world.
In March 1999, the company purchased Jasper Foods, which significantly strengthened
Gilster-Mary Lee's position in the private label microwave popcorn and cereal industry.
Most recent publicly available data suggests that in 2002, company sales amounted to
around $630.4 million. IBISWorld estimates that revenue totaled approximately $798.5
million in 2006. In 2007, Gilster-Mary Lee introduced an organic line of its 'Mother's Joy'
brand of products in response to changing consumer dietary concerns and tastes.
Ralcorp Holdings, Inc. (cereals, crackers and cookies segment) - financial performance
2002 656.0 N/C 70.1 N/C
2003 714.3 8.9 76.9 9.7
2004 789.9 10.6 85.7 11.4
2005 717.2 -9.2 69.1 -19.4
2006 777.4 8.4 77.6 12.3
2007 934.8 20.2 87.8 13.1

January 28 2010
Industry Performance
CURRENT PERFORMANCE
While the Cereal Production industry showed flakes of brilliance in the five years
leading up to 2009, industry revenue is expected to decline at an annualized rate 2.7%.
Consistently strong performances from all of the industry's major players over this
period were offset by sharp declines in revenue in the 2005 and 2006 periods. The
industry has been faced with substantial challenges during this period, with highly
volatile commodity prices, turbulent economic conditions and changing consumer
tastes and spending patterns. Industry participants have had to keep abreast of these
trends, and constantly innovate with new product introductions, packaging and labeling
improvements. The increasingly time poor consumer, along with increased availability
of cheap and convenient substitute products have further necessitated prudent
business strategies in order to retain market share. The following discussion provides
an overview of industry performance in the past five years, with all figures being
expressed in 2009 real (constant) dollars.
Revenue and consumption.
In 2009, the US Cereal Production industry revenue is expected to increase by 3.0% to

total $11.1 billion. The year is expected to be characterized by a substantial tempering
in key input prices, following two successive years of dramatic increases due to an
increase in food demand in developing countries, unfavorable weather conditions, and
a weaker US dollar. Changing dietary trends and the shift towards healthy eating and
living is expected to continue to drive consumption patterns, and consequently
determine the products producers choose to introduce. The emphasis on portability and
convenience will continue, with a trend towards smaller, bite-sized portions and greater
use of innovative packaging materials and styles. In terms of products, cereal bars and
nutrition bars containing nuts and fruits are expected to largely drive growth
opportunities, as they represent high margin, value-added products.
The Cereal Production industry in the United States is estimated to be worth $10.8
billion in 2008, recording a marginal increase of 1.4% from the previous year. This
positive trend is reflected in the performance of the industry's major players (top four
players account for approximately 85% of the market), all of whom posted increases in
net sales and operating profits over the 2008 period. Such an outcome was surprising
considering the drastic increases in commodity and energy prices during the year. The
domestic price of flour increased by 34.0% combined with a 38.8% rise in corn prices,
both of which, are key production inputs that significantly affect industry costs and
supply. All of the downstream demand industries were also adversely affected during
2008, most notably, the 5.0% decline in the Grocery Wholesaling industry. On a
positive side, real household disposable income increased by 1.7% over the year
combined with a 33.5% revenue increase in wheat farming and a 10.3% increase in
corn farming revenue. The staggering increases in the prices of wheat and corn are
estimated to have primarily contributed to the growth, as farmers had the ability to
pass on the price increases to manufacturers, thereby increasing their profit margins.

