cereal -ibis

IBISWorld Industry ReportJanuary 28 2010

Cereal Production in the US: 31123

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ContentsIndustry Definition.................................................................................................................................................. 3

ACTIVITIES (PRODUCTS AND SERVICES)...................................................................................................................................... 3SIMILAR INDUSTRIES....................................................................................................................................................................... 3DEMAND & SUPPLY INDUSTRIES................................................................................................................................................... 3

Key Statistics......................................................................................................................................................... 5INFLATION ADJUSTED (CONSTANT) PRICES................................................................................................................................ 5REAL GROWTH................................................................................................................................................................................. 5RATIO TABLE..................................................................................................................................................................................... 5GRAPHS............................................................................................................................................................................................. 6

Segmentation........................................................................................................................................................ 7PRODUCTS AND SERVICE SEGMENTATION................................................................................................................................. 7MAJOR MARKET SEGMENTS.......................................................................................................................................................... 8INDUSTRY CONCENTRATION.......................................................................................................................................................... 9GEOGRAPHIC SPREAD.................................................................................................................................................................... 9

Market Characteristics......................................................................................................................................... 11MARKET SIZE.................................................................................................................................................................................. 11LINKAGES........................................................................................................................................................................................ 11DEMAND DETERMINANTS............................................................................................................................................................. 12DOMESTIC AND INTERNATIONAL MARKETS............................................................................................................................... 13BASIS OF COMPETITION................................................................................................................................................................ 14LIFE CYCLE..................................................................................................................................................................................... 14

Industry Conditions.............................................................................................................................................. 16BARRIERS TO ENTRY..................................................................................................................................................................... 16TAXATION........................................................................................................................................................................................ 16INDUSTRY ASSISTANCE................................................................................................................................................................ 16REGULATION AND DEREGULATION............................................................................................................................................. 17COST STRUCTURE......................................................................................................................................................................... 18CAPITAL AND LABOR INTENSITY.................................................................................................................................................. 21TECHNOLOGY AND SYSTEMS...................................................................................................................................................... 21INDUSTRY VOLATILITY.................................................................................................................................................................. 22GLOBALIZATION.............................................................................................................................................................................. 22

Key Factors......................................................................................................................................................... 23KEY SENSITIVITIES......................................................................................................................................................................... 23KEY SUCCESS FACTORS.............................................................................................................................................................. 23

Key Competitors.................................................................................................................................................. 25MAJOR PLAYERS............................................................................................................................................................................ 25PLAYER PERFORMANCE............................................................................................................................................................... 25OTHER PLAYERS............................................................................................................................................................................ 31

Industry Performance.......................................................................................................................................... 34CURRENT PERFORMANCE............................................................................................................................................................ 34HISTORICAL PERFORMANCE........................................................................................................................................................ 36

Outlook................................................................................................................................................................ 42

MARKET CHARACTERISTICSCereal Production in the US

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Industry DefinitionThe 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 INDUSTRIESIndustry: 11114 - Wheat Farming in the USDescription: Establishments primarily engaged in growing wheat.

Industry: 11115 - Corn Farming in the USDescription: Establishments that grow corn.

Industry: 31121 - Flour Milling in the USDescription: Establishments that mill flour or meal from grains or vegetables.

Industry: 31131 - Sugar Processing in the USDescription: Establishments that manufacture raw sugar, liquid sugar, and refined sugar from sugarcane, raw cane.

Industry: 31142 - Canned Fruit & Vegetable Processing in the USDescription: Establishments that manufacture canned, pickled, and dried fruits, vegetables, and specialty foods.

Industry: 31199 - Other Food Manufacturing in the USDescription: Establishments that manufacture food, including mixing purchased dried and dehydrated ingredients.

Industry: 42241 - Grocery Wholesaling in the USDescription: Establishments that wholesale a general line (wide range) of groceries.

Industry: 44511 - Supermarkets & Grocery Stores in the USDescription: Establishments known as supermarkets and grocery stores that retail a general line of foods and goods to consumers.

DEMAND & SUPPLY INDUSTRIES11114 - Wheat Farming in the US11115 - Corn Farming in the US31121 - Flour Milling in the US

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31131 - Sugar Processing in the US31142 - Canned Fruit & Vegetable Processing in the US31194 - Mayonnaise & Salad Dressing Production in the US31199 - Other Food Manufacturing in the US42241 - Grocery Wholesaling in the US42251 - Corn, Wheat & Soybean Wholesaling in the US44511 - Supermarkets & Grocery Stores in the US44512 - Convenience Stores in the US72231 - Food Service Contractors in the US












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Key StatisticsINFLATION ADJUSTED (CONSTANT) PRICES

2006 2007 2008 2009 2010Industry Revenue *10,070.7 *10,651.8 *10,800 *11,125.1 *11,400.1 $MilIndustry Gross Product *7,065.8 *7,948.9 *8,070.7 *8,255.7 *8,395.1 $MilNumber of Establishments *66 *67 *68 *69 *70 UnitsNumber of Enterprises *45 *45 *43 *43 *43 UnitsEmployment *14,020 *14,626 *15,100 *15,250 *15,412 UnitsExports *819.3 *891.8 *415.2 *425.1 *452.1 $MilImports *339.4 *410.4 *457.7 *496.1 *522.4 $MilTotal Wages *850.8 *868.7 *888.5 *908.4 *920.1 $MilDomestic Demand *9,590.8 *10,170.4 *10,842.5 *11,196.1 *11,470.4 $Mil

Production Volume *1,470,023,923

*1,452,245,861

*1,466,768,320

*1,482,902,772 n/a Kilograms

REAL GROWTH2006 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 TABLE2006 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 $MilWages and Salaries Share of Revenue *8.45 *8.16 *8.23 *8.17 *8.07 %



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GRAPHSRevenue 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.



