Breaking Into a Tough Market? Lessons From 'Cereal' Entrepreneurs There's opportunity in every industry, including the established ones, like breakfast cereal. To find success, you just need to think strategically.
By Neil Parmar
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Taking a bite out of the cereal industry isn't easy. Four behemoths—Kellogg's, General Mills, Post Holdings and PepsiCo's Quaker brand—control about 72 percent of this $11 billion market. It's an industry dictated by habit and it's not one slated for massive growth. Yet there are certain sectors poised to surge – like health foods -- where consumers are willing to pay premium prices, according to market research firm IBISWorld, and these slivers of opportunity are encouraging entrepreneurs to push their way into grocery shelves.
Here's what these cereal entrepreneurs have found works—and hasn't—on their quest to make the next great breakfast brand. Their creative and strategic thinking could help entrepreneurs in any industry.
Capitalize on a targeted audience. Entrepreneur Ryan Blair recently released Vi Crunch, a "super cereal" with plenty of fiber and rosemary antioxidants but little fat and sodium and no artificial sweeteners. It's not Blair's first foray into the health food game and a business he founded in 2005 has sold more than 500 million protein shakes). By targeting a pool of 3 million customers who've already tried his other products—sometimes with free samples just to get Vi Crunch into a house next to Tony the Tiger or Toucan Sam—Blair has sold more than 1.7 million bowls worth of cereal since it debuted in October. Next year he plans to market to a broader base of consumers. "Ultimately we want to have customers ship the cereal to their house every month, for the rest of their life," says Blair, a 36-year-old single father, who came up with Vi Crunch's ingredients while trying to get his autistic son to eat a protein-enriched breakfast without sugar.
Show don't tell. Larger players have been hungrily acquiring smaller cereal makers—particularly those in the healthy foods segment. But some brands might seem too quirky for corporate buyers. Brian Strom named his cranberry-apple-granola concoction "Crapola" as a play on its ingredient's names and to stand out on crowded store shelves. Still, this branding and its slogan ("Makes even weird people regular") might be too edgy for some companies to swallow. Rather than pitch over the phone, Strom usually mails boxes directly. That tactic has worked better than cold calling, and a distributor has helped get placement in states such as Iowa, Nebraska, South Dakota and Wisconsin, where each package retails for around $5 at grocery stores and up to $8 at specialty shops.
Account for volatility. Getting started can be a pricey endeavor. Blair, for one, says he invested "well over" $10 million to develop and produce Vi Crunch. And scaling up can be a challenge given the industry's shrinking profit margin—now 12.6 percent, down from 14.7 percent in 2009. Then there's fluctuating food costs, like when wheat surged more than 60 percent in 2011 due to a Russian export ban. Or when Strom watched as the price of maple syrup doubled shortly after he and his wife started using it in Crapola, which launched in 2007. Expanding a product portfolio with less volatile ingredients, as the Stroms have done with their "Number Two" cranberry-orange-granola offering, can offset some of this unpredictability.
Think beyond breakfast. Those thinking the market is saturated can forge a new one. For cereal makers, this could mean targeting the high number of shoppers who buy breakfast outside of the home, according to IBISWorld's research. Welcome to The Cereal Bar, a Toronto-based food court stop where a bowlful of cereal (selected from more than 20 kinds) and three toppings (fruits, nuts and chocolate chips for those with a sweet tooth) runs $4 to $5. In its early days, the now eight-year-old business failed to garner an investment to expand from judges on Dragon's Den—Canada's version of Shark Tank. And a rival cereal-centric café that used to be located nearby—Cerealicious—closed within a few years of opening.
The biggest challenge for these kinds of ventures, and The Cereal Bar in particular, is "taking advantage of the entire day, and not just having your sales come from breakfast," says Andrew Applebaum, the store's 44-year-old founder. He says he managed to turn a profit, in part, by adding grab-and-go cereal bars, premium juice brands and coffee. And new owners who took over in 2010 say they've boosted sales further by introducing steel-cut oatmeal and offerings that lure customers back throughout the day—specifically a new lunchtime meal: a buckwheat soba noodle salad. "We're thinking to expand our menu in the future," says Jian Zhang, 50, the latest owner.
Correction: A previous version of this story misstated the date Ryan Blair's business was founded.
