General Mills makes Cheerios a serial business

The cereal tinkerers who invented Cheerios 71 years ago needed only one variety, the yellow-box original that remains a staple of American breakfast tables.

They would barely recognize what their humble oat concoction has become: a General Mills franchise that has grown to encompass 13 varieties, with five added in just the past three years.

The latest arrived this winter: Dulce de Leche and Multi Grain Peanut Butter.

Cereal is what marketers call a "variety-seeking" category, driving Golden Valley-based General Mills and its competitors to continually put new offerings on the shelves.

"Most people don't want the same thing every morning," said Jeff Harmening, president of General Mills' Big G cereal division. Yet "with a category as old as cereal it's a challenge to find something really compelling and new."

So cereal makers increasingly rely on the less risky practice of extending key brands, and none more so than Cheerios. General Mills started in the 1970s, most notably with Honey Nut Cheerios, but has ramped up the pace in recent years with frequent new introductions.

The addition in January of Dulce de Leche and Multi Grain Peanut Butter gave the company more varieties than ever.

"What's developing now in the [cereal] category is the megabrand," said Rick Shea, owner of Shea Marketing, a Chanhassen-based food industry consultancy. With Cheerios, for instance, "oat circles" have essentially become a manufacturing platform, he said.

General Mills has done the same thing on a smaller scale by extending its Chex brand. And Kellogg has had success expanding Special K into 10 varieties.

Special K Red Berries outsells the original, just as Honey Nut Cheerios -- the nation's top-selling cereal since 2009 -- bests its plain-oat parent.

"The general principle is, "I'm better off with one brand I can extend indefinitely,'" said Akshay Rao, a marketing professor at the University of Minnesota's Carlson School of Management.

Shea said simple math often drives the strategy.

"A typical new cereal product launch costs millions of dollars in advertising over several years, and even then the odds of success are fairly limited," he said.

A brand extension, in contrast, requires limited extra marketing money, with promotions piggybacking on the main brand.

No wonder General Mills hasn't launched an entirely new cereal since Reese's Puffs hit the shelves in 1994.

A mature business

Ready-to-eat cereal is a $6 billion-plus business in the U.S., and General Mills and Michigan-based Kellogg have long been its kings. Kellogg leads the market, with General Mills a close second, and each has a 30-plus percent share.

Cereal is General Mills' biggest U.S. retail business and a nicely profitable one, too, with more than $2 billion in annual sales.

Still, as big as cold cereal is, it's a mature business and its share of all packaged food sales has declined since 2009, according to a recent report by Alexia Howard, a stock analyst with Sanford C. Bernstein Co.

In the past few years there has been more pressure from breakfast alternatives, particularly Greek-style yogurt. "Right now, the cereal category is fairly weak," Shea said. "It's really up to leaders like General Mills and Kellogg to use innovation to drive sales to the category."

Cheerios was a big innovation when it launched in 1941. The first oat-based, ready-to-eat cereal, it debuted as "Cheerioats" but was rechristened in 1945 after a trademark dust-up with oat kingpin Quaker Oats. Nowadays, several Cheerios iterations have at least as much whole grain corn as they do whole grain oats.

Cheerios has become the most prominent U.S. cereal brand, with a demographic reach extending from toddlers -- it's often their first solid food -- to aging baby boomers looking for an oat fiber fix. Harmening said the brand accounts for 13 percent of the entire U.S. ready-to-eat cereal market.

Regular Cheerios, a plain grain Jane in a world of iced skinny lattes and "hand-tossed" salads, is still the third-biggest-selling U.S. cereal, according to SymphonyIRI Group, a market researcher that tracks sales in conventional supermarkets.

The first Cheerios line extension came in the mid-1970s with Cinnamon Nut Cheerios, not to be confused with Cinnamon Burst, which launched last year. Cinnamon Nut bombed in test markets, vanishing so completely into obscurity that even Harmening, General Mills' cereal chief, couldn't recall it.

It was reformulated into Honey Nut Cheerios, which debuted in 1979 and quickly proved that extending the brand could work. In 1988, Apple Cinnamon Cheerios hit the shelves, and the 1990s saw the launch of Frosted Cheerios and Multi Grain Cheerios.

But most of the growth in new varieties has come since the mid-2000s. Chocolate Cheerios, introduced in 2010, has been a particular success, and it offers insight into how General Mills chooses Cheerios flavors.

Chocolaty cereals aimed at kids are common, and include General Mills' Cocoa Puffs. But chocolate offerings are scarce in the family-cereal market, Cheerios' sweet spot.

Ditto for peanut butter: Like chocolate, adults can crave it as much as kids. But in the cereal world, it's found mostly in brands like Reese's Puffs.

With Dulce de Leche Cheerios, General Mills is harnessing a flavor that's rare in the entire cereal category, but which the company has successfully deployed in its Häagen-Dazs ice cream line.

Encouraging debut

General Mills has particularly high hopes for the new peanut butter offering. Multi Grain Cheerios was "limping along" until a few years ago when General Mills repositioned it with a "weight management" theme, Harmening said. Sales have more than doubled since, and initial sales of the peanut butter variety have been "really promising," he said.

Outside of Honey Nut, Multi Grain and regular Cheerios, none of the Cheerios iterations cracks the 15 bestselling U.S. cereals as tracked by SymphonyIRI. But market share among individual cereals is fragmented.

Though big hits are always welcome, a company will be happy if an extension makes more money than it costs to produce and burnishes the overall brand, said the U's Rao. The question a food marketer asks is, "'If I launch this product, will it help others in my product line?'" Rao said.

Indeed, Harmening said each Cheerios iteration must "give something back to the brand." On the flip side, a failed brand extension can diminish a brand's overall standing.

That hasn't happened often for Cheerios. Besides Cinnamon Nut, General Mills has opted to ax only one other Cheerios, Berry Burst. It succeeded initially after debuting in 2003, but lost ground with the rise of Kellogg's Red Berries Special K.

Harmening contends that there's plenty of room for innovation around the brand. "Cheerios still has a lot of legs," he said.

Mike Hughlett • 612-673-7003