Product and Service
Companies, who has been grouped in breakfast cereals& snacks sector of bakery industry , are manufacturers of
of ready-to-eat cereal and convenience foods
Demand for Product and Service
The market is large enough for breakfast cereals manufacturers to compete for space. However, it seems that the demands may be reaching a temporary low and starting to rebound driven by slower increase in price. However, increasing raw materials may, on other hand, be putting extra pressure on price. The long run trend in cereal market may not be optimistic.
The Sector
Sector’s current, trend, causes behind trend, and future
Current and Trend
- Sales volume data indicates that the demands have reached temporary low and may be rebounding after a few years of decline resulted from less cereals consumption of consumers.
- There is apparent declining trend in consumption of cereal in US market. Companies have been gaining support, from international market, for their traditional breakfast cereals.
- Demands are sensitive to rising price and less sensitive to decreasing price in US market.
- Companies are looking to the controlling of manufacturing and operating costs to improve their financial performance. However, products renovation may be the key for those companies to survive in US market’s competition.
Causes behind the trend
- Due to the lack of innovation of products, consumption simply reached temporary high and economy elastic plays less important role in this situation. We cannot see any radical factor that could fundamentally shift consumers’ preference for their breakfast choice. However, competition from alternative products still contributes increasing pressure for demand growth.
Industry Future
- Companies will spend more on products innovation as pressure on demand growth get heavier and they need more rooms for cutting costs and spending on marketing and selling.
Numbers
General Financial Performance of Companies In the Sector
It seems that the recent sales volume of companies in this sector indicate that the demands for breakfast cereals had been weak (primarily from non-core products) and declining and the decline may be reaching its maximum and rebounding in 2018. Accompanying with the decline in volume, selling price of those products seems to have been rising. Our analysis indicates that this sector is very sensitive to price’s rising. Company will lose its market share if it significantly lags behind its peers in price reduction or promotion. However, our data also indicates that the competition did not come only from the competitors inside the category but came from alternative products of cereals because the lost market shares from one company did not directly go to another one. At the same time, demand from international market seems to keep strong and contribute most of increase for those companies in the past several years.
However, while it is very sensitive to rising price, as a mature market with stable but slowly growing demands it is not that sensitive to reduction of price. Therefore, since there is no better way to stimulate sales, companies have been focusing on productivity and management costs controlling to try to improve their margins and profits and it seems that companies have been doing well before 2017. However, increasing input costs seem to be causing upward pressure on price and hurting companies ‘profitability. Companies have managed to improve their gross margins to average 34% (30-38%), operating margin to average 16% (14-17%), and cash flow margin to 8%.
Therefore, companies will firstly need to find the sensitivity of its products price to alternative products and competitors. As long as they find its sensitive point of price, companies’ performance may up to their brands loyalty and products’ innovation.
According our analysis, the sector’s ratios of enterprise price/adjusted EBI ranges 18-24, which present a decrease in multiples compared with 2016/17 caused by concern with consumption of cereal in future.