January 28 2010
During 2007, industry revenue grew by 5.8%, to total $10.5 billion. Dramatic increases
in domestic wheat and corn prices were, once again, responsible for the 69.2% revenue
increase in wheat farming and a 58.1% increase in corn farming revenue. Cereal
manufacturers are forced to pay market prices for their raw materials which are
subsequently passed on to wholesalers, retailers and, finally, to consumers. This may
be evidenced by the 7.9% increase in the net sales of market leader Kellogg's, and
corresponding increases in revenue amongst all of the industry's players. These price
increases however, do not seem to have dampened consumption levels, suggesting
that demand for staples such as breakfast cereals is relatively unresponsive to a
change in price. Consumers seek out alternative products within the same category,
such as the shift from traditional milk-based cereals to convenient, ready-to-eat
breakfast bars. This supports growth of overall industry revenue despite substantial
increases in the prices of certain products. Manufacturers have responded to these
changes with constant new product introductions, innovative packaging and aggressive
marketing and brand promotion strategies.
In 2006, industry revenue declined by 9.8% totaling $10 billion. The year was
characterized by increased costs of operating, especially in the areas of marketing and
promotions, as producers attempted to boost domestic consumption following the
slump caused by Hurricane Katrina in 2005. In addition to marketing their products
more fervently, producers also introduced new product lines to keep their consumers
engaged. Kellogg's, for example, introduced organic versions of its popular "Rice
Krispies" and "Raisin Bran" cereal brands.
The 2005 fiscal year was marred by the devastating effects of Hurricane Katrina, as
industry revenue decreased by 12.6%. The economic effects of the hurricane were far-
reaching, with over $150 billion in damages and large scale displacement and
unemployment in the affected areas of Louisiana, Mississippi, and Alabama. There was
also widespread damage to grain farms across the South, evidenced by declines in
revenue growth in all of the key supply industries, particularly wheat and corn farming.
Consumer sentiment also fell, reflected by the fall in domestic consumption.
Industry size, employment and wages.
The last five years have witnessed a moderate increase in participation in the Cereal
Production industry, with a 1.5% increase in the average annual growth of
establishments. In 2009, IBISWorld estimates that there will be 69 establishments,
employing approximately 15,250 people when compared to 64 establishments
employing 12,294 people in 2004. This is line with the trend of major players like
Kellogg and Kraft increasing acquisitions and investing in technology and equipment to
aid production efficiencies through automation and mechanization.
The average growth in employment over the same period was 4.4%, reflecting a
general trend of expansion through merger and acquisition activity. For example, in
2001, General Mills acquired the Pillsbury brand and in the same year, PepsiCo
purchased the Quaker Oats Company. Employment is forecast to decrease over time as
productivity increases with investments in technology and equipment which eliminates
the need to employ additional labor. Nevertheless, opportunities for future employment

January 28 2010
do exist as niche players may decide to enter the market to cater to changing
consumer tastes, especially in the ready-to-eat, convenience based breakfast cereal
bars. Further, the expansion of export markets into new countries has also increased
the scope for employment opportunities.
In the five years up to 2009, wages increased by an annualized average rate of 1.8%,
and are estimated to account for 8.2% of total revenue. Wages have risen much slower
than employment reflecting the effects of increased capital investment in stream-lining
production to maximize efficiency. As the level of capital intensity rises, labor
participation decreases and subsequently the level of wages fall. IBISWorld predicts
that this trend will continue in the future, as manufacturing becomes more technology-
focused, considerably reducing the need for human involvement.
International trade.
Over the five years to 2009, exports of breakfast cereal manufactured in the United
States decreased by an annualized rate of 7.3%. In 2009, total exports are estimated to
grow by 2.4% and total $425.1 million, accounting for 3.8% of industry revenue. This
result is primarily due to the dismal economic conditions that began over the second
half of 2008. Rapidly falling global demand, combined with the expected 11.3%
appreciation over 2009, drove the dramatic 53.4% fall in exports by the end of 2008. In
terms of export markets, Canada is estimated to account for the majority of US cereals,
with 58.4%, followed by Mexico, Guatemala, Taiwan and Honduras.
Imports increased by an annualized rate of 14.0%, in five years up to 2009. Total

imports for 2009 are expected to total $496.1 million, representing a growth of 8.4%
and comprising 4.4% share of domestic demand. Majority of the imports are expected
to originate in Canada, primarily because of its proximity and ease of access facilitated
by the North American Free Trade Agreement (NAFTA). Mexico is the second largest
importer of cereals into the United States, followed by the Ireland, Germany, the
Dominican Republic and Bolivia.
Production.
The volume of cereal produced in the United States in 2009 is projected to total 1.6
billion kilograms, representing a marginal increase of 0.1% from the previous year.
Overall, production costs have risen much faster than average cereal prices between
2004 and 2009. Flour prices grew annually by an average of 13.3%, while corn prices
increased by 16.6% over the same time period. As a result, manufacturers were
compelled to pass on these cost increases to their consumers, in order to continue to
maintain market share and profitability.
Consumer attitudes are also an important determinant of production and demand in

the industry. As the marketplace gets increasingly fragmented, consumer needs tend
to get more diverse. A recent trend within this industry has been a shift towards
healthy, convenient and functional options in favor of traditionally milk-based cereals
consumed at home. There is also a growing preference towards convenience-based

