The recent global economic down cycle, punctuated by one of the worst recessions on record, has forced many to reevaluate their spending habits, even with regards to their most basic purchases. Indeed, today’s cash-strapped consumers are now looking to maximize the value of their food dollars, seeking the biggest bang for their bucks at the supermarkets, mass merchandisers, and grocery stores. Such behavior has even made its way to the all-important center aisles of the supermarkets, particularly to the ready-to-eat cereal category. Many continue to view a box of cereal as a great value compared to other more expensive daily breakfast options (i.e., bagels, French toast, bacon, eggs). However, those same individuals can’t help but notice that the price of cereal has moved markedly higher over the last few years.
There are a handful of factors contributing to the rising price of cereal. Perhaps the biggest challenge for the cereal makers is the elevated costs of the commodities (i.e., ingredients) used in the production of cereal. The main staples used in cereal production (i.e., wheat, soybeans, corn, oils, and sugars) are also in high demand within some other industries, most notably the biofuels and meat production sectors. The growing need for biofuels, which has coincided with the relatively higher fuel prices in recent years, has led to higher prices for corn, a main ingredient used in the production of ethanol. The high demand for corn has also caused more farmers to plant that crop, leaving less farm acreage for other commodities, like wheat and soybeans. The final outcome of this trend has been higher prices for the three commodities. This, when combined with the fact that the worldwide consumption of protein (i.e., beef, chicken, and pork) products continues to rise, has led to significantly higher prices for these commodities. Corn and soybeans remain the two main ingredients used in animal feed for cattle, hogs, and chickens.
The highly competitive nature of the cereal industry has also played a big role in the rising price of cereals. The major players, including Kellogg Company (K), General Mills (GIS), Quaker Oats, a division of PepsiCo, Inc. (PEP), and Post, part of the Ralcorp Holdings (RAH) family, have all ramped up their spending on advertising in recent years in an effort to convince consumers to buy their products. Meanwhile, spending on research and development is also crucial to remaining at the forefront of the industry. The aforementioned Big Four continue to aggressively spend on new product development, hoping to grab the attention of the rapidly changing tastes of today’s consumers. These two initiatives account for a significant portion of the food manufacturers annually outlays. In recent years, the cereal makers have sought to recoup some of these expenses through price increases at the retail counter.
All of the aforementioned costs have contributed to the higher price of a box of cereal. The cereal makers have pushed through the rising costs of producing and shipping cereals to the consumer in the form of price increases. During the past few years, the Big Four cereal makers have typically raised prices in increments of 3% to 5%. Another creative way they have pushed through costs to the consumer is by reducing the size of their cereal boxes. By selling cereal in smaller-sized boxes, consumers are receiving less volume for the same price, which is an obvious attempt to hide the fact that they are inflating the price paid by the consumer.
In conclusion, given the continued increase in the cost of producing and marketing ready-to-eat cereal, there is unlikely to be any near-term pullback in the price of a box of cereal. If anything, a sustained recovery in the global economy may give the cereal manufacturers more leeway to raise prices in the coming years.