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SegmentationPRODUCTS 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 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.



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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

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



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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 CONCENTRATIONThis 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 SPREADYear: 2009Number of Establishments by Region

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.



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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.

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.



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Market CharacteristicsMARKET 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.

LINKAGESDemand Linkages

42241 - Grocery Wholesaling in the USThis is a major source of immediate sales for breakfast cereal manufacturers.

44511 - Supermarkets & Grocery Stores in the USSupermarkets with sufficient purchasing power can buy direct from the manufacturer.

44512 - Convenience Stores in the USManufacturers are expanding their traditional distribution networks to include convenience stores.

72231 - Food Service Contractors in the USThis is a reasonably small but significant source of demand for cereal products.

Supply Linkages11114 - 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 USA major raw material for manufacturing products made by this industry, such as corn flakes.

31121 - Flour Milling in the USMalt extract is another raw material used in almost all breakfast cereals.

31131 - Sugar Processing in the USThis is a very important ingredient required for making cereal bars and breakfast products.











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31142 - Canned Fruit & Vegetable Processing in the USDried fruit is also a key ingredient in some cereal products.

31194 - Mayonnaise & Salad Dressing Production in the USSalt is required for most products made by cereal producers.

31199 - Other Food Manufacturing in the USOther key ingredients, such as gluten, vitamins, preservatives, emulsifiers and honey are purchased from manufacturers in this industry.

42251 - Corn, Wheat & Soybean Wholesaling in the USRice, 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

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.







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DOMESTIC AND INTERNATIONAL MARKETSDomestic and International Markets ExportsExports in this industry are mediumExports in this industry are increasing

Domestic and International Markets ImportsImports in this industry are lowImports 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 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.



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BASIS OF COMPETITIONCompetition in this industry is highCompetition 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 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 CYCLELife Cycle StageThe 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



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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 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.



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Industry ConditionsBARRIERS TO ENTRYBarriers to entry in this industry are highThese 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 ASSISTANCEThe level of Industry Assistance is lowThe trend of Industry Assistance is steady



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Key TariffsGoods Low Rate* High Rate*Tariff rate (percent) 1.1 14.9*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 DEREGULATIONThe level of Regulation is heavyThe 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

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



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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.

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



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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

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)



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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

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.



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CAPITAL AND LABOR INTENSITYThe 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 SYSTEMSThe 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.

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.



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INDUSTRY VOLATILITYThe 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.

GLOBALIZATIONThe level of Globalization is mediumThe 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.



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Key FactorsKEY SENSITIVITIESThe key sensitivities affecting the performance of the Cereal Production industry include:

Domestic Price - Crops - Coarse GrainsDescription: 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 CaneDescription: 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 USDescription: 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 USDescription: 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 FACTORSThe key success factors in the Cereal Production industry are:

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

Ability to pass on cost increasesGiven 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 DifferentiationIn 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 inputsReliable 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.


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Economies of scale and scopeThe 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.



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Key CompetitorsMAJOR PLAYERSMarket Share

Major Player Market Share Range

Kellogg Company 34.2% (2009)

General Mills, Incorporated 31.2% (2009)

Kraft Foods, Incorporated Class A 14.2% (2009)

PepsiCo, Incorporated 8.0% (2009)

Other 12.4% (2009)

PLAYER PERFORMANCEKellogg CompanyBrand/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 etcMarket 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.

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


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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 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

YearMillion Dollars

Sales% change

GrowthMillion Dollars

Operating Income% change

Growth2004 6369.3 N/C 1240.4 N/C2005 6807.8 6.9 1251.5 0.92006 7349.8 8.0 1340.5 7.12007 7786.0 5.9 1345.0 0.32008 8457.0 8.6 1447.0 7.603/10/2008 6431.0 N/C 1163.0 N/C03/10/2009 6574.0 2.2 1244 7.0Source: Annual Report

General Mills, Incorporated




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Brand/Trading Name(s): Big-G cerealsMarket 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 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 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



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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

YearMillion Dollars

Revenue% change

Growth2004 2020.0 N/C2005 1919.0 -5.02006 1902.3 -0.92007 1932.9 1.62008 2028.0 4.9Source: Annual ReportGeneral Mills, Inc. (U.S. retail segment) - financial performance

YearMillion Dollars

Revenue% change



Growth2007 8491.3 N/C 1896.6 N/C2008 9072.0 6.8 1971.2 3.92009 10052.1 10.8 2208.5 12Source: Annual Report

Kraft Foods, Incorporated Class AMarket 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 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.