January 28 2010
products like smaller, bite-sized portions that are portable and can be consumed more
frequently. Manufacturers will therefore have to keep abreast of changing consumer
trends and continuously improve and innovate to avoid losing market share to
substitute products. The frequency of new product introductions by most of the major
players is testament to the importance of timely and adaptive responses to changing
trends.
Profitability.
The Cereal Production industry is highly profitable, with profits estimated to account for
an 11.3% share of total revenue in 2009. The extremely high level of value addition
during the production process, combined with a highly concentrated market allows
producers high gross margins and lower per unit production costs. Furthermore, as the
level of capital intensity within the industry increases, labor costs will correspondingly
decline resulting in improved profit margins. The significant size, brand and market
power of the industry's major players enables them to continue to remain highly
profitable regardless of volatility in the prices of raw materials, as they are able to pass
on increases down the supply chain and still command a price premium.
Total and per capita consumption of cereal products in the United States
Million Bushels Million Bushels Million Bushels Pounds (lb)
Year Corn used in cereal Oats Wheat Flour and cereal
2003 188.8 62.4 911.9 193.3
2004 184.6 63.0 906.7 192.2
2005 185.9 62.9 909.4 192.2
2006# 187.2 63.2 910.2 192.0
2007# 187.3 63.1 909.5 191.7
2008# 187.6 63.2 909.9 191.9
Source: US Department of Agriculture
HISTORICAL PERFORMANCE
Revenue and consumption
Per capita consumption of flour and cereal products in the U.S. declined steadily from
the early 20th century to the mid 1970s, as a result of changes in diet and lifestyles.
This trend continued until around 1980, after which industry per capita consumption
began rising again. Per capita consumption of flour and cereal products increased from
144.7 lbs. in 1980 to 182.3 lbs. by 1991, largely as a result of aggressive marketing
and promotional campaigns by producers.
The Cereal Production industry generated revenue of $13.2 billion (in constant prices)
during 1992 as per capita consumption of flour and cereal products increased to 184.7
lb. Strong revenue growth was experienced over the next two years, rising to $14.8
billion by the end of 1994. Although total consumption of wheat and oats decreased,

January 28 2010
the volume of corn used in cereal and other foods increased from 128 million bushels in
1991 to 150 million bushels by 1994.
In 1995, revenue declined to $14.5 billion as per capita consumption of flour and cereal
products declined to 190.3 lbs. and total oats consumption continued to fall. A
substantial 22.2% decline in revenue occurred during 1996 as a result of falling prices,
primarily due to market saturation. However, the situation stabilized during 1997, with
per capita consumption of flour and cereal products at 197.3 lbs. and volume of corn
used in cereal and other foods up to 182 million bushels. During 1998, revenue grew to
$11.6 billion as higher volume of corn used in cereal and other foods rose to 184 million
bushels, more than offsetting a slight decline in per capita consumption of flour and
cereal products and total consumption of oats and wheat.
Revenue grew strongly during 1999, up by 10%, as domestic demand increased rapidly
due to generally stable prices and an increase in wheat consumption. Per capita
consumption of flour and cereal products also increased, up to 195.9 lb. Growth slowed
during 2000, rising by 0.3% to $12.81 billion. This was mainly due to modest prices
(despite retail prices rising for cereal and bakery products) received from downstream
industries, thus eroding price increases achieved during the previous year. This
occurred in a market where volumes of wheat consumed increased substantially and
per capita consumption of flour and cereal products rose to 199.0 lb.
The year 2001 was characterized by fierce competition in the ready-to-eat cereals
sector of the industry, resulting in most players experiencing lower unit volume sales.
Overall, few major players achieved higher sales but were essentially flat across the
industry as a result of volume decline, while minor pricing/mix improvements arrested
revenue decline. Consequently, revenue rose by 1.1% to $12.9 billion during the year.
Sales revenue decreased rapidly by 23.1% to $9.95 billion in 2002 as per capita
consumption of flour and cereal foods was reduced to 191.7 lbs., representing a 1.6%
decline from the previous year. This was chiefly due changing dietary trends, as
Americans began to switch to low carbohydrate foods in an attempt to reduce fat
intake. Competition between industry producers was intense, a factor which is likely to
have led to price discounting during the year. An increase in prices of raw materials, in
particular grain, also impacted revenue negatively.
Industry size, employment and, wages
There were 43 firms operating 66 manufacturing establishments in the domestic

breakfast cereal processing industry in 1992. This increased marginally over the next
few years as new entrants were attracted by the industry's growth phase. In 2002,
there were 46 firms that operated 66 establishments around the country.
The industry employed 15,334 workers during 1992. This increased to 15,785 in the
following year, stabilized during 1994 before rising rapidly to 17,908 during 1995. This
dramatic increase, encouraged by strong past industry performance, was counter-
productive as revenue fell during the year. As a result, employment was reduced back

