It's crunch time in the fight for your breakfast dollar
Rare figures are illuminating the cereal battlefield, writes Rob O'Neill.
You may not realise it sitting over your cereal bowl each morning, but the battle for your breakfast dollars is intense – and tough times have not helped local player Hubbard Foods.
Hubbard, the number three player, behind Sanitarium and Kellogg's, in the so-called "ready-to-eat" cereal market, consistently gained market share until 2004 when it hit 12.3%. At that point its market share began to tail away. Revenue, however, grew until at least 2007, the last year for which privately owned Hubbard disclosed its numbers.
Now, data posted on the company's website, and confirmed by CEO Doug Paulin, indicates Hubbard's market share is around 9.4%, over 23% down on that 2004 peak and on a stated target of 11% for 2010.
"To deliver, we need to be in more segments," Hubbard's chief executive told the Sunday Star-Times. "We need to innovate into other areas."
And that is exactly what Hubbard is doing, with new products – Big Bugs 'n' Mud and Honey Bumbles for instance – appealing to kids and challenging in mainstream cereal categories and Outward Bound Power 8 in the energy category. It is also selling an expanded gluten-free range and co-branded cereals, such as Ronald McDonald House Cornflakes.
Paulin said the last 18 months, the major multinational producers dropped their prices after a significant shift to "private label" brands – the supermarket home brands. Research indicated some of these consumers would not shift back once the economy improved.
Hubbard got caught in that price squeeze, which appears to have successfully halted or even reversed the home-brand shift, Paulin said.
Mark Roper, marketing manager of breakfast behemoth Sanitarium, said while price competition has heated up in the recession, most of that is driven by the retailers who are also fighting for share. He said home brands gained in 2009, pushed strongly by Progressive's supermarkets, but that had slowed this year.
Either way, signs of the damage from that price war are now emerging. In December, the Rotorua Energy Charitable Trust bought a 35% stake in Hubbard. The sale price was not disclosed, but the trust's recently released annual report reveals that stake cost $4.76 million, valuing Hubbard Foods at around $14m, well down on the $30m to $40m speculated when sale rumours emerged in 2008.
The price could also have been affected by Hubbard's stated commitment to keep his company in New Zealand ownership. A $2.3m loan from the trust also appears to have been part of the deal, taking the trust's investment to $7.5m.
When Hubbard disclosed its financials in 2007, it also set public growth targets for 2010. These were total sales of $47.5m, market share of 11% and profit before tax of $2.9m. According to the trust's accounts, that target may also have been missed, with a profit before tax of around $1.1m indicated by a rough and ready grossing up the 17 weeks of Hubbard ownership reported in the trust's full year.
At the time of the sale, trust chairman Grahame Hall said Hubbard stood out as a local business that would be able to provide a "satisfactory commercial return over the long term".
Tim Morris of Coriolis Research, which analyses the supermarket sector, said every time there's a recession, sales of private label goods increases. In the UK, they now account for more than 50% of sales. Whether New Zealand goes that way, from below 15% now, is moot. Morris said private label success is inversely proportional to the amount of innovation in the market – and New Zealand has some very innovative players. Morris cites Tasti Products and Vogel's as two local firms disrupting the status quo. Tasti, he says, "flies under the radar" but has done really well both locally and in Australia.
Roper pointed out it isn't just the challengers innovating. He said Sanitarium's Up & Go range of liquid breakfasts had created a new category from nothing.
Sanitarium, too, has been forced to disclose some rare data. A registered charity, owned by the Seventh Day Adventist Church, it now has to provide financial information to the Charities Commission. Its first report, for the year to June 30, 2009, covers a number of entities, but the Sanitarium food business is easily the largest. Total sales revenue for the various entities was $70.7m with expenses for the "nutrition, wellbeing and health food" activities at $62.6m.
Meanwhile, international giant but New Zealand number two Kellogg's is in a financial holding pattern. Sales for the year ended January 2, 2010, were $45.8m, little changed over the past three years.
Sunday Star Times