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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.

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

YearMillion Dollars

Revenue% change



Growth2003 5342 N/C 1046 N/C2004 5843 9.4 785 -25.02005 6250 7.0 930 18.52006 6358 1.7 829 -10.92007 6526 2.6 1018 22.8Source: Annual ReportKraft Foods, Inc. (U.S. snacks segment) - financial performance

YearMillion Dollars

Revenue% change



Growth



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2007 4879.0 N/C 607.0 N/C2008 5025.0 3.0 530.0 -12.730/09/08 3736.0 N/C 532.0 N/C30/09/09 3717 -0.5 530.0 -0.4Source: Annual Report

PepsiCo, IncorporatedBrand/Trading Name(s): Quaker Foods North America (QFNA), Quaker Oatmeal, Life cereal, Cap'n CrunchMarket Share: 8.0%

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.

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%.




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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

YearMillion Dollars

Revenue% change



Growth2004 1526 N/C 475 N/C2005 1718 12.6 537 13.12006 1769 3.0 554 3.22007 1860 5.1 568 2.52008 1902 2.3 582 2.505/09/08 1292.0 N/C 422.0 N/C05/09/09 1299.0 0.5 438.0 3.8Source: Annual Report

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.

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.



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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 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

YearMillion Dollars

Revenue% change



Growth2002 656.0 N/C 70.1 N/C2003 714.3 8.9 76.9 9.72004 789.9 10.6 85.7 11.42005 717.2 -9.2 69.1 -19.4



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2006 777.4 8.4 77.6 12.32007 934.8 20.2 87.8 13.1Source: Annual Report



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Industry PerformanceCURRENT 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.

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



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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 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.



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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 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

YearMillion Bushels

Corn used in cerealMillion Bushels

OatsMillion Bushels

WheatPounds (lb)

Flour and cereal2003 188.8 62.4 911.9 193.32004 184.6 63.0 906.7 192.22005 185.9 62.9 909.4 192.22006# 187.2 63.2 910.2 192.02007# 187.3 63.1 909.5 191.72008# 187.6 63.2 909.9 191.9Source: 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, the volume of corn used in cereal and other foods increased from 128 million bushels in 1991 to 150 million bushels by 1994.



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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 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



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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

Corn used in cereal Oats WheatPounds (lb)

Flour and cerealand other foods consumption consumption products(million bushels) (million bushels) (million bushels) (per capita)

1991 128 76.6 789.5 182.31992 129 77.4 834.8 184.71993 140 73.0 871.7 189.31994 150 70.0 853.0 192.01995 161 67.0 882.9 190.31996 172 63.0 890.7 196.31997 182 59.0 914.1 197.31998 184 57.0 909.7 196.11999 185 56.8 928.8 195.92000 185 56.7 949.6 199.22001 186 59.2 926.4 195.02002 187 60.2 918.6 191.7Source: USDA/Economic Research Service



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Consumer price index for cereals and bakery products UnitsIndex

1991 145.81992 151.51993 156.61994 163.01995 167.51996 174.01997 177.61998 181.1Source: US Department of Labor/Bureau of Labor Statistics

Revenue (constant prices)Revenue $ Million Growth %

1992 14,139.3 N/A1993 14,971.4 5.91994 15,891.2 6.11995 15,535.8 -2.21996 12,093.4 -22.21997 11,887.1 -1.71998 12,461.6 4.81999 13,722.6 10.12000 13,762.1 0.32001 13,892.1 0.92002 10,890.6 -21.62003 12,282.1 12.82004 12,765.4 3.92005 11,161.1 -12.62006 10,070.7 -9.82007 10,651.8 5.82008 10,800.0 1.42009 11,125.1 3.02010 11,400.1 2.5



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Revenue Revenue Growth Rate

Gross Product (constant prices)Gross Product $ Million Growth %

1992 10,588.8 N/A1993 10,948.4 3.41994 12,043.9 10.01995 12,074.9 0.31996 8,593.6 -28.81997 8,567.9 -0.31998 9,180.6 7.21999 10,455.8 13.92000 10,497.9 0.42001 10,591.2 0.92002 8,070.9 -23.82003 9,498.1 17.72004 9,835.1 3.52005 8,312.6 -15.52006 7,065.8 -15.02007 7,948.9 12.52008 8,070.7 1.52009 8,255.7 2.32010 8,395.1 1.7



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Gross Product Gross Product Growth Rate



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OutlookRevenue (constant prices)

Revenue $ Million Growth %2010 11,400.1 2.52011 11,643.0 2.12012 11,887.9 2.12013 12,115.4 1.92014 12,318.8 1.72015 12,510.0 1.6

Revenue Revenue Growth Rate

Gross Product (constant prices)Gross Product $ Million Growth %

2010 8,395.1 1.72011 8,554.5 1.92012 8,813.1 3.02013 8,969.9 1.82014 9,103.4 1.52015 9,237.0 1.5



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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. 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.



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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 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.


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