January 28 2010
to 15,878 workers the following year and to a further 14,396 in 1997 due to a dramatic
fall in revenue. In 1998, employment increased slightly and totaled 14,876, but
productivity during the year declined, which negatively impacted the industry. In 2000,
employment totaled 14,555 workers, which then declined to a low of 13,019 by 2002
due to productivity improvements.
Wages and salaries accounted for 7.6% share of revenue during 1992, comparing
favorably to similar food processing industries. It declined over the next two years,
down to 6.4% by 1994, as average wages were reduced. In 1995, higher employment
forced up total wages, and the ratio of wages to revenue increased to 7%. It increased
to 8.6% the following year as average wages once again rose. Wages began to decline
over the next two years to 1998, down to 7.5%, primarily due to reduced employment
and average wage levels. Wages further declined in 1999, down to 7% as slightly lower
average wages were awarded to workers. Share of industry revenue declined from
6.8% in 2000 to 6.5% in 2001, resulting from reduced employment and average wages,
combined with improved labor productivity (as measured by value added per
employee). In 2002, it rose to 7.9% of revenue due to rapidly falling sales.
Profitability
The U.S. cereal manufacturing industry has historically been highly profitable due to
large scale automation of processing and the high level of added value to its products.
The industry profit ratio (value added minus labor costs, divided by revenue) was
67.3% during 1992. It increased to 69.3% by 1994 as revenue was rising while labor
and raw material costs were declining. However, the profit ratio was down to 62.1% by
1996 as the situation reversed itself. It improved to 64.4% in 1997 and by 1999 the
ratio had increased to 69.2%, as wages and commodity costs were simultaneously
reduced, followed by higher sales in 1999. The industry profit ratio was 69.5% as at
December 31, 2000 and this continued to increase until 2001, up to 69.8%, helped by
falling wages and employment. The profit ratio fell to 66.8% in 2002 because of falling
sales.
Total and per capita consumption of cereal products in the United States
Pounds (lb)
Corn used in cereal Oats Wheat Flour and cereal
and other foods consumption consumption products
(million bushels) (million bushels) (million bushels) (per capita)
1991 128 76.6 789.5 182.3
1992 129 77.4 834.8 184.7
1993 140 73.0 871.7 189.3
1994 150 70.0 853.0 192.0
1995 161 67.0 882.9 190.3
1996 172 63.0 890.7 196.3
1997 182 59.0 914.1 197.3
1998 184 57.0 909.7 196.1
1999 185 56.8 928.8 195.9

January 28 2010
2000 185 56.7 949.6 199.2

2001 186 59.2 926.4 195.0
2002 187 60.2 918.6 191.7
Source: USDA/Economic Research Service

January 28 2010
Consumer price index for cereals and bakery products

Units
Index
1991 145.8
1992 151.5
1993 156.6
1994 163.0
1995 167.5
1996 174.0
1997 177.6
1998 181.1
Source: US Department of Labor/Bureau of Labor Statistics
Revenue (constant prices)

Revenue $ Million Growth %
1992 14,139.3 N/A
1993 14,971.4 5.9
1994 15,891.2 6.1
1995 15,535.8 -2.2
1996 12,093.4 -22.2
1997 11,887.1 -1.7
1998 12,461.6 4.8
1999 13,722.6 10.1
2000 13,762.1 0.3
2001 13,892.1 0.9
2002 10,890.6 -21.6
2003 12,282.1 12.8
2004 12,765.4 3.9
2005 11,161.1 -12.6
2006 10,070.7 -9.8
2007 10,651.8 5.8
2008 10,800.0 1.4
2009 11,125.1 3.0
2010 11,400.1 2.5

January 28 2010
Gross Product (constant prices)

Gross Product $ Million Growth %
1992 10,588.8 N/A
1993 10,948.4 3.4
1994 12,043.9 10.0
1995 12,074.9 0.3
1996 8,593.6 -28.8
1997 8,567.9 -0.3
1998 9,180.6 7.2
1999 10,455.8 13.9
2000 10,497.9 0.4
2001 10,591.2 0.9
2002 8,070.9 -23.8
2003 9,498.1 17.7
2004 9,835.1 3.5
2005 8,312.6 -15.5
2006 7,065.8 -15.0
2007 7,948.9 12.5
2008 8,070.7 1.5
2009 8,255.7 2.3
2010 8,395.1 1.7

January 28 2010
Gross Product Gross Product Growth Rate

January 28 2010
Outlook
Revenue (constant prices)
Revenue $ Million Growth %
2010 11,400.1 2.5
2011 11,643.0 2.1
2012 11,887.9 2.1
2013 12,115.4 1.9
2014 12,318.8 1.7
2015 12,510.0 1.6
Gross Product (constant prices)

Gross Product $ Million Growth %
2010 8,395.1 1.7
2011 8,554.5 1.9
2012 8,813.1 3.0
2013 8,969.9 1.8
2014 9,103.4 1.5
2015 9,237.0 1.5

January 28 2010
Gross Product Gross Product Growth Rate
Future prospects for the U.S. Cereal Production industry are decidedly modest. Over
the next five years, industry revenue is expected to increase by an annualized rate of
2.1%, to total $12.3 billion by 2014. In comparison, real GDP is expected to grow at an
average of 1.6% over the same time period, along with a 2.3% increase in real
household disposable income. Over the outlook period, IBISWorld forecasts that the
industry will be aided by moderating commodity prices, advancements in technology
and production and lower labor costs.
In the current economic climate, in-house or private label brands in supermarkets have
become a significant trend within the industry. Private brands are closing the gap on
their branded counterparts, by aggressive price discounting and establishing a
pervasive presence across shelves. Merchants are using their retail power to
outperform branded manufacturers, by offering a limited shelf space and leasing terms
and conditions, while others simply give their own private brands preferential
treatment, with prominent shelf space and in store displays. While players such as
Kellogg, Kraft and General Mills enjoy considerable brand and customer loyalty, they
are not immune to the crippling effects of rapidly falling incomes and historically high
rates of unemployment.
Supply and demand.
On the demand side, major food retail clients such as supermarkets and grocery stores
are increasingly consolidating their operations to exert their enormous buying power
and negotiating strength. IBISWorld estimates that the top four players will account for
around 47.6% of market share in 2009, with the number of small to medium
enterprises falling consistently over the past five years. This has produced large,
sophisticated customers (i.e. supermarkets), who are capable of operating with
reduced inventories, resisting price increases and introducing in-house, private labels.

January 28 2010
If the industry's players are unable to respond to the changing retail structure, supply
will be restricted as supermarkets will choose to stock their own brands to enhance
their profitability.
Supply side factors present a more promising outlook, with the majority of key input
prices expected to temper substantially over the outlook period, but are however
dependent on the vagaries of weather patterns. Wheat farming revenue is expected to
be supported by the increase in consumption over the next few years, combined with
the growing demand for feed grains will largely support the price of wheat. The corn
farming industry is forecast to grow relatively strongly over the outlook period. The
primary driver of this growth comes from the ever-expanding demand for ethanol,
combined with increased acreage.
Breakfast on the run.
As consumer preferences change to accommodate their busy lifestyles, there will be a

shift towards more convenient, portable products like cereal bars, muesli, yogurt and
fruit bars. This suggests that manufacturers are attempting to blur the line between
breakfast and snacks and to stretch usage occasions throughout the day. Kellogg's Rice
Krispies Treats, Quaker's Fruit & Oatmeal bars and General Mills' line of Milk & Cereal
Bars, all of which, being launched in the past two years, reflect this trend.
It is expected that the cereal manufacturing industry will remain resilient during the
current recessionary environment, primarily driven by an increase in the purchases of
food consumed inside the home. This trend bodes well for the industry, as it increases
the volume of cereal purchased and consumed, as Americans become more frugal with
their spending. For example, an average meal consumed outside the home costs
approximately $12, when compared to $5 if eaten inside. The belief that home cooked
food is healthier and offers better value will further sustain the industry in the current
economic climate.
Size, employment and wages .
Employment within the industry is estimated to increase at an annualized rate of 1.0%

over the outlook period, to total approximately 16, 005 persons. The number of
establishments is expected to increase by 1.1%, to 73 establishments in 2014.
Correspondingly, wages are also expected to grow by an annualized rate of 1.3% over
the next five years, and are estimated to account for 7.9% of industry revenue by
2014. This reflects the trend of an increasing level of investment in technology and
equipment that help to improve productivity and expand volumes, without the need for
additional labor.
International trade.
Exports are forecast to perform strongly over the next five years, with an annualized
growth rate of 6.9% until 2014. This growth is expected to be principally driven by the
huge presence of the industry's major players in overseas markets. Demand from the

January 28 2010
primary markets of Canada and Mexico is expected to increase, while emerging

markets such as China, India, Korea, Singapore and Jamaica are projected to be strong
sources of demand in the future. The saturated domestic market further provides the
impetus for manufacturers to seek out new markets as domestic profit margins begin
to get squeezed. Over the outlook period, share of exports are expected to increase
from 3.8% of revenue in 2009 to 4.8% in 2014.
Growth in the value of imported cereal products is also estimated to follow suit.
IBISWorld predicts annualized growth rate of 5.5% over the outlook period. Despite
strong competition from American manufacturers, imports from Canada and Mexico are
expected to increase primarily due to low trade barriers as a result of the North
American Free Trade Agreement. Canadian cereal brands are popular in some niche
U.S. markets such as the organic, health-based cereal segment. Latin American
countries such as the Dominican Republic, Bolivia and Argentina have recently
emerged as a popular source of imports, as American consumers become more
accepting of overseas produce. Imports are expected to comprise a 5.2% share of
domestic demand in 2014, compared to 4.4% in 2009.
Profitability.
The cereal manufacturing industry is expected to remain profitable over the outlook
period, with an average of 11.4% share of overall industry revenue. This represents a
marginal increase of 0.1% when compared to the current performance period. Gains
from production efficiencies and lower labor costs are expected to be partially offset by
higher spending on advertising and marketing activities.

Ibisworld Industry Report: Cereal Production in The Us

Uploaded by

Document Information

Original Description:

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Ibisworld Industry Report: Cereal Production in The Us

Uploaded by

Copyright:

Available Formats

IBISWorld Industry Report

Cereal Production in the US: 31123

© Copyright 2011, IBISWorld Inc. 2

ACTIVITIES (PRODUCTS AND SERVICES)

The major products and services in this industry are:

Industry: 11115 - Corn Farming in the US

Industry: 31121 - Flour Milling in the US

Industry: 31131 - Sugar Processing in the US

Industry: 31142 - Canned Fruit & Vegetable Processing in the US

Industry: 31199 - Other Food Manufacturing in the US

Industry: 42241 - Grocery Wholesaling in the US

Industry: 44511 - Supermarkets & Grocery Stores in the US

© Copyright 2011, IBISWorld Inc. 4

Description: Establishments known as supermarkets and grocery stores that retail a

DEMAND & SUPPLY INDUSTRIES

© Copyright 2011, IBISWorld Inc. 5

© Copyright 2011, IBISWorld Inc. 6

Employment Imports and Exports

© Copyright 2011, IBISWorld Inc. 7

Hot cereals 28.0%

Ready-to-eat cereals 45.0%

© Copyright 2011, IBISWorld Inc. 8

© Copyright 2011, IBISWorld Inc. 9

MAJOR MARKET SEGMENTS

Market Segment Share

Supermarkets and convenience stores 19.7%

Food service providers 5.1%

Supermarkets and convenience stores

© Copyright 2011, IBISWorld Inc. 10

© Copyright 2011, IBISWorld Inc. 11

New England 6.0

Rocky Mountains 1.0

© Copyright 2011, IBISWorld Inc. 12

© Copyright 2011, IBISWorld Inc. 13

44511 - Supermarkets & Grocery Stores in the US

44512 - Convenience Stores in the US

72231 - Food Service Contractors in the US

© Copyright 2011, IBISWorld Inc. 14

11114 - Wheat Farming in the US

11115 - Corn Farming in the US

31121 - Flour Milling in the US

31131 - Sugar Processing in the US

31142 - Canned Fruit & Vegetable Processing in the US

31194 - Mayonnaise & Salad Dressing Production in the US

31199 - Other Food Manufacturing in the US

42251 - Corn, Wheat & Soybean Wholesaling in the US

Changing Consumer Lifestyles

© Copyright 2011, IBISWorld Inc. 15

Changing consumption trends and patterns require cereal producers to be able to

Pricing and the Presence of Substitutes

Household Disposable Income

Typically, a rise in disposable income is directly proportionate to increased

DOMESTIC AND INTERNATIONAL MARKETS

Domestic and International Markets Imports

Domestic and International Markets Analysis

© Copyright 2011, IBISWorld Inc. 16

demand. In 2004, imports constituted only a 1.7% share of domestic demand,

© Copyright 2011, IBISWorld Inc. 17

Relationship with key suppliers

Developing and maintaining strong relationships with downstream suppliers is also a

Innovation and differentiation

© Copyright 2011, IBISWorld Inc